Donald Trump and Natural Gas – An Explosive Combination? Examining the natural gas industry’s response to NAFTA renegotiations

An overview of the natural gas industry's response to current NAFTA renegotiations.

The past 35 years have seen unprecedented growth in international trade.1 Much of this growth was facilitated by free trade agreements, which reduced or eliminated international trade restrictions such as tariffs, regulations, and protectionist policies.2 Perhaps the most domestically well-known of these agreements is the North American Free Trade Agreement (NAFTA). Signed in 1994, NAFTA streamlined trading rules and eliminated most trade tariffs between the USA, Canada, and Mexico. This agreement had a significant impact on trade between the three countries, as overall trade volumes between them grew from $290Bn in 1993 to $1.1Tn in 2016.3

Following President Trump’s election victory, where he repeatedly railed on “unfair” trade deals such as NAFTA, his administration has engaged with Mexican and Canadian counterparts in an attempt to renegotiate NAFTA – though he has not taken scrapping NAFTA entirely off the table.4

One of the largest beneficiaries of NAFTA in recent years has been the natural gas industry. Taking advantage of NAFTA’s free trade provisions along with a large increase in domestic US gas production, the US has increased exports to Mexico dramatically in recent years and now supplies more than 25% of Mexico’s natural gas needs. Mexico is the single most important export market for US natural gas, representing 60 percent of all exports.5 President Trump’s recent posturing on NAFTA has raised alarms throughout the natural gas industry, which risks heightened supply chain costs in the event that cross-border tariffs increase.

Some of the key players in the natural gas supply chain are pipeline builders such as Energy Transfer Partners (ETP), which build and operate the pipelines used to transport natural gas. ETP builds, owns, and operates multiple domestic and international pipelines, including four gas pipelines to Mexico they have completed over the last two years.6

Many organizations in the industry, including ETP, are taking proactive steps to mitigate any potential effects of a NAFTA renegotiation or repeal. The most prevalent short-term strategy for doing so has been to lobby the US government for favorable treatment for the industry in any NAFTA renegotiation. In the short run, ETP has been working through the American Petroleum Institute (the trade association for the American oil and gas industry) to redouble its lobbying efforts in an attempt to influence pending NAFTA renegotiations. ETP hasn’t stopped there, however – they are also leveraging personal connections with Rick Perry, the current US Energy Secretary. Mr. Perry formerly served on the board of ETP and remains close with ETP’s current CEO, Kelcy Warren.7

Over a somewhat longer time frame (3-10 years out), Energy Transfer Partners and the oil and gas industry broadly have indicated a commitment to remaining diligent in observing the current political climate in all of the countries in which it operates, redoubling or redirecting lobbying efforts as necessary. There are also ancillary political goals that ETP and others will seek to lobby for in any additional trade deal the US signs with Mexico and/or Canada; chief among them is an effort to lock in recent Mexican reforms that open up Mexico’s energy market for foreign investment.8

In addition to the steps outlined above, there are several additional actions that ETP could take to strengthen their competitive position and minimize risk in a new world with strong nativist sentiments. Although ETP appears to have done a good job up to this point in coordinating its lobbying activity through the API, there is more internal work they can do to mitigate the downside risk of an unfavorable NAFTA renegotiation (or worse, a straight-up repeal of the agreement). In the short term, ETP should consider exploring alternative areas to construct new pipelines – expanding domestic pipelines and pursuing additional international operations outside North America. They could also explore establishing a Mexican subsidiary to mitigate the tax implications of a NAFTA repeal.

Over the longer run, ETP should continue the push to diversify geographically – reducing dependence on business with Mexico, and seeking a broader combination of international and domestic projects. ETP will also face an existential moment in the future as alternative energy (e.g., wind, solar) gains momentum and market share. In the face of this new market reality, ETP would also be well served by seriously asking themselves if they can enter into the distribution market for these new forms of energy. Although it may prove difficult, ETP has significant logistics and operational expertise they could leverage to evolve their business model.

One important open question on this issue where I would welcome comments: Just how “real” is the risk to US natural gas companies from NAFTA renegotiations? Given energy’s importance to the US economy and the industry’s favorable relationships with the Trump administration, is there a real threat of supply chain disruption or are these concerns simply political posturing?

