Trump, NAFTA and energy

LOVE HIM, HATE HIM, don't know what to make of him...Donald Trump is President-elect and a Trump presidency is likely a positive for the North American oil and gas industry as a whole.

Campaigning in Gettysburg, Pennsylvania in late October, Trump spoke about his then-plan for his "100-day action plan to Make America Great Again." One proposed task: to "lift the restrictions on the production of $50 trillion dollars' worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal." Policy changes in this regard would likely benefit North American oil-weighted producers and those in the midstream space. In the same speech, Trump noted his "intention to renegotiate NAFTA or withdraw from the deal under Article 2205."

There are numerous US energy companies involved, in various stages and capacities, in the energy business in Mexico. For one, there are projects to transport natural gas from the US to Mexico, and pipelines being built…some in Texas and some in Mexico. What could revisions or a complete US withdrawal from NAFTA mean for the various working relationships?

I reached out to Ariel Ramos, a partner in the banking and finance practice and global energy group of Mayer Brown for his expertise and thoughts on the matter. Speaking from his office in Mexico City, Ramos first provided a bit of history.

The first point on background, he said, is that "while NAFTA included certain specific energy provisions, it excluded NAFTA benefits from energy because of the Mexican energy regime at the time that NAFTA was approved included restrictions on private investment in oil and gas and power which were grandfathered under NAFTA. Following the constitutional reform in 2013 and the subsequent reforms of applicable legislation, there has been discussion about NAFTA's impact with respect to the energy sectors in Mexico. The official interpretation from the Mexican government was that NAFTA did not apply to the energy sectors and, as a result, the Mexican government has the ability to retain and impose certain restrictions (such as with respect to national content)."

He told me that the potential impact of any renegotiation of NAFTA with respect to energy would be indirect on two fronts. "On one hand," he said, "most of the equipment and resources Mexico needs for the energy sector come from the US. Importation of those under NAFTA are subject to minimum or no customs duties and taxes or other kind of foreign trade restrictions. That is an important benefit because much of the equipment that is required to perform oil and gas activities—for upstream, or equipment to build midstream and downstream infrastructure and power projects—comes from the US. I don't anticipate restrictions being implemented in this front, but, if for any reason certain restrictions are placed on the importation of that type of equipment, it could have an impact on expected investment in the sector.

"The other indirect effect that a review or repudiation of NAFTA could have would be on Mexico's GDP growth. At the end of the day, both the power sector and the production of oil and gas in Mexico impact the growth of the Mexican economy. So to the extent that the growth of the Mexican economy is affected by any type of revisions to NAFTA, an impact on how much investment we would need in the sectors could be made."

As Mexico is a developing economy, there is great market potential for US energy companies and the oil and gas produced within, which fits well with Trump's stated energy industry goals. Ramos said that, at least in the foreseeable future, there is a need for power and gas and some oil-related products in Mexico. By US Energy Information Administration calculations, US natural gas pipeline exports to Mexico from the US were up approximately 33% year over year in April 2016, reaching 102.6 billion cubic feet.

"There are still a lot of opportunities to import power capacity from the US, specifically from the Texas market where there's plenty of gas and power available, at least for the system in Mexico. With respect to how much capacity consumers or industrial companies will need in the foreseeable future—we still have a deficit of gas in Mexico that needs to be covered but any effects in the growth expectation and investment could have an impact," Ramos continued.

Another factor is jobs. Trump campaigned on job-producing, and as Ramos told me, NAFTA has created jobs both in the US and Mexico and many US products are targeted to the Mexican market. "In the US, more than six million employees are directly related to the production of NAFTA-related products. And, there are approximately 60,000 US companies active in Mexico in different capacities," he detailed.

"To view the impact of a potential modification of NAFTA on the long-term is more complex and unclear at this stage. We don't have full visibility yet on what specific lines the Trump administration would actually seek," Ramos told me as we ended the call, but the above "represents a few of the issues the new administration should analyze before considering any revisions to NAFTA."