Resource Imperialism

Energy Policy under NAFTA

by David Lapp

ALTHOUGH THEY COMPRISE ONLY 12 of more than 2,000 pages of text, the energy provisions of the North American Free Trade Agreement (NAFTA) represent a serious threat to the environment and energy security of Mexico, and the United States. To the benefit of multinational energy companies, implementation of NAFTA's energy chapter will stifle the development of renewable energy resources and energy efficiency. Multinational energy companies will be able to exploit Mexican and Canadian natural resources to satisfy the unsustainable energy appetite of the United States, while the governments of Mexico and Canada will be prevented from limiting or placing levies on energy exports to protect the interests of their citizens.

"The continent's energy resources have immense strategic importance for the United States," explains John Dillon of the Toronto-based Ecumenical Coalition for Economic Justice. "U.S. geopolitical interests demand that Mexico and Canada concede substantial control over energy as a price for a broad trade agreement."

 When the agreement was announced last August, then-Secretary of Energy James Watkins declared that "the agreement will promote the rapid deployment of new, more efficient energy technologies that promise to enhance environmental quality." The words "energy efficiency" are found nowhere in the text of the NAFTA agreement, however. "There is no recognition that energy savings is a resource on par with new generation," says Ken Stump, a Greenpeace consultant. "There is no recognition or acknowledgment of the huge economic as well as environmental benefits of developing the demand-side resource [efficiency] over the supply-side resource."

Instead, NAFTA is skewed to protect the big energy companies' interest in expanding energy production. If the agreement lives up to its drafters' expectations, it will certainly hinder the expansion of efficiency and conservation.

"NAFTA will encourage growth in fuels trade and will expand opportunities for U.S. investment in electricity generation. Sweeping reform in petrochemicals offers access to a range of world-scale petrochemical investments," says an August 1992 Bush administration statement. "While crude oil represents the largest component of our trinational energy trade, refined oil products, petrochemicals, natural gas, electricity and coal trade are also significant and are expected to expand."

"The implications [of NAFTA] are for the U.S. to continue to consume the huge quantities of fossil fuels it has in the past," says Carol Alexander, a consultant to Greenpeace, and co-author with Stump of A Greenpeace Report: The North American Free Trade Agreement and Energy Trade. The agreement will "shoulder out efficiency and renewables from the global marketplace, create resource colonies out of Mexico and Canada and inflict our habits on their energy marketplace," she says. Further, the environmental costs of exploration and development of fossil fuels to be consumed in the United States will be shifted to Canada and to Mexico, where environmental regulations are weak and enforcement is lax.

Eyeing Mexico

 U.S. companies have eyed Mexico's rich energy reserves for a long time - since March 18, 1938, when Mexican President Lázaro Cárdenas, capitalizing on widespread disenchantment with foreign oil companies, nationalized the country's electricity and petroleum assets and expelled foreign companies. Cárdenas's constitutional reforms established that foreign "concessions and contracts [for petroleum and hydrocarbons] will not be granted, and those that have been granted will no longer subsist, and the Nation will carry out the development of these products."

To this day, oil remains a sensitive area of U.S./Mexico relations, and March 18 is still celebrated as a national "Day of Dignity." While there is considerable debate over the amount of oil reserves that exist in Mexico, a January 1991 Mexican government estimate put the figure at 45 billion barrels of crude oil that would last for 50 years. TheOil and Gas Journal says that Mexico has the eighth largest amount of oil reserves in the world.

 NAFTA appears to set the stage for the return of U.S. companies to a prominent, and maybe preeminent, position in the Mexican energy industry. U.S. oil companies "were asking for access to the upstream, in terms of being able to invest in oil and gas resources in Mexico," says Ed Porter of the American Petroleum Institute. Porter calls NAFTA's energy provisions "very vague" but says they "could mean essentially what we had hoped for."

