Table of Contents
| Citation | Vol. 17 No. 2 |
| Publication year | 2014 |
17 Gonz. J. Intl L. #1 (2014) 1 PEMEX, PEÑA NIETO AND PETRO-CANADA: NAFTA AND MEXICAN ENERGY REFORM WITHIN THE CHANGING NORTH AMERICAN CRUDE LANDSCAPE Gonzaga Journal of International Law Volume 17 - Issue 2 (2013 - 2014)
PEMEX, PEÑA NIETO AND PETRO-CANADA: NAFTA AND MEXICAN ENERGY REFORM WITHIN THE CHANGING NORTH AMERICAN CRUDE LANDSCAPE
Zach Flati
Table of Contents
I. Introduction........................... 42
II. Petro-Canada.........................43
III. Free Trade.......................... 46
IV. Pemex............................. 46
V. Previous Reforms Of Pemex................. 49
VI. NAFTA............................ 51
VII. Energy Under NAFTA......................51
VIII. Foreign Investors Under NAFTA................52
IX. The Canadian Energy Scheme Under NAFTA.........53
X. The Mexican Energy Regime Under NAFTA.......... 55
XI. The Need To Reform Pemex..................56
XII. North American Pressures To Reform Pemex........56
XIII. Hydraulic Fracturing.....................56
XIV. Keystone XL...........................58
XV. Peña Nieto's Proposed Reform of Pemex...........59
XVI. Peña Nieto's Reform's Reception In Mexico.........62
XVII. An Unanticipated Ally.....................63
XVIII. Peña Nieto's Reform's Intersections With NAFTA .....64
XIX. Conclusion...........................65
I. Introduction
On January 1, 1994, the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico took effect.(fn1) By the end of 1993, Canada produced 1.68 million barrels of crude oil per day (MBPD),(fn2) exported 0.516 MBPD,(fn3) and sent 83.5 percent of its crude oil exports to the United States.(fn4) Nineteen years later, Canada's crude oil production rose to 3.14 MBPD,(fn5) exports rose to 1.58 MBPD,(fn6) and 99 percent of its exported crude oil went to the United States.(fn7) This progression equates to an 86 percent increase in total crude oil production, a 201 percent increase in crude oil exports, and a 260 percent increase in the number of barrels sent to the United States since NAFTA's enactment.
Similarly, in 1993, Mexico produced 2.67 MBPD(fn8) of crude oil, exported 1.32 MBPD,(fn9) and sent 25 percent of its crude oil exports to the United States.(fn10) Yet in 2012, Mexico's crude oil production fell to 2.59 MBPD,(fn11) exports fell to 0.79 MBPD,(fn12) and 48 percent of its crude oil exports went to the United States.(fn13) These developments equate to a three percent decline in total crude oil production; a 40 percent decline in crude oil exports and a 15 percent increase in the number of barrels sent to the United States. To summarize the juxtaposition, since NAFTA's enactment, Canada increased its U.S. crude oil exports by 260 percent while Mexico, in the same period, only increased its U.S. crude oil exports by 15 percent.
Explanations for the disparity are multifarious. The factors contributing to this difference include history, culture, geology, law, and technology. In addition to analyzing these factors, this article names certain current consequences and potential implications of NAFTA within the changing North American crude oil landscape. Within this context, Mexican President Enrique Peña Nieto's proposed energy reform is introduced and discussed. A meaningful discourse on these topics begins with an introduction to state-owned oil companies in Canada and Mexico.
II. Petro-Canada
Petro-Canada was Canada's state-owned oil company from 1975 to 2004.(fn14) Petro-Canada has been entirely privately-owned for a decade, has a short history, and is not particularly significant in the current North American crude oil landscape. With these caveats noted, an introduction to Petro-Canada serves as useful context, particularly when considering potential long-term implications of Peña Nieto's proposed reform of the Mexican state-owned oil company, Pemex.
