NAFTA talks in Canada could result in energy agreement with Mexico

An agreement to have Mexico join a NAFTA clause governing oil exports may be one of the first significant products of the renegotiation talks this weekend in Ottawa.

When NAFTA was originally signed 23 years ago, Mexico rejected parts of the energy chapter because its oil industry was entirely owned and operated by the government.

However, President Enrique Pena Nieto is looking to solidify the reforms he started in 2013, opening up the Mexican oil industry to international investment and participation.

As such, Mexico has asked to sign Article 605, which limits government interference in oil exports to any of the participating NAFTA countries.

Known as the "proportionality clause", it was a holdover from the Canada-U.S. Free Trade Agreement and means Canada and the U.S. cannot reduce access to each other's oil, natural gas, coal, electricity or refined petroleum products without an equivalent reduction in domestic access to the same product.

So if Canada wanted to cut oil exports to the U.S. by 20 per cent it would have to cut domestic supplies by 20 per cent as well, except in specific circumstances such as the need to protect national security.

For Mexico, joining this clause has one main benefit, said Duncan Wood, head of the Mexico Institute at the Wilson Center, a Washington, D.C. think tank.

"They want to armour plate the (oil industry) reforms through an international agreement against the possibility of a left-wing victory next year," said Wood.

Pena Nieto isn't eligible to run in the presidential elections next year and the leading candidate is Andres Manuel Lopez Obrador, a left-wing politician who is campaigning against Pena Nieto's oil industry reforms and has pledged to reverse many of them.

If Mexico becomes part of a fully integrated North American energy market in NAFTA, it would be difficult for anyone to undo those changes said Wood.

Mexico's ambassador to Canada said Friday that his country wasn't able to fully participate in NAFTA's energy chapter in 1994, but with the industry reforms, that has changed.

"Now it is open for private, foreign direct investment," Dionisio Perez Jacome said at an event in Calgary.

"We are ready to talk about it, to include it, so that the agreement reflects that reality."

Those talks could conclude in this third round of NAFTA negotiations, which begins Saturday.

For Canada, this change isn't all that significant, said Jeff Rubin, senior fellow at the Centre for International Governance Innovation and a former chief economist at CIBC World Markets.

It will give foreign companies, including Canadian energy firms, some confidence in their existing or planned investments in Mexico.

Rubin said Canadian pipeline companies like Enbridge and TransCanada stand to benefit by getting involved in building pipelines to move U.S. oil and gas into Mexico.

If it is more certain Mexico won't nationalize the oil industry again, those investments can be made with less risk.

However there are significant critics of Article 605. The Council of Canadians listed it as one of the top three things they'd like to see eliminated from NAFTA.

Council chair Maude Barlow told The Canadian Press on Friday it is "disappointing" that Canada seems set not to cancel the article, but extend it to Mexico.

The council said the provision cedes Canada's sovereign control of its oil industry and allows the U.S. to dictate that Canada must continue to produce and export as much oil as the U.S. wants.

Barlow said it locks Canada into continuing to produce more and more fossil fuels from the oilsands, even if that goes against Canada's domestic climate change goals and priorities.

Environment Minister Catherine McKenna said Friday NAFTA will not be used as a vehicle to stop Canada from protecting its environment and Canada is pushing for strong environmental standards in the agreement.

"The right for Canada to regulate to protect the environment is a top priority," she said.