HowMightaU.S.-MexicoTradeConflictAffectTradeinNaturalGas?
BySamWalshandJasonBordoff
February22,2017
JasonBordoffisaformerWhiteHouseenergyadvisertoPresidentObama,aprofessorofprofessionalpracticeininternational
andpublicaffairsandthefoundingdirectoroftheCenteronGlobalEnergyPolicyatColumbiaUniversity.SamWalshisapartner
atHarris,Wiltshire&GrannisLLP.From2014to2016,WalshwasDeputyGeneralCounselforEnergyPolicyattheU.S.Department
ofEnergywhereheoversawthelegalaspectofDOE’snaturalgasexportauthority.
U.S. Secretary of State Rex Tillerson and Homeland Security Secretary John Kelly will have their hands full
ThursdaywhentheyvisitMexico.FromthreatsofdeportationandaborderwalltoendingMexico’sprivileged
trade relationship with the United States, the U.S.-Mexico diplomatic relationship under the Trump
administrationhasbecomemorestrainedthanithasbeeninyears.
Whileconcernsaboutenergysecuritymaynotbeasimmediate,theyarenonethelessacuteformanyMexican
energyofficials–aswellasformanyU.S.naturalgasproducerssupplyingoursouthernneighbor–giventhe
size of the cross-border trade. Mexico has become increasingly reliant on cheap U.S. natural gas imports.
Pipelinecapacitybetweenthetwocountriesdoubledinthepastfiveyears,andmaynearlydoubleagainby
theendof2018,accordingtotheU.S.EnergyInformationAdministration(EIA).TheshareofgasinMexico’s
electricitygenerationmixjumpedfrom34to54percentbetween2005and2015,andMexicanindustryhas
staked its growth on the availability of low cost imports. The United States exported three times as much
naturalgastoMexicoin2015asitdidin2009attheonsetoftheshaleboom,EIAstatisticsindicate.Inthefirst
elevenmonthsof2016,theUnitedStatesexportedatotalof1.25trillioncubicfeettoMexico,aremarkable
31%increaseoverthesameperiodin2015.
Indeed, substantial capital investments in U.S.-Mexico natural gas trade were made based not only on
projectionsofalong-termsupplyofrelativelyinexpensiveU.S.naturalgas,1butalsothesupportiveregulatory
environmentforenergytradebetweenthetwocountries.TheNorthAmericanFreeTradeAgreement(NAFTA)
eliminatedtradebarriers,theFederalEnergyRegulatoryCommission(FERC)issuedtherequiredauthorizations
forthepipelines,andtheDepartmentofEnergyimplementedaweb-basedsystemthroughwhichapplicants
canexpecttoreceive“blanketauthorizations”forexportsofnaturalgastoMexicowithinweeks.
TheprospectofaconflictwithMexicoovertradecouldunsettlethisregulatoryenvironment.OntheU.S.side,
naturalgasproducersandexporterslikelyexpectthatthenewAdministrationwouldnotintentionallyinterfere
with their industry. Nonetheless, some involved in the U.S.-Mexico gas trade are asking what inadvertent,
1
SeeEIA,ShortTermEnergyOutlook:NaturalGas,athttp://www.eia.gov/outlooks/steo/report/natgas.cfm,(showingEIAforecastpricesand
NYMEXfuturespricesforHenryHubroughlyflatthrough2018).