In 1973, world oil prices quadrupled due to the Arab oil embargo following the Yom Kippur War.(fn15) In response, the Canadian government turned its focus to energy security.(fn16) In addition to external motivation, the Canadian government faced two internal pressures to act: 1) foreign (e.g., U.S.) companies predominantly controlled its oil sector and; 2) the Canadian Arctic appeared increasingly attractive as large amounts of oil were recently discovered in Alaska.(fn17) In order to stave off rising oil prices, deliver secure energy to its citizens, and participate in the development of its own resources, the Canadian government created Petro-Canada as a Crown Corporation in 1975.(fn18)
The company received $1.5 billion in start-up capital to implement broad powers for exploration, research and development, and refining and marketing of Canadian oil.(fn19) Petro-Canada received federal subsidies and enjoyed special exploration rights. The Canadian government also instituted a "made in Canada" price for oil which was substantially below world market prices.(fn20) Canadian oil exports were taxed to pay for the consumer and corporate subsidies.(fn21)
Petro-Canada quickly became popular as a symbol of Canadian nationalism.(fn22) However, in 1991, plummeting oil prices and new government leadership led the Canadian government to sell 30 percent of the state-owned company.(fn23) Over the next decade, the government slowly sold its ownership in installments. By 1995, Canadian government owned only 19 percent of the company and Petro-Canada was listed on the New York Stock Exchange.(fn24) In 2004, the Canadian government sold its remaining share of the company for $3.2 billion, completing the privatization of Petro-Canada.(fn25)
Petro-Canada's sale yielded over $5.7 billion, and was the largest Canadian governmental privatization to date.(fn26) The Canadian Parliament's website states: "The total gross proceeds... from the sale... are estimated to have exceeded taxpayers' total investment by almost $750 million."(fn27) The Canadian government views the sale of the company as a necessary action, characterizing Petro-Canada as having grown "inefficient, oversized and debt-ridden."(fn28) But not all Canadians are happy to have seen Petro-Canada privatized. Some Canadians would have preferred to keep Petro-Canada under state control. This is because in addition to the loss of secure jobs for Canadians, the profits from oil price increases are accruing to foreign investors rather than the Canadian citizens.
Further to this analysis is the idea that Petro-Canada's privatization combined with the regulations of NAFTA act as the "one-two punch" for Canada's sovereignty over its oil resources. There is some legitimacy to this analysis and, admittedly, national policies with consequences for sovereignty should be considered with the utmost scrutiny.
With these concessions noted, globalization and free trade are not passing trends. In fact, the adoption of free trade policies is gaining momentum around the globe. Globalization and free trade inherently have a homogenizing effect on national policies and frequently require renunciation of sovereignty. Further, homogenization and renunciation of sovereignty are part and parcel of globalization and free trade. The goal of free trade, and a requirement of globalization, is to provide the private sector with a uniform predictable legal and investment climate free of individual nations' protectionist preferences. The energy industry, although an area of entrenched interests, is no exception.
While it is accurate to say that Canada forfeited sovereignty over its oil, this negative treatment is not the only valid analysis. Rather, Canada should be considered an early-adopter of free trade energy policy. It was on the front end of a trend. Early-adoption has its benefits. Canada has, and will continue to, accrue the benefits of its early-adoption.
Canada gained the "first-mover advantage" in free trade oil. A "first mover" has a "form of competitive advantage that a company [or in this case, country] earns by being the first to enter a specific market or industry."(fn29) Central to the first-mover advantage is the concept that the "first-mover" usually accumulates enough market share, expertise, and customer loyalty to remain "on top" of the particular market segment.(fn30)
Specifically, as the "first-mover," Canada increased its access to, and preference within, the United States crude oil market. Generally, early-adopters of free trade enjoy a "head start" over subsequent developing nations that will eventually gain access to the free trade sphere and increase competition. As the "first-mover," Canada enjoyed a decade-long "head start" before the next "class" of free trade countries entered the free trade...
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