(789 words)

 

1 Donnan, S., “Trade: Into uncharted waters,” Financial Times (Oct. 24, 2013)

2 Shujiro, Urata, and Okabe Misa. “The Impacts of Free Trade Agreements on Trade Flows: An Application of the Gravity Model Approach.” RIETI Discussion Paper Series, 07-E-052, July 2007

3 “NAFTA’s Impact on the U.S. Economy: What Are the Facts?” Knowledge @ Wharton, 6 Sept. 2016, knowledge.wharton.upenn.edu/article/naftas-impact-u-s-economy-facts/.

4 “Trump Renews Threat to Scrap NAFTA Going into next Round of Talks.” Reuters, 27 Aug. 2017, www.reuters.com/article/us-trade-nafta/trump-renews-threat-to-scrap-nafta-going-into-next-round-of-talks-idUSKCN1B70NA.

5 Goldberg, Shelley. “U.S. Natural Gas Market Sees Big Benefits From Nafta.” Bloomberg, 16 Aug. 2017, www.bloomberg.com/view/articles/2017-08-16/u-s-natural-gas-market-sees-big-benefits-from-nafta.

6 Krauss, Clifford, and Azam Ahmed. “Trump’s Anti-Nafta Stance Is on a Collision Course with Natural Gas.” NY Times, 26 June 2017, www.nytimes.com/2017/06/26/world/americas/rick-perry-mexico-gas-energy-industry-electricity-natural-gas.html.

7 ibid.

8 Dlouhy, Jennifer. “Oil Companies That Cheered Trump’s Regulatory Rollback Are Quaking about Changing NAFTA.” Calgary Herald, Bloomberg News, 1 Sept. 2017, calgaryherald.com/business/energy/oil-companies-that-cheered-trumps-regulatory-rollback-are-quaking-about-changing-nafta.

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25 thoughts on “Donald Trump and Natural Gas – An Explosive Combination? Examining the natural gas industry’s response to NAFTA renegotiations

  1. This is a very interesting situation. My opinion is that NAFTA renegotiations pose very little threat to US natural gas companies. I think you will continue to see Mexico and the US think about what to do under a scenario where renegotiation affects the oil and gas market, but you won’t see any significant investments made because neither side sees it as a legitimate threat. As you mentioned, ETP will continue to look for opportunities to diversify outside of Mexico. I see this as a normal business activity that would/should be occurring with or without the political concerns. And as stated in the NY Times article you cited, Mexico will continue to research backup options – an activity that it more than likely should have been doing on an intermittent basis anyway. Ultimately, the huge benefits of the current arrangement and terrible consequences of renegotiation are too obvious and significant to ignore. Mexico would be left with an energy shortage and US companies would see natural gas prices fall to a point that made some operations unprofitable. Between the fact that it just doesn’t make sense for either side and the involvement of the political entities and people you mentioned, I just don’t see this happening. It is always good to make a plan against potential risks, but ETP doesn’t need to be pressing the panic button just yet.

  2. While there is no doubt that this situation could escalate into a destructive situation in terms of both potential economic (for ETP and other U.S. pipeline companies) and environmental impact (e.g. Mexico returning to the use of coal), I think regardless of what happens with NAFTA, Mexico and the United States will reach some sort of bi-lateral trade agreement. One of the potential interesting responses to this protectionist move would be the acceleration of production and exportation of liquefied natural gas (LNG). LNG itself is disruptive to the natural gas market, as it enables a commodity once bound to a pipeline to be loaded onto tanker ships and transported across the globe. With the glut of natural gas on the U.S. market, one can only wonder about the potential benefits of expanding access to cleaner energy to developing markets and removing Europe’s dependence on Russian energy exports (Lithuania and Poland were the first European nations to take advantage of the rise of U.S. LNG). While I firmly support open and free trade, perhaps even in the “doomsday scenario” of a full NAFTA breakdown, there may be a silver lining.

