Donald Trump and Justin Trudeau at the White House on Feb. 13, 2017.Kevin Lamarque/Reuters
Canada and the United States are keen to see Mexico enshrine its far-reaching energy liberalization in a revamped North American free-trade agreement, as the three partners look beyond the trade deal to forge a new North American energy strategy.
The Trump administration signalled it is largely content with Canada-U.S. energy relations when it released its goals for NAFTA renegotiations on Monday, but that it wants to "preserve and strengthen" energy-market liberalization that has occurred in Mexico. Key Canadian concerns on energy revolve around President Donald Trump's frequent commitment to require American-made steel for pipeline projects, and fears in the oil industry that Canadian companies face rising duties as a result of a tougher U.S. approach on "rules of origin" for the diluent that companies need to dilute oil sands bitumen so that the crude can flow through pipelines.
Canadian officials appear optimistic that those potential irritants will be avoided.
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Still, Ottawa is eager to shield its industries from any protectionist impulses by reaffirming NAFTA commitments, and reaching a North American strategy on cross-border infrastructure, U.S. treatment of Canadian electricity exports and joint efforts on regulations and innovation.
"It is clear to us that the new administration is seeing energy as a sweet spot in relation to Canada," a senior federal official said.
Both the Trudeau government and the Trump administration want to bring Mexico fully into the energy chapter of NAFTA to lock in its recent free-market reforms. President Enrique Pena Nieto is facing tough criticism over his liberalization agenda – and a pledge to reverse it – from the leading left-wing candidate to succeed him after next year's election.
With its market opening, Mexico has emerged as a powerful partner and customer for American – and to a lesser degree, Canadian – energy companies. The government pushed through constitutional reforms to eliminate the monopolies held by state-owned Pemex in the oil and gas sector and by its publicly owned electricity supplier, opening the door for foreign investors.
Oil and gas companies are increasing their exports to their southern neighbour, which is emerging as an important market for natural gas from Texas and New Mexico. Calgary-based TransCanada Corp. is building several gas pipelines in Mexico.
"The administration recognizes that it is in the interests of everyone for a renegotiated NAFTA to maintain the newly found openness in the Mexican market, and to codify the Mexican constitutional energy reforms in any new agreement," said Jacob Dweck, a Washington-based energy lawyer with Eversheds Sutherland LLP.
One major concern is Washington's insistence on its right to pursue "Buy America" programs. Mr. Trump reiterated this week his determination to ensure that American steel is used in construction of pipelines in the United States, though it remains to be seen how he intends to enforce that, and whether Canada would win an exemption.
On bilateral energy trade, Canada would like to eliminate some irritants but is more likely to look outside the trade agreement as Natural Resources Minister Jim Carr and U.S. Energy Secretary Rick Perry promote the benefits of a North American energy strategy that would facilitate the deeper integration of markets.
A federal official said the three governments are looking at striking an accord that would commit to co-operation on energy trade and infrastructure; on R&D and innovation; and on regulation including growing concerns over cybersecurity.
Canadian electricity exporters are eager to see a deepening relationship through a North American strategy, but are largely content with the NAFTA provisions.
However, oil and gas producers are facing increasing problems at the border as customs officers take a hard line on rules of origin that govern whether a commodity is allowed in the country duty-free, or taxed because it contains too much content from non-NAFTA suppliers.
In a submission to the federal governments, the Canadian Association of Petroleum Producers (CAPP) sounded the alarm about "overzealous" customs officers who require importers to verify the source of their crude and the diluent that is blended with the oil sands bitumen.
Importers of Canadian crude face duties when they can't definitively show the diluent originates in a NAFTA country, according to CAPP, which argues the requirement is onerous. It wants the origin of diluent to be effectively disregarded in a revamped NAFTA, said Nick Schultz, vice-president of pipeline regulation and general counsel with the lobby group.
"What's happening now is that U.S. customs is expanding their enforcement approach as they've found more and more situations where people aren't providing certificates of origin," he said by phone. "So we need to find some solution that's sensible that recognizes that Canada is just not a practical back door into the U.S. for offshore oil and natural gas."
With a file from Jeff Lewis in Calgary