By Juliana Ennes
The aging infrastructure that links the United States, Canada and Mexico in the energy sector poses a threat to the North American Climate, Clean Energy and Environment Partnership. The region will have to increase investment while facing American production escalation due to fracking technologies; a prolonged depression in oil and gas prices; and a new geopolitical scenario.
Energy has been a major component of all three economies individually, responsible for jobs and wealth creation and for innovation. But energy underpins a great part of the relationship between those countries. Today, Canada, the United States, and Mexico have partnerships that include shared power lines and oil and gas trade. The aging infrastructure is inadequate to further this relationship, which led leaders of all three countries to pledge an increase in investments. Whether or not it will lead to more cooperation, is yet to be seen.
Although regional integration may change after US presidential elections (with a possible revision of the North American Free Trade Agreement, NAFTA), US – Canada and US – Mexico bilateral energy relations tend to get stronger.
In the US, according to the Federal Energy Regulatory Commission, the main critical infrastructure in the country lies in the electricity and oil & gas sectors. A deficient infrastructure impacts not only resiliency and reliability of energy supply but also energy prices. Northern states in the US have faced difficulty in further developing pipelines due to popular opposition (and ecological threats). However, better midstream infrastructure is seen as the short-term solution to fix high energy prices in the region, and President Trump has already signaled in favor of new pipelines.
Canada aspires becoming an energy superpower but depends on the US
A significant part of Canada’s oil and gas infrastructure is rapidly approaching the end of its useful life. 30% of Alberta’s (Canada’s largest oil and gas producing province) pipelines are older than 25 years and 5% older than 50 years. The aging infrastructure increases the risk of environmental accidents. Canada faces the need for more investment in both existing pipelines and new builds to facilitate an increase in production.
Canada is the largest energy-trading partner of the United States, according to the US Energy Information Administration (EIA), while the US is essentially Canada’s only customer for oil. Despite prices variations, the general design of this bilateral energy trade flow has changed very little. Until now.
President Trump’s green light for the construction of Keystone Pipeline (a project that had been suspended for more than seven years) may help Canada export its tar sands oil. The president has also published a memorandum allowing the construction of Dakota Access Pipeline (DAPL), which could be used to move Canadian oil into the US market. The Northern neighbor aspires to become a superpower of energy by exporting its excess production, but it directly depends on the US to achieve this goal.
The US has the largest refining capacity in the world suitable for the heavy oil Canada produces. Furthermore, the US has profited handsomely from this cheap imported oil. On the other hand, Canada now plans to export its heavy oil to markets in Asia and the Pacific. Part of the exports would use the US as route, since the American Congress has lifted the 40-years oil exports ban. The first shipment of Canadian oil through a port in Louisiana may be going overseas soon, according to a report from Bloomberg.
The remaining Canadian oil will reach the Asian-Pacific markets through the Trans Mountain pipeline, a project that would cross Canada towards the West Coast (however, despite having been approved by the federal government in November, it now faces intense provincial opposition).
Mexico risks staying out of the regional accords
In contrast, the US-Mexico relationship is much less balanced, since Mexico has little bargain power. The bilateral energy trade between both countries has dramatically changed in recent years. The lack of investments by state-owned Petroleos Mexicanos (Pemex) drove down production, with Mexico going from a large exporter of crude oil to the US to rapidly growing its imports from the US of both petroleum products and natural gas.
To counterbalance this tendency, attract investments and decrease energy prices, Mexico started in 2013 a wide-ranging energy reform, opening its oil and gas sector to foreign investors for the first time after 70 years of governmental monopoly. The energy reform has already proved to be a success in attracting foreign private capital to the country’s oil and gas sectors since 2015.
Mexico, however, still needs more investments to enlarge its refining capacity and to increase LNG import capacity, expanding gas import options beyond American pipelines.
The Mexican energy reform includes the power sector as well, which is essential to economic competitiveness. The country is trying to further develop reliable and affordable power, especially for the industrial sector. To achieve that, it needs more investments in infrastructure to better connect different regions in the country. Attracting international investments is another great way Mexico can develop its relationship with the US.
Trump’s energy platform – to become “totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests” – has a direct relevance for the neighboring countries. Canada and Mexico have long been considered “friendly suppliers”.
Even though the new administration pursues a national production boost to achieve independence, “most experts recognize that North American, rather than US, oil independence is a much more reasonable target at which to aim,” according to a report from the Woodrow Wilson Center.