  3. I think natural gas exports will be prioritized by the US government during NAFTA renegotiation talks, as the industry brings considerable trade surplus with Mexico. Additionally, US natural gas might be the best option for Mexico, as existing infrastructure and proximity to the US proves to be more cost efficient than other current alternatives. In the case of NAFTA breakdown, it is possible for both US and Mexico to engage in a trade war, yet it is highly unlikely for Mexico to impose a tariff on natural gas, as demand for energy is growing at a steady pace and a shock in natural gas price will cause a ripple effect through the economy (increase in inflation). Furthermore, Mexico’s natural gas production is declining at a rate of 10 percent this past year alone, which signifies the importance of gas imports for Mexico. Although unlikely, it is important for the US to not initiate any actions that could result in retaliatory actions by Mexico, as tariffs imposed to the industry will likely hurt US gas industry as it will substantially decrease demand and prices.

    Source:
    https://www.forbes.com/sites/jamestaylor/2017/06/08/u-s-racks-up-massive-natural-gas-trade-surplus-with-mexico/#125733643066

  4. I agree that the Trump administration’s posturing is adversely affecting the natural gas, and energy sectors. Both the natural gas and energy ETFs (UNL and XLE respectively) are down by about 8% this year.

    Natural gas companies will need to take a hard look at diversification – both in terms of geographical reach, and moving towards renewable sources. In the short term, I also recommend exploring technological advances that help easy transport and use of natural gas, such as liquification. This can expand the reach of natural gas companies to other geographies, such as Asia and Australia.

  5. I understand from your essay that the US natural gas industry has been one of the most significant beneficiaries of the NAFTA. This is especially interesting, because when people hear current government’s opinions about this trade agreement, they mostly see Mexican and Canadian companies as benefiting. Therefore thank you fro bringing up this example. I have though two points to add to your essay regarding the negotiation dynamics with Mexico and my concerns about ETP’s expansion to other geographies in pipeline business.

    Firstly, I also think that the outcome of the renegotiation is extremely important to ETP and ETP’s significant dependency on Mexico business might show the company vulnerable. However, I also want to add that ETP (and the US natural gas industry) has also a great leverage in these negotiations. Mexico’s import volume of the US natural gas increases each year and has a significant portion in its energy mix. For Mexico it will not be so easy to replace such a source, which flows economically through a pipeline from a neighboring politically stable country – a rare combination around the planet.

    Secondly, ETP might face with many challenges in finding new geographies outside of North America to expand their pipeline business. As you also mentioned in your essay nativist sentiments are rising in the world and such politically valuable pipelines are mostly owned and operated by government subsidized or owned companies. Gazprom from Russia, BOTAS from Turkey, Petrobras from Brazil, and OMV from Austria are some examples of such companies from different continents; ETP would need to compete with those regional holdings to build pipelines.

  6. This is a very interesting essay about the uncertainty and unpredictability of NAFTA talks isolationism in general. In fact, I learn two things from your essay: the first one is that it is not clear who from the two countries would benefit from the renegotiation of NAFTA but that the outcome for ETP is hard to predict. The most important takeaway I find in your essay and in your questions is that the inability to have a clear visibility of the outcome of isolationism movement leading in particular to trade renegotiations pushes companies to be more reactive and adaptable. I take two lessons from that situation:

    1) The first is the need to diversify your risk and not be dependent on a major trade that no longer offers long-term stability nor visibility.

    2) The second one is to seek more in-countries opportunity as relation gets weakened with isolationism movement, be it between US, Canada and Mexico for example, or between the EU and the UK.

    Finally, as we see in your essay that no matter how close the relationships are between a company and members of the current administration, companies should perhaps consider subscribing to additional insurances, that could raise the price of projects, but protect them from political uncertainty.

  7. I agree with Grant in that I do not think that natural gas companies need to panic regarding NAFTA just yet (just given that I do think that natural gas will be prioritized in any renegotiation talks). At the same time, it is important to think through the broader operational challenges if natural gas trade were to be challenged in some way. For example, the natural gas industry in the U.S. has contributed to the rapid growth of the chemicals industry in the country, which in turn has benefited from access to Mexico. [1] Currently, Mexico is the second largest market for US chemicals – valued at $19.2 billion. [1] The ripple effects of a setback would extend beyond the immediate natural gas supply chain – making natural gas clauses in NAFTA even more sticky.

