Will North American Energy Trade Wax or Wane Under Trump?

Cross-border trade in energy-electricity, natural gas, and oil-has been an unanticipated boon to the U.S., Canada, and Mexico, exceeding $140 billion in 2015. The Trump administration's antipathy toward the North American Free Trade Agreement (NAFTA) threatens to roil that trilateral trade. Alternatively, a reworked NAFTA could open new energy trade opportunities.

A Canadian electric and gas utility company, which also owns the largest merchant electric transmission company in the U.S., plans a $1 billion infrastructure project to bring power from Canada to the U.S. It's a vivid example of how North American cross-border energy is booming.

Fortis Inc., working through its ITC transmission company, plans a 73-mile, 1,000-MW high-voltage direct current (HVDC), bidirectional transmission line under Lake Erie, connecting the Fortis Nanticoke substation in Ontario, which contains several 500-kV and 230-kV circuits, with the Erie West substation in Pennsylvania, with several 345-kV circuits (Figure 1). The project would move excess Canadian power, much of it generated by hydropower plants, into the PJM Interconnection.

1. An example of cross-border energy trade. A 73-mile bidirectional transmission line under Lake Erie would connect the Fortis Nanticoke substation in Ontario, Canada, with the Erie West substation in Pennsylvania. It would move excess power from Canada, much of it from hydropower plants, into the PJM Interconnection. The $1 billion project has approval from both the U.S. government and Canada's National Energy Board. Courtesy: ITC

The project has approval from the U.S. government and a green light from Canada's National Energy Board. Fortis expects to receive an Army Corps of Engineers permit this year, while it finds financing and customers for the project. ITC began planning the project in 2011; Fortis acquired ITC in 2014. The company wants the transmission line in service by late 2020.

In just a decade, North American energy trade has boomed, and transformed. In 2006, the U.S. was a large net importer of energy, primarily crude oil from Canada and Mexico, with a smaller but significant amount of electricity, primarily generated by hydro, from Canada. The U.S. was largely an exporter of refined petroleum products, both from domestic and imported crude.

That picture has changed significantly. Mexico made constitutional changes enabling it to import U.S.-produced hydrocarbons, competing against the state-owned Pemex oil company. The U.S. developed and perfected shale gas and oil production technology. All three countries embraced policies to encourage renewable energy.

Economics of Energy Trade

The Congressional Research Service (CRS) earlier this year produced a paper-"Cross-Border Energy Trade in North America: Present and Potential"-that noted, "The United States, Canada, and Mexico in many ways comprise one large, integrated market for energy commodities. Canada, for example, is the single largest supplier of crude oil to the United States, and the United States is Canada's sole crude oil customer (Figure 2). Both Mexico and Canada are major buyers of petroleum products refined in the United States.

2. Washington refinery sources Canadian crude oil. The Andeavor Anacortes Refinery near Anacortes, Washington-Andeavor was formerly known as Tesoro-is among the U.S. refineries that receive crude oil from Canada. The U.S. receives virtually all of Canada's oil exports, and most of the crude oil imported to the U.S. comes from Canada, primarily heavy crude from the oil sands in Alberta. Courtesy: Wikipedia

"A growing trade in natural gas produced in the United States is also increasingly important to the energy relationship among the three countries. Trade in other energy commodities-electricity, natural gas liquids, and coal-is comparatively small but regionally important. Altogether, the value of the energy trade between the United States and its North American neighbors exceeded $140 billion in 2015, with $100 billion in U.S. energy imports and over $40 billion in exports."

The CRS report also says, "Over the last decade, the United States has experienced a market trend of growing net electricity imports from both Canada and Mexico, although Canada is, by far, the greater trade partner " U.S. electricity imports have increased overall since 2006, while U.S. exports to Canada and Mexico have decreased over the same period. U.S. exports to Mexico have been relatively low and flat. The value of electricity imports from Canada and the United States rose (overall) from approximately $1.9 billion in 2011 to about $2.95 billion in 2015." U.S. electricity export to Canada totaled about $100 million in 2015.

The vast majority of U.S. electricity imports from Canada, about 60%, flow to the Northeast, primarily New York and New England. While this is a small portion of the electricity consumption in the region, electricity is a bigger item for Canada, representing almost 10% of Canadian generation, and Canada's high-voltage transmission grid is designed to work most efficiently north to south.

The U.S. and Canadian grids are closely integrated (as major blackouts sometimes remind us). The Northeast Power Coordinating Council, the Midwest Reliability Organization, and the Western Electricity Coordinating Council all work to keep the integrated grids stabilized, with Canadian participation. According to the U.S. Energy Information Administration, there are 30 power linkages between the U.S. and Canada.

The CRS report highlights several examples of new infrastructure to facilitate U.S.-Canada electricity commerce. These projects require a "presidential" permit, technically requiring the White House to sign off on them, although the U.S. Department of Energy (DOE) runs the applications through the bureaucracy. Four have gone through the convoluted process for cross-border electricity projects. They are:

a- Montana-Alberta Tie-Line, a 230-kV, 214-mile bidirectional line to move wind generation to markets on both sides of the border. Partly financed by the Western Area Power Administration, the line went into service in 2013.

a- New England Clean Power Link, planned by Transmission Developers Inc. (TDI) and Hydro-Quebec, is a 1,000-MW HVDC line that would run about 154 miles from Canada to Vermont, with 97 miles traveling underwater down Lake Champlain. The DOE awarded the project a presidential permit in late 2016.

a- Champlain Hudson Power Express, also being developed by TDI, would be a $2.2 billion, 336-mile, 1,000-MW HVDC line from Canada under Lake Champlain and the Hudson River, and underneath railroad and highway rights of way to New York City. It has a presidential permit and hopes to be in service in 2021.

a- Great Northern Power Line, being developed by Minnesota Power, would move hydropower from Manitoba to Minnesota over a 220-mile, 500-kV line to a new substation in the state. It has a DOE presidential permit and is scheduled to be in service in 2020.

U.S. natural gas exports to Mexico-driven by low-cost U.S. shale gas and rising demand for electricity south of the border-are an unexpected outcome of the shale revolution. The CRS report says, "The United States has become Mexico's largest foreign supplier of natural gas, and Mexico's demand for imports continues to grow. Mexico imported a total of 1,307 billion cubic feet of natural gas in 2015, of which 85% came from the United States."

NAFTA Under Fire

While most analysts expect North American trilateral trade in energy will continue to grow, there is anxiety that political issues could have a negative impact, primarily U.S. President Donald Trump's threat (Figure 