In anticipation of the free trade agreement, the Salinas government has already undertaken a series of reforms to make Mexico more attractive to foreign investors. In 1992, for example, Salinas announced that 70,000 workers would be laid off as part of a reorganization of Mexico's national oil company PEMEX into a holding company with four semi- autonomous divisions. The government will have less control over each division, which will be freer to enter into contracts with foreign interests.

"The restructuring of PEMEX is certainly a move in a positive direction," says API's Porter. "It will give the operating units a little bit more flexibility to do things that are in cooperation with some of the international companies."

 The Mexican government has also opened its petrochemical industry to foreign investment. "We think the agreement will be a boon to our industry," says Owen Kean of the Chemical Manufacturers Association, characterizing the trade association's support for NAFTA as "very active."

Under Mexican law, petrochemicals are categorized either as "basics," which cannot be owned by foreign investors, or "secondaries," which are restricted to 40 percent ownership by foreign investors. Last year the Salinas government reduced the number of "basic" petrochemicals from 16 to eight (a decade ago the number was over 100). Some of the basics were recategorized as secondaries, the total of which has been reduced to 13 petrochemicals. "None of the products that are now in the list of basics were reported as exports by PEMEX in 1990; all [petrochemical exports] are now secondaries or deregulated," explains Antonio Gerhenson, a Mexican academic and a former official of the nuclear electrical workers union.

 NAFTA will further loosen restrictions related to investment and contracts with the state-owned electric and petroleum companies. Under the agreement, U.S. and Canadian companies will be able to bid on Mexican service contracts for electricity (with the Comisión Federal de Electricidad, or CFE) and petroleum services. When the agreement goes into effect on January 1, 1994, 50 percent of the contracts are reserved for Mexican companies, but this percentage decreases incrementally to zero in 2003.

 Mexican environmentalists and critics of the conservative Salinas government argue that NAFTA's energy provisions violate the public interest as well as the Mexican constitution. "NAFTA tends to liberalize and open to foreign investment areas that our Constitution categorizes as strategic, like petroleum and electricity," Gerhenson asserts. Gerhenson rejects the argument that the Mexican energy industry needs private and foreign investment to increase exploration or to modernize its equipment.

"The technological arguments are only pretexts because in fact petrochemical technology requires only more equipment, which PEMEX has bought time and time again, of its own power and through the Mexican Institute of Petroleum," he contends. "The other pretext, the need for investment, is also more than questionable. Past privatizations have given place to marginal private investment, the equivalent of 3 percent of PEMEX's petrochemical production."

 NAFTA will also loosen restrictions on foreign investment in electricity generation in Mexico. It explicitly allows U.S. companies to build generating facilities in Mexico and transmit that power across the border. A separate provision allows U.S. companies to build power plants in Mexico to meet their own power needs or to sell electricity in Mexico through CFE. Gerhenson says this provision "violates Mexican law, since the object of the generation is providing electricity, although it is through the intermediate of CFE."

 Energy vs. the environment

 Continental free trade in energy is likely to interfere seriously with the efforts of environmentalists to promote energy efficiency and cleaner energy production. First, despite the alleged "free trade" goal of eliminating government interventions in the marketplace, NAFTA specifically authorizes governments to subsidize oil and gas exploration and development. Government subsidies to fossil fuel development make fossil fuels artificially more attractive to energy investors and consumers and divert funds away from energy efficiency and renewable energy technologies. Moreover, most new oil and gas exploration and development will occur in Mexico and Canada, meaning Mexican and Canadian citizens will be subsidizing the price of energy for U.S. consumers.

Second, the lack of any mention of energy conservation or efficiency could affect efforts already underway to reduce power consumption in the United States. Since NAFTA proposes that Canada, Mexico and the United States "make compatible their respective standards-related measures, so as to facilitate trade in a good or service," any party that perceives any regulation to be a trade barrier can challenge that regulation before a dispute resolution panel that operates in tight secrecy, without public input.