    [1] Baker Institute. NAFTA Negotiations: What’s In It For The U.S.-Mexico Energy Trade? Forbes. November 2017.

  8. Great, highly topical post, JS. I’d agree with the consensus above that it’s highly unlikely Trump explodes NAFTA in ways that will disadvantage oil and gas companies given the political and financial pressure to avoid that situation (though I like Drew’s LNG silver lining suggestion). Given that it’s just not possible to say for certain what the administration will end up doing, I’m intrigued by your suggestion that Energy Transfer Partners should look into distributing alternative energy given their expertise in this discipline. The strategic rationale is clear – reduce dependence on natural gas and diversify to try to de-risk the business – but the expertise point is less clear. Based on ETP’s company website, they seem to have more than 71 billion millions of pipelines for “natural gas, crude oil, natural gas liquids and refined products” [1], and from what I understand, wind energy, solar energy, nuclear power, and hydro electricity don’t run through pipelines, so that asset base and expertise wouldn’t be of any use. Potentially those pipelines could be used for biofuels, though the market does seem to be moving more toward other renewables like wind and solar [2]. While ETP might not consider getting into the wind or solar power generation business, they would need to be able to transport and likely store the energy, which requires expertise in batteries and electricity transport. I’m not sure ETP has any edge there, though the company might consider acquiring it or entering into a joint venture. Potentially, the compelling narrative ETP could tell about acquiring a wind or solar energy transport company is that ETP has expertise in the government and corporate relationships required to successfully sell the energy as well as the financing required for these highly capital intensive transport construction projects and therefore the combination would be synergistic.

    [1] http://www.energytransfer.com/
    [2] https://www.theguardian.com/environment/2017/oct/04/solar-power-renewables-international-energy-agency

  9. Thank you, JS for a very interesting article. My initial reaction is to echo much of what the above comments have mentioned, and to express a high degree of skepticism around any serious disruption in the Mexico/US natural gas trade relationship. This surely feels like a true win-win situation that it would not make sense to walk away at this point.

    While there is a slim risk of disruption, I want to push back a bit on the mitigation actions that you identified, should NAFTA completely come to an end. With my limited understanding of the situation, the suggestion around ETP setting up a Mexican subsidiary seems it would be unfruitful at first glance. The assets would still be in place, and the cross-border trading would still have to occur under the new status quo.

    Pushing for increased geographic presence within the US would seem like the most obvious manner to mitigate the situation, however as Grant correctly identified, the viability of this strategy would be put in question if NAFTA falls apart given a new equilibrium that would render certain operations unprofitable.

  10. This is a comprehensive review of a very relevant topic. I agree with the sentiments expressed above that the talks of NAFTA restructuring is largely political posturing. Additionally, if changes are made, the changes will most likely benefit American industries. With that said, it is important to focus on natural gas specifically. Whatever changes are potentially made, I cannot see a scenario in which the natural gas industry is negatively impacted. The mutual profitability of exporting to Mexico makes any detrimental changes untenable.

    Additionally, the political reality is key. Perhaps most illustrative of this is the following fact: the current CEO of ETP, Kelcy Warren, was the single biggest contributor to the Energy Secretary, Rick Perry, when he ran for president [1]. The article above says that the two are close, but these donations lead me to believe that Perry would never allow ETP’s profits to be jeopardized.

    Sources
    [1] https://hurd.house.gov/media-center/in-the-news/could-trump-s-position-nafta-upend-natural-gas

  11. Really interesting potentially impact of pulling out of NAFTA with which I was unaware. I agree with the consensus that Trump’s political ties with the strong republican majority in Texas, would make it unlikely that he would do something that would hurt the energy-dependent Texas. The glut of natural gas in the US that has driven down natural gas prices from a high of $12.69/MM Btus in June 2008 to less than $3 / MM Btus in September 2017 https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm.

    Exporting this glut of natural gas is much more difficult than exporting oil as it requires use of a pipeline or through LNG. As a result 66% of US exports of natural gas are to Mexico https://oilprice.com/Energy/Energy-General/US-Natural-Gas-Needs-Mexico.html. Trump’s anti-NAFTA rhetoric feels more like red meat for his populist base (similar to Obama’s make the 1% “pay their fair share” than something that actually becomes policy. Even if he does act on NAFTA, I agree with others that another agreement would be put in place that would ensure ETP and others who export natural gas to Mexcio could continue to do so.

