Copyright of the Daily Oil Bulletin 2017
Dispute Mechanism A Key Part Of NAFTA For Canada’s Energy Sector That Should Be Kept
Maintaining the dispute settlement mechanism is a priority for Canada’s energy sector in the current renegotiations of the North American Free Trade Agreement (NAFTA), said speakers at a School of Public Policy panel discussion.
“If we think about how the energy sector will be impacted, we want to make sure this agreement lives on and we want to make sure it’s better,” said Eugene Beaulieu, program director of international economics at the University of Calgary’s public policy school. “We want to make sure we don’t focus on trade deficits and faulty economics.”
According to Beaulieu, Chapter 19 was a “big win” during initial NAFTA negotiations, and it is something Canada must see continued for effective free trade in energy and other aspects of the economy.
From the energy sector’s perspective, Canada should maintain fairly modest objectives with current NAFTA renegotiations, said Dennis McConaghy, as the 23-year-old arrangement thus far has worked fairly well for the country’s oil and gas industry, as it has for the United States.
“As long as the dispute mechanism survives, then this will have been a bullet dodged as far as I am concerned,” the Ivey School of Business fellow told Wednesday’s panel discussion on what NAFTA talks mean for Canada’s energy sector. “It is notable to remember that probably the most notable energy irritant between our two countries in the 20 years of NAFTA, I would contend, was the treatment of Canada over [Keystone XL].”
During the period after former President Barack Obama rejected Keystone and current President Donald Trump approved it, TransCanada Corporation had two major lawsuits, noted McConaghy, including one under NAFTA to basically contest the American president’s ability to reject the project based on the regulatory record that existed.
“I only point that out to underscore NAFTA as it did give Canada some tools to ensure there was a consequence for how we were treated on KXL. It is worth remembering that existing statute had the potential to at least remind future Democratic administrations there is some consequence for being entirely out of the norm of what is expected treatment, which is what the disposition of KXL disposition spoke to.”
Canada and the U.S. would harmonize carbon policy “in an ideal world,” he added. However, he believes NAFTA renegotiations are not the way to achieve that goal, especially with the current federal political regimes in either country being so out of sync on that issue.
“I do acknowledge it should be a fundamental objective of Canada, because in terms of any other country that is relevant for our position on climate, we can never be misaligned with [America’s] climate policy for any long period of time, but I just do not believe this NAFTA negotiation is one where any of that is going to come into play.”
However, Beaulieu suggested Canada’s ability to push the environmental file at NAFTA renegotiations is not as farfetched as some might think. He noted strengthening labour and environmental standards are part of the U.S. agenda, which are probably aimed more at Mexico, but are on the agenda nonetheless. Further supporting environmental goals for NAFTA is the fact the U.S. Congress must approve any plan, and that may require bipartisanship.
“It might come down to getting Democrat and Republican support in Congress, and they have an environmental constituency there as well. At the end of the day, when Congress and the U.S. Senate goes to look at the NAFTA agreement, it is unlikely the Republicans will pass it on their own, depending on how negotiations go.”
Expansion of the Trans Mountain pipeline certainly could give Canada a bit of leverage in energy negotiations, because Canada would be less dependent on the U.S. as the market for Canadian crude, but Beaulieu does not expect that project to be underway in time to have much impact on current NAFTA talks.
“We need other markets and a more diversified trade portfolio,” he said. “The challenge for current negotiations is timing. They are on a very fast schedule and they want to get negotiations completed so they can try and get something together before the Mexican election and mid-term [U.S.] congressional elections.”
McConaghy, former vice-president of corporate development at TransCanada, suggested that while free trade talks are important, Canada’s energy sector has more to worry about from Canadian governments attempting to meet Paris Agreement reduction targets than the sector does from NAFTA renegotiations.
“The litany of negative things governments are still applying to the energy sector and the Canadian economy is a long list — implausible emissions reduction targets, an Alberta oilsands emissions cap in the context of an aggressive carbon pricing regime, no clarification by governments if they actually want growing hydrocarbon production in this country, and the potential for massive interventions in the ways Canadians are allowed to use energy.”
Energy free-trade benefits go both ways across 49th Parallel
Dinara Millington, vice-president of research at the Canadian Energy Research Institute (CERI), said labour mobility and skills transferability are important topics for NAFTA talks, especially as it pertains to oil and gas services. “I have spoken to a few companies that are Petroleum Services Association of Canada (PSAC) members, and one of the limits and constraint that currently stands is this lack of ease of transferring labour and infrastructure.”
Regarding free trade between Canada and the U.S. in relation to the two countries’ energy sectors, Millington noted the important role that not only the U.S. plays for Canada, but that Canada plays for the U.S. — a key consideration in current NAFTA talks.
“In 2013, and this is the most recently-available data that [CERI] has, Canada’s oil and gas sector, the Canadian oil and gas construction sector, and Canada’s oil and gas services sector spent more than $6 billion in the United States, purchasing goods and services from U.S. companies.”
She added: “Not only does the Canadian industry and Canadian private sector benefit from the development of oil and gas and natural resources in Canada, but the U.S. economy does too. That is something we need to understand and that our U.S. counterparts need to understand.”
Make way for Mexico on the North American energy front
Mexico was originally largely exempt from the energy chapter of NAFTA, noted Beaulieu, but with the recent reforms and a willingness to open up both politically and economically, the Mexicans are ready for free trade on that front, and that is a substantial opportunity and consideration for North America energy.
He said: “I don’t know what that means for negotiations, maybe not much, but that is a piece of this I think we should focus on.”
Tim McMillan, chief executive officer of the Canadian Association of Petroleum Producers (CAPP), told the panel that before Mexico was part of North American energy free trade, capital investment from places such as New York, Europe and Toronto had little options for large-scale investment in free-enterprise countries other than in areas such as the U.S. Gulf Coast and Canadian oilsands.
“As Mexico liberalizes its trade, it does put another competitor on the market. We believe in free trade, it is not a bad thing and North America should be targeting out to reach the world, but that is a dynamic where the freedom of trade has put another option for New York bankers to put their money that isn’t Canada.”
However, assuming TransCanada is successful with completing Keystone XL, McConaghy said it means credible financial parties are prepared to pay billions of dollars to link substantial volumes per day of Canadian bitumen to the Gulf Coast market. He believes that project basically means Mexico cannot crowd out Canada over time. “That is a long-run integration, and that is not going to be displaced. In fact, it augurs well for further increments to it.”
McConaghy added: “This is why it is actually more important that Canadian interests have a way of ensuring we can deal with future disputes [through NAFTA], but I am not fundamentally concerned about Mexico crowding us out as long as that infrastructure goes into place.”