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Michael Cleland

Michael Cleland

Michael Cleland

Why Canada should welcome a competitive Mexican energy industry Add to ...

The recent announcement by the Mexican President that he wants to allow private and foreign investment in Mexico’s oil and natural gas industry is a change that Canada should welcome, not fear.

The fear is that an inflow of investment into Mexico will mean less investment in Canada while the rise in production levels brought on by the private investment will add to the glut of energy in the North American market and reduce demand for Canadian energy exports.

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These concerns are overstated and they miss a much more important point.

Canada has had an open energy trade and investment strategy since the mid- to late 1980s when price deregulation, easing of restrictions on foreign ownership and the Canada-U.S free-trade agreement (FTA) ushered in a new market-based energy policy. That strategy prevails today and it still works.

In the North American free-trade agreement energy negotiations, Canada and the U.S. tried to convince Mexico that it should agree to an open energy trade regime and an open investment regime. Mexico agreed to the first notion but rejected the second.

At the outset of the negotiations, Mexico identified five “no’s” – issues that were not on the table. They all entailed different aspects of investment. One was that there would be no consideration of private investors (not just foreign) entering into risk-sharing arrangements on Mexican oil and natural gas development. Despite relentless efforts by Canadian and especially U.S. negotiators, the five “no’s” were still intact at the end game.

Current Mexican proposals to allow production or profit sharing are one small toe dipped in the open investment ocean. Whether they succeed against political opposition is yet to be seen, but Canadians should be cheering them on – not fearing the competition.

Ironically, at the time of NAFTA the political risk for the Canadian government was that Mexico would be seen as a better negotiator than Canada. After all, according to several influential and supposedly knowledgeable commentators, Canada gave up control of its energy industry in the FTA only a few years earlier and Mexico successfully “protected” its industry. With over twenty years of experience what does the score card tell us about which strategy was most successful?

Look at one measure: change in production.

In the 25 years since the ratification of the FTA (1988) Canada has seen its oil production grow from two million barrels per day to 3.5 million, a 75 per cent increase. Natural gas production went from 9.6 billion cubic feet per day in 1988 to 18.2 billion at the peak in 2006, a 90 per cent increase which has been followed by a slow decline as our industry makes the adjustment to unconventional production and much lower prices.

Mexico has lots of oil and natural gas resources. Its sole equity investor in those resources, state-owned PEMEX, has long been capital constrained and has focused primarily on oil despite having solid conventional and unconventional natural gas resources.

Since 1988, Mexico’s oil production went from 2.9 million barrels per day to a peak of 3.8 in 2008, then declined to just under 2.9. Although Mexico’s natural gas production has increased from 2.5 billion cubic feet per day in 1988 to just over five billion currently, its natural gas resources have remained far less than fully developed and Mexico remains a net importer of natural gas.

Mexico depends on growing its energy production. Crude oil export revenues play a key role in Mexico’s trade balance. Its fast growing domestic economy needs more and more energy, especially clean energy like high quality petroleum fuels and natural gas. For many politically understandable reasons, Mexico chose in the early 1990s to pursue a strategy which prevented it from mobilizing all the capital needed to make the best use of its energy resources. Today it shows signs of shifting strategy.

Canada can help because we don’t just produce oil and natural gas. We produce very capable, well-capitalized energy companies in oil, natural gas, pipelines and all manner of ancillary services. If those Canadian energy assets can be brought more effectively to bear in helping our NAFTA partner meet its energy needs, as well as those of the big NAFTA partner in the middle, then bring it on.

Sure it’s competition. That was exactly what Canadians opted for in 1988 and we have benefited ever since.

Michael Cleland is the Nexen Executive-in-Residence at the Canada West Foundation.

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