US consumers benefit from energy integration with Mexico, Canada

U.S., Canadian, and Mexican energy markets are poised for substantial and sustained growth that will contribute to expanded employment and energy abundance throughout the North American continent. This production growth offers energy security and growing abundance in oil and gas supplies for consumers in all three countries.

This integrated market is especially important for the U.S., which is well placed to expand domestic oil and gas production, as well as exports of advanced oil field services and equipment.

{mosads}As negotiations begin on the future of the North American Free Trade Agreement (NAFTA), it is essential that U.S. policymakers have a full understanding of the long-term economic and security stakes related to sustaining and promoting full integration of the North American energy market. 

This expansion in North American energy output took its lead from the U.S. petroleum renaissance that saw domestic crude oil rise from 5 million barrels per day (MBD) in 2008 to over 9.5 MBD by mid-2015.

Although U.S. production fell back by nearly 1 MBD when oil prices collapsed in the second half of 2015, output is rising again with the recent gain in world oil prices. U.S. natural gas production has followed a similar path, growing from 45 billion cubic feet a day (Bcf/d) in 1985 to nearly 75 Bcf/d in 2015. 

Our NAFTA partners are participating in this petroleum renaissance. The Canadian Association of Petroleum Producers forecast oil sands production in Alberta to rise from 3.8 MBD to 4.9 MBD by 2030. Energy reform and privatization in Mexico promises to halt the decline in crude oil production in a province historically starved for investment by a government monopoly.  

The actions by the Trump administration to restore certainty and rule of law to oil and gas development and pipeline permitting in the U.S. will provide new supplies and low-cost transportation options for both Canadian oil sands and North Dakota crude oil for delivery to U.S. refining centers.

An open border for natural gas, combined with pipeline development and power generation in Mexico, is providing an important and growing market for U.S. natural gas producers, pipeline developers, and equipment manufacturers.

Open access and connections to petroleum production and consumption centers outside of North America will provide additional opportunities for both efficiency and economic growth in a sector that the U.S. already has many comparative advantages in.

We are already realizing the benefits of enhanced energy security and resiliency from this integrated production platform. At the recent Energy 2017 petroleum conference in Mexico City, undersecretary of hydrocarbons for the Mexican government, Aldo Flores Quiroga, emphasized his nation’s commitment to full integration.

Quiroga pointed out that when it comes to natural gas flows, U.S and Canada already have 42 cross-border interconnections, while the U.S. and Mexico have 13 interconnections. Refined products move across three cross-border pipelines in Canada and four in Mexico.

Estimates by the U.S. Energy Information Administration (EIA) show that North American petroleum consumption exceeds 22 MBD, but well over three-fourths of this consumption is now sourced from NAFTA partners, as net petroleum imports amounted to less than 4 MBD. Government forecasts expect the combined U.S., Canadian and Mexican markets to be a net crude oil exporter by the end of the decade. 

Last month, U.S exports of natural gas to Mexico exceeded 4 billion cubic feet/day (Bcf/d) and are expected to double in the next few years. The growing export market has helped U.S. producers survive in a depressed market and has also permitted Mexico to replace high-cost, oil power generation capacity with low-cost natural gas.

This is both good economic news and a plus for the environment, as Mexican power generation capacity moves toward eco-friendly natural gas and away from fuel oil. At the same time, the large and technologically advanced refining centers on the U.S. Gulf Coast are exporting low-cost gasoline and diesel fuel to Mexico, freeing up capital for oil and gas exploration and production that would otherwise have gone into new refining capacity. This is how international trade is supposed to work. 

Admittedly, trade flows can be highly unbalanced. According to an analysis by Kevin Book of ClearView Energy Partners, in the first 11 months of 2016, the U.S. exported over $19 billion of energy products to Mexico, including bituminous coal, gasoline, diesel fuel, propane and natural gas. At the same time, the U.S. imported about $9 billion of energy products from Mexico, nearly all of which was crude oil.

Energy trade with Canada was more unbalanced. The U.S. imported $52 billion in energy products versus exports valued at $15 billion. Recall that this trade is taking place in close proximity, largely overland, with stable and secure allies. It is also a highly-dynamic market. Just a few short years ago, the U.S. was highly dependent on Canadian natural gas, but this trend has now reversed as U.S. supplies surge.

Some commentators have raised concerns that the U.S. will now mimic a Russian strategy with Ukraine by cutting off Mexico from U.S natural gas supplies to gain some kind of leverage on trade deals.

Participants in the NAFTA energy market should instead take solace that the value of the North American integrated energy market is well understood as both an economic boom to American consumers, employment for the U.S. oil field workers, and more importantly, a critically valuable strategic asset.

In recent years, the Pentagon has put considerable effort into understanding how the North American energy surge contributes to an improved strategic outlook. Secretary of Defense Gen. James Mattis and Secretary of Homeland Security Gen. John Kelly are well aware of its importance.

Secretary of State Rex Tillerson, the former CEO of ExxonMobil, has intimate knowledge of the functioning of this market. The important task going forward is to reassure our Canadian and Mexican partners that the U.S. is committed to full integration of the North American energy market, even if some aspects of our trade relationship require adjustment. 

Lucian (Lou) Pugliaresi is president of the Energy Policy Research Foundation (EPRINC).

The views expressed by contributors are their own and not the views of The Hill.