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collateraldamagecouldbedoneasaresultofatradeconflictdrivenbythepoliticsofU.S.manufacturingand
PresidentTrump’sbaseintheindustrialMidwest.2OntheMexicansideoftheborder,asdiscussedduringa
recent Center on Global Energy Policy roundtable on Mexico’s energy sector in a Trump Administration,
officialsareincreasinglyworriedaboutthedamagethatcouldbewroughtshouldPresidentTrumpchooseto
usedependenceonU.S.naturalgassupplyasleverage,asRussiahasdoneinthepast.3
TheanswertobothquestionsturnsonthefateofNAFTA.NAFTAiscentralnotonlybecauseitistheagreement
throughwhichbothcountrieshavecommittedtotradefreelyinnaturalgas,butalsobecauseCongresshas
reliedonthe“freetradeagreement”conceptinsettingthelevelofregulatoryreviewthatexportsofnatural
gasmustundergopriortoauthorization.Undercurrentlaw,theDepartmentofEnergymustgrantcompanies
naturalgasexportauthorizations“withoutmodificationordelay”tocountrieswithwhichtheUnitedStates
hasineffecta“freetradeagreementrequiringnationaltreatmentfortradeinnaturalgas.”ExportstononFreeTradeAgreementcountriesrequireapublicinterestreview,anopportunityforpubliccomment,andan
environmentalreviewundertheNationalEnvironmentalPolicyAct(NEPA).ExportstoFreeTradeAgreement
countriesdonot.
Indeed, exports and imports of natural gas with NAFTA countries undergo regulatory processes about as
complexasrenewingapassport.TheDepartmentofEnergygrantstwo-yearblanketauthorizationsforexport
toMexicowithinweeks.(LongertermexportauthorizationstoMexicoandCanadarequiretheapplicantto
submit a sales contract with a term greater than two years, and such requests are generally processed in
monthsratherthanweeks).EvenwhentheissueofLNGexportsbecameheatedandpoliticallycontroversial
duringPresidentObama’sfirstterm,leadingtoaroughlytwo-yeardelaywhiletheAdministrationstudiedthe
economicandenvironmentalimpacts,exportauthorizationstoMexicocontinuedtomoveforwardwithout
delay.
ShouldMexiconolongerqualifyasafreetradeagreementcountry,anewregulatoryburdenwouldfallonU.S.
exporters.Existingauthorizationswouldlikelyremaininforce,butwithintwoyearsmostU.S.exporterswould
needtocomebacktotheDepartmentofEnergyforafullpublicinterestreviewofthekindthatLNGexporters
tonon-freetradeagreementcountrieshaveundergoneinrecentyears.Alsoofcriticalimportanceintermsof
timingwouldbethescopeoftheenvironmentalreviewsthatarerequiredtoaccompanythepublicinterest
review.WhileexportsoverexistingpipelineswouldbeeligibleforacategoricalexclusionfromNEPA,arecent
challengebySierraClubworkingitswaythroughtheU.S.CourtofAppealsfortheD.C.Circuitcouldexpand
theenvironmentalreviewrequiredforexportstoincludetheenvironmentalimpactsofnaturalgasproduction
andtheeffectofexportsonnetglobalgreenhousegasemissions.Thebroadertherequiredenvironmental
review,thelongertheapprovalprocesswouldtakeandthemorelitigationriskwouldaccompanyit.Ultimately,
2
See e.g., Trump-Mexico feud puts oil and gas industry on high alert, EnergyWire, Nathan Gronewold & Jenny Mandel (Jan. 27, 2017); Eagle
Ford Shale region stewing over Trump's Mexico rhetoric, EnergyWire, Nathan Gronewold (Feb. 7, 2017); Energy Cos. Unnerved By Trump's
Mexico Border Tax Talk, Law360, Keith Goldberg (Feb. 9 2017).
3
Jason Bordoff and Tim Boersma, “For Mexico, US could become the New Russia,” CNBC (Feb. 6, 2017) at
http://www.cnbc.com/2017/02/06/for-mexico-us-could-become-the-new-russia-commentary.html.
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evenassuminganAdministrationthatviewstheU.S.-Mexicogastradefavorably,thedelayanduncertainty
associatedwithsuchreviewswouldposeanunwelcomeinterferencewithcurrentcommercialpractice.