"I'm particularly concerned about the potential threat of the free trade agreements to the least-cost planning reform and environmental cost initiatives because they conceivably could be perceived as trade barriers," says Greenpeace's Stump.

For example, if Massachusetts passes proposed legislation that would apply U.S. environmental standards to all power purchases, including Hydro-Quebec's massive James Bay hydroproject [see The James Bay Disaster," Multinational Monitor, December 1991 ], Canada might challenge that law as a non-tariff trade barrier. Further, under a clause called "non-violation impairments," NAFTA allows challenges to environmental and consumer protection standards even if they do not violate NAFTA rules, provided the country believes that it has missed an economic "benefit it could reasonably have expected to accrue to it."

 "There is so much gray area here that it's really hard to know what the outcome will be," explains Stump.

Third, environmentalists fear that unrestricted trade and investment will enable companies to circumvent U.S. environmental standards by producing energy in Mexico for sale in the United States.

So while Doug Turner, a program advisor for international trade with the U.S. Environmental Protection Agency, says the improved opportunities for cross-border electricity trade under NAFTA will bring "environmental advantages because we generally produce cleaner electricity," environmentalists believe these advantages will prove elusive.

Environmentalists say U.S. companies operating south of the border will have little incentive to follow U.S. environmental regulations. For example, a company that builds a coal plant in Mexico would accrue substantial savings by not having to abide by U.S. emissions standards, allowing it to sell its power more cheaply than if it generated electricity within the United States.

Further, a U.S. utility could conceivably buy power from its own subsidiary operating in Mexico and reap huge profits or pass down the savings to ratepayers in the United States. "The losers would be the people who have to breathe the air in Mexico - and the global climate," says Lynn Fischer of the Natural Resources Defense Council.

Fourth, NAFTA may encourage the Mexican government to foster increased use of nuclear energy. Jose Arias Chavez, a professor at the National University of Mexico and the communications and energy coordinator for the Pacto de Grupos Ecologistas, notes that the governor of the Mexican state of Sonora has suggested building a nuclear power plant "in the desert" to generate electricity for export to the United States. The agreement also "leaves the possibility of harm from the traffic and business of dangerous nuclear wastes like those from nuclear power plants, with Mexico acting as the repository," Chavez warns.

 Undermining environment and society

 NAFTA's short energy section exemplifies the dangers posed by the treaty: the undermining of national environmental and social standards and the infringement of national sovereignty. Limitations on multinational corporate power are defined as impediments to free trade, but government interventions that benefit these companies are allowed.

 The U.S.-Canada Free Trade Agreement provides insights into what can be expected to result from NAFTA. The evisceration of Canada's National Energy Board (NEB) due to the U.S.-Canada trade deal encapsulates NAFTA's broad reach. After examining a number of natural gas projects being developed by several U.S. companies, the NEB determined the projects would provide no net benefit to Canada and rejected the companies' applications for export licenses. The companies appealed the ruling, arguing that the NEB's cost-benefit analysis was, in effect, a price test that violated the free- market intent of the Free Trade Agreement. In the end, the NEB conceded that its cost/benefit analysis might violate the Free Trade Agreement, and, rather than risking potential arbitration, it backed down.

Dillon explains in an upcoming book entitled The Political Economy of North American Free Trade that before the deregulatory measures of the free trade agreement were implemented, "the NEB applied a ęsurplus test' requiring that minimum supplies of nonrenewable hydrocarbons be available for Canadians before sanctioning exports. However, under [the trade agreement] the NEB has been reduced to a monitoring agency with limited ability to restrict exports."

 Opponents of NAFTA argue that the energy industry plays too central a role in the economies of all three signatory countries - the United States, Mexico and Canada - for governments to substantially forfeit their rights to regulate it. Chavez recommends that the proposed agreement be rejected: "The compromises constitute a certain obstacle to the future energy independence and to exercising our energy sovereignty."