North American Energy Markets Will Benefit From USMCA

After more than a year of intense negotiations, the United States, Canada and Mexico reached an agreement to update the North American Free Trade Agreement, the 1994 pact that governs more than $1.2 trillion worth of trade among the three nations.

The new deal won't go into effect right away as most of the key provisions don't start until 2020. Leaders from the three countries must sign it and then Congress and the legislatures in Canada and Mexico must approve it, a process that is expected to take months. If approved, the United States Mexico Canada Agreement (USMCA) stipulates that the three nations will review the agreement after six years. If all parties agree it's working then the deal will continue for the full 16-year period (with the ability to renew after that for an additional 16 years).

While details have not yet been released, the deal has significant changes for automakers, opens Canada's milk market to U.S. dairy farmers and maintains arbitration rules that many American companies hoped would be kept in place. The new trade pact reduces a dispute resolution provision for multinational companies operating in other countries but gives an exception for some sectors, including oil and natural gas.

So, what will the effects of the new agreement be on the energy market?

No Tariffs on Energy

USMCA ensures a "zero-tariff" on energy products traded between the United States, Mexico and Canada. These provisions allow the energy industry to continue expanding U.S. natural gas exports into Mexico without worrying about tariffs. Additionally, American refiners will still be able to tap some of the 3.3 million barrels of oil exported from Canada each day.

It also requires that Mexico retain at least its current level of openness to U.S. energy investment, and allows additional flexibility for U.S. customs authorities to accept alternative documentation to certify that natural gas and oil have originated in Canada or Mexico upon entering the United States. These protections are especially important for the energy market because investments usually require substantial time to reach profitability, such as the process of exploring, and then producing crude oil in the Gulf of Mexico.

Natural Gas to Mexico

Mexico has accounted for the bulk of U.S. gas exports, with 90 percent coming from pipelines and the rest from Liquefied Natural Gas (LNG). The U.S. now accounts for 60-65 percent of Mexico's total gas supply. Since its domestic output comes along with crude oil extraction as "associated gas," Mexico's gas production has fallen 30-40 percent since 2010, as its oil production has diminished greatly since the 2004 peak. It appears that Mexico has come out of this with extremely strong protections for investors in the oil and gas sectors, which is good news for the future of the energy reform.

A Good Deal for Canadian Oil

Looking north of the border, Canada is the largest supplier of foreign oil and a significant exporter of electricity to the U.S. The deal also makes Canada's heavier crude oil more attractive to refiners in the Mexican Gulf, especially at a time when Venezuela's production has plummeted due to political and financial worries.

It appears that the USMCA will save Canadian-based oil and gas corporations tens of millions of dollars a year. CBC (Canadian Broadcasting Corporation) reports "A border bottleneck that cost Canadian oil producers as much as $50-$60 million every year also appears to have been addressed. Under the old NAFTA rules, oil and gas producers had to prove the origin of their product right back to the wellhead if they were to be exempt from duty at the border."

Energy producers had been extremely concerned that a decision to discontinue NAFTA would dramatically affect their ability to capitalize on Mexico's growing natural gas market. The American Petroleum Institute (API), a Washington-based association representing oil and gas corporations, is already calling on the U.S. Congress to approve the deal. "Having Canada as a trading partner and a party to this agreement is critical for North American energy security and U.S. consumers," API president and CEO Mike Sommers said in a statement. "Retaining a trade agreement for North America will help ensure the US energy revolution continues into the future."

For now, at least, it appears good for the oil and gas sectors in all three North American economies.

Written by Scott Bauer. Read more from the author here.

Read more stories like this on OpenMarkets. And for trader tools and resources visit: https://activetrader.cmegroup.com

(This article is sponsored and produced by CME Group, which is solely responsible for its content.)

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