Ifnaturalgaspricesweretospikeforanyreason,politicianswouldhowlabouttheharmtomanufacturing
businessesandconsumers.Insuchascenario,tradecouldbethreatenedwerethemorecumbersomenonFTA approval process to get bogged down again in heated political rhetoric. Again, we saw this first-hand
servingintheObamaAdministration.
ItwouldnottakeNAFTAbeingabandonedentirelyforMexicotonolongerqualifyasafreetradeagreement
countryundertheNaturalGasAct.IfNAFTAisre-negotiated,newrestraintsonnaturalgastrade(suchasthe
impositionoftariffsonU.S.-boundMexican-origingas)couldmeanthattheagreementnolongerqualifiesas
providingfor“nationaltreatmentfortradeinnaturalgas.”And,evenifthenaturalgasprovisionsofNAFTA
remainintact,are-negotiatedagreementthatincludesnewtariffsortraderestrictionscouldinvitelitigation
onwhetherNAFTA–itsnamenothwithstanding–isstilla“freetradeagreement”atall.Thequestionwould
be a novel one. The term “free trade agreement” is not defined in the Natural Gas Act, nor is there an
authoritativedefinitionoriginatingintradelaw.InanearlyLNGexportcase,theDepartmentofEnergyrejected
anargumentthattheWorldTradeOrganizationagreementisafreetradeagreementundertheNaturalGas
Act,suggestingthatafreetradeagreementmustbesomethingthatprovidesformoreliberalizedtraderules
thattheWTO–astandardthatare-negotiatedNAFTAmightfailtomeet.
Andwhatif,assomeinMexicofear,theAdministrationsoughttousenaturalgasasaweaponagainstMexico
ortoextractleverageinabroadernegotiation?Ofcourse,theU.S.caseisfundamentallydifferentfromthe
RussiancasebecauseU.S.naturalgasexportersandpipelineoperators,unlikeGazprom,areentirelyprivate
companiesthatwouldlikelyresistanygovernmentalefforttointerferewiththefreeflowofgas.Andsothe
legalquestionwouldbewhether,absentnewlegislation,theExecutivehasauthoritytostoptheflowofgasto
MexicoovertheobjectionoftheU.S.exportersandpipelineoperators.IfMexiconolongerqualifiesasafree
trade agreement country, the Department of Energy could deny export authorizations to Mexico on the
groundsthattheyarenotinthepublicinterest.TheDepartment’sdecisionwouldbesubjecttopublicnotice
andcommentandarightofjudicialreview.But,iftheDepartmentprovidedareasonedbasisforitsdecisions
rootedinU.S.foreignpolicyobjectives,courtswouldlikelydefer.
Ontheotherhand,ifMexicoremainsafreetradeagreementcountry,ahypotheticalAdministrationseeking
to use gas exports as a weapon would have fewer options. One possibility would be to withdraw the
PresidentialPermitsFERChasgrantedforcross-borderpipelines.TheauthoritytoissuePresidentialPermits
doesnotcomefromanactofCongressbutfromthePresident’sauthoritytoconductforeignaffairsunder
ArticleIIoftheConstitution.TheextentofthePresident’sauthorityunderArticleIItocontrolcross-border
infrastructure has never been litigated and would be fraught with legal uncertainty, calling to mind what
SupremeCourtJusticeRobertJacksononcecalledthe“zoneoftwilight”inwhichthePresidentandCongress
“mayhaveconcurrentauthority,orinwhichitsdistributionisuncertain.”
Atthispoint,itremainsunlikelythatthenewAdministrationwouldwanttointerferewiththefreeflowof
natural gas across our border. Mexico has simply become too important of a market for U.S. producers.
Nevertheless, given the importance of NAFTA to existing gas trade and the deteriorating U.S.-Mexico
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relationship,preservingfreetradeinnaturalgaswhilere-openingotheraspectsoftheU.S.-Mexicoeconomic
relationshipwillbeachallengeforU.S.officialsthatmayprovemoredifficultthanitfirstappears.
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