  12. I tend to agree with the sentiments above that the impact on the natural gas industry due to issues with NAFTA will likely be mitigated by additional bi-lateral trade agreements or other measures that will benefit the American natural gas industry. It is also worth noting some of the close ties between natural gas oil executives and policymakers who can influence this issue. According to the (failing) NY Times, “With American gas exports to Mexico expected to double by 2019, most gas will come from Texas, a vital Republican stronghold that is the home state of both Mr. Perry and Secretary of State Rex W. Tillerson.” [1]

    If I were to dig into this question further, however, it would be interesting to see how short-term stock prices and other economic factors have been influenced simply by some of the rhetoric coming out of this administration.

    [1] https://www.nytimes.com/2017/06/26/world/americas/rick-perry-mexico-gas-energy-industry-electricity-natural-gas.html

  13. Thanks for an interesting read. There are two elements of this that lead me to believe the impact on natural gas pipelines is likely to be less than for other types of industries. The first is that the political rhetoric surrounds job losses to Mexico. That issue is not as relevant to pipelines as it is to manufacturing for example. It’s not necessarily worse for U.S. jobs to build a pipeline to Mexico vs. a pipeline within the U.S. The argument could be made, however, that if tariffs were instituted in the U.S. they would likely be instituted in Mexico and that could impact natural gas entering the country. Natural gas is a commodity product, however, and it seems to me more damaging to Mexico to increase the cost of it to its citizens and businesses, especially if natural gas tends to be imported to the country. Given these two elements of natural gas trade, I suspect natural gas would be safer than other industries in a renegotiation of a trade agreement.

  14. Given the unpredictability of the political environment, I agree with Drew that it would be wise of Energy Transfer Partners (ETP) and other US natural gas producers supply Medico to invest in ways to store natural gas supply such as liquification. In the near- to mid-term, ETP and other industry players should focus on establishing new trading partners to hedge geo-political risks. In addition, ETP should ensure that they have enough flexibility in their supply chain to quickly dial down production in case NAFTA changes dramatically cuts demand which risks collapsing the natural gas market.

    Krauss, Clifford. “Trump’s Anti-NAFTA Stance is On a Collision Course with Natural Gas.” New York Times, June 26, 2017, https://www.nytimes.com/2017/06/26/world/americas/rick-perry-mexico-gas-energy-industry-electricity-natural-gas.html. accessed December 2017.

  15. Extremely well-written and thoughtful piece, JS. While I agree with some of the earlier comments that the Trump is unlikely to affect changes in NAFTA that would materially impact our ability to trade with Mexico, I’d like to push back on Grant and a few others’ comments in that I think the potential downside is quite real and should not be ignored. My knowledge of natural gas pipelines and trade agreements is limited, but from what I understand, sourcing new international projects and constructing alternative pipeline options outside of North America are challenging tasks, to say the least. In addition to high upfront costs and regulatory uncertainties, the gradual global shift toward sustainable energy will also decrease the viability of natural gas pipelines in the medium to long term. With infrastructure and distribution channels already in place between US and Mexico, there are significant advantages to continuing the status quo.

    That said, I think alternative energy is an area that the ETP should definitely consider sooner than later. As you mentioned, it’ll be tough, but as natural gas reserves are depleted and green energy becomes the standard, ETP will need to adapt to the changing marketplace to remain solvent in the long term.

  16. Those are some great points on why the NAFTA is so important to the Oil and Gas Industry in the U.S. However, I wonder if not having the NAFTA would actually harm the industry. I say that because trade barriers are usually imposed in a two-way-street, so if the U.S. prefers to negotiate with NAFTA, other countries probably have higher restrictions to negotiate with the U.S. Not being part of the NAFTA would actually provide some competitive advantages to ETP, such as flexibility to freely negotiate with other countries with same conditions (http://www.hbs.edu/faculty/Publication%20Files/06-043.pdf).
    You made a great point about the supply chain. To highlight your question about the real risk of NAFTA renegotiations to ETP, as this report points out (https://www.accenture.com/us-en/service-tomorrow-oil-gas-supply-chain-solutions), the O&G industry already have a globalized supply chain and I believe that ETP should not worry that much.

  17. Good read, JS. You pose a very relevant question on what are the “real” risks and what is just political posturing. With isolationist movement leaders, we tend to hear a lot of emotional and overstated comments. As you appropriately question, it is difficult to determine what is real and what is political hype. Unfortunately, the fact is that these comments are being made about real trade deals that could seriously affect the US and global economy. It is really not something to be taken lightly. Due to articles like the one from the link below, I believe Trump will prioritize the natural gas export industry. Trump has certainly taken a pro fossil fuel energy stance; he also “digs coal” in case you haven’t heard.

    http://thehill.com/blogs/pundits-blog/energy-environment/339712-natural-gas-exports-centerpiece-of-trumps-energy-plan

  18. Thank you for a highly thought provoking article, JS. I agree with Sushant that the US government would likely limit the harm done to US natural gas companies in the event of a NAFTA renegotiation. Why? As the article mentions, the US supplies 60% of its energy exports (natural gas) to Mexico. The entire US economy could be jeopardized if the current status quo were to be adversely affected. It also begs the question of what US companies should do to mitigate the risks of a NAFTA renegotiation.

    One band-aid approach is to advocate for companies to aggressively lock-in future cash flows via commodity hedging in the market. Firms can obtain greater certainty over future cash flows by doing so. Therefore, firms can limit downside risk should a NAFTA renegotiation fail to protect the status quo in the natural gas market.

  19. Thanks for the interesting read Justin! In this thread, there has been a lot of discussion about the United States’ defense tactics regarding this issue. It’s evident that Mexico is currently very dependent on a supply of natural gas from the U.S. As Grant mentioned, I’m curious to how Mexico is thinking about this issue and hedging for it on their side. However, in recent years, Mexico has been investing more in alternative energy supplies, including wind and solar.

    In a recent study by GTM research, Mexico was identified as one of next five countries to surpass 1 gigawatt threshold of solar energy installed annually. Wind power is also on the rise. Enel just announced this week that it won the right to develop four new wind farms in Mexico that will generate 593MW. As Mexico’s supply of other energy sources increases, it may lead to reduced dependence on the U.S. natural gas supply.

    Sources:

    GTM Research, “Here Are Solar’s Next Gigawatt-Scale Markets,” https://www.greentechmedia.com/articles/read/here-are-solars-next-gigawatt-scale-markets#gs.fwteTJs

    RE News, “Enel Secures 593MW in Mexico,” http://renews.biz/109246/enel-secures-593mw-in-mexico/

  20. Thanks for writing this post! I agree with your perspective and wanted to add some information to the conversation. Your article and a number of additional comments have cited the likelihood that some replacement trade deal would be implemented for natural gas in the absence of natural gas, but I think it may be helpful to highlight some of the industry specific reasons that may shape that perspective. I found an interesting article from the paper from the US International Trade Commission, on some of these dynamics, which include very high transportation costs, non-competitive pricing (e.g. government set or oil-indexed pricing), markets with minimal excess capacity, and generally restrictive contracts (https://www.usitc.gov/publications/332/obstacles_natural_gas_final_pdf_accessible.pdf) . For example, in 2014 74% of natural gas was consumed in the country where it was produced. These barriers highlight the difficulties that US natural gas companies will have in entering global markets in the absence of a regional market. In addition, this underlies the broad global trend in the industry for regional agreements and contracting and the unlikelihood that the US would make it more difficult or expensive to trade natural gas regionally. As others have mentioned, the US stands to be harmed the most by removing a bilateral trade agreement covering natural gas.

  21. Brilliant read, thanks a lot for putting this together. I agree with your overall recommendations and actions to be taken by organizations like ETP to go beyond lobbying. An additional action to be taken by US-based gas producers to mitigate the risk of renegotiated or terminated NAFTA agreements, is ramping up exports of liquefied gas to other markets such as the EU. For this course of action, the rhetoric and dynamics within the Trump administration might actually be helpful. In August 2017, Trump visited Poland and was cheered by the crowd as promised to raise US gas exports. [1] US producers profit from a dual dynamic: Trump is incentivized to disprove allegations of his close ties with Russia and (Eastern) Europe actively seeks to liberate itself from the dependency on Russian gas.

    ‘US and Russia step up fight to supply Europe’s gas’, Financial Times, https://www.ft.com/content/352f4cac-6c7a-11e7-b9c7-15af748b60d0, accessed December 1, 2017

  22. Thank you for writing such an interesting piece! I also echo the sentiment that NAFTA changes would probably have a limited impact on the US natural gas industry, given the strategic importance of this sector, the benefits it brings to the US and the current dependency that Mexico has on imports. According to the EIA, exports of natural gas to Mexico have doubled since 2009 and are projected to keep rising. [1]

    Mexico has dwindling reserves of natural gas which cannot keep up with the rising consumption rates . Despite efforts to liberalize the energy sector and facilitate private investment, high natural gas prices have deterred the exploration of natural gas in Mexico, which further increases the dependency on imports. 50% of the current supply of natural gas in Mexico is imported, of which 82% is directly transferred from the US via pipelines. This dependency seems difficult to circumvent in the short term. [2]

    While Mexico has announced the licitation of onshore exploration for natural gas, these might only become available in the medium term, and the US natural gas industry can compensate a potential decline of exports to Mexico with from exports of LNG to Europe and other geographies, as others have already commented.

    [1] https://www.eia.gov/todayinenergy/detail.php?id=30052
    [2] http://www.fticonsulting.com/~/media/Files/us-files/insights/white-papers/natural-gas-mexico-energy.pdf
    [3] http://expansion.mx/2016/11/14/la-nueva-ronda-petrolera-abre-la-puerta-al-gas-en-burgos

  23. Thanks for your article, JS. To your question as to whether this is political posturing, I would answer a resounding “yes” in a normal political climate. But Donald Trump’s fickle nature is such that the last thing he hears in a meeting often determines his stance on major issues (see: climate change decision re: Steve Bannon’s recommendation). Trump has been beating the “end NAFTA” drum for quite some time and he has been fairly consistent in his policy making as related to campaign pronouncements thus far.

    NAFTA has broad support from the business community and that, in the end, I think will allow for its survival (http://fortune.com/2017/10/12/nafta-mexico-canada-donald-trump/). That being said another more and more likely scenario is that NAFTA dies a slow death, as outlined recently in the NY Times (https://www.nytimes.com/2017/10/17/us/politics/nafta-negotiators-extend-talks-delaying-its-expected-demise.html). In the article, Commerce Secretary Ross notes that Congress might not have the will to reauthorize TPA, which is necessary for maintaining NAFTA. In the end, I think we’ll see that cooler heads prevail re: NAFTA, especially given that we’re seeing a slow burn of criticism on the decision to pull out of TPP from both sides as it is clearer and clearer that the USA abdicated leadership to China by pulling out of that deal.

  24. Thanks for a great read.

    To answer your question of how “real” is the risk to US natural gas companies from NAFTA renegotiations? It is extremely low. In addition to the energy’s importance to the US economy and the industry’s favorable relationships with the Trump administration, the economic and production fundamentals of natural gas make it anything but a threat.

    The US is believed to have well in access of 100-150 years of natural gas that could be commercially extracted for about $2.50/Mcf. But the more important piece of this equation is the fact that a lot of this natural gas is “associated” gas i.e. gas that is a by product of drilling oil. So an argument could be made that exporting natural gas or LNG to Mexico or other FTA and non-FTA countries around the world isn’t in any way leading to additional drilling in the US.

  25. Great analysis of the situation. I agree that natural gas companies are relatively less at risk from any changes to NAFTA given the Trump’s administration affinity towards the energy industry as reflected in their support for the keystone pipeline, for example, and strong support base in “energy” states, such as Texas. Given this situation, I am surprised, however, that they have not hurried to provide further reassurances to the sector. I assume that since Trump is a great negotiator (he wrote the ‘Art of the Deal’ after all), he simply doesn’t want to give away this bargaining chip too soon. But I assume both Canada and Mexico will call his bluff once negotiations on new terms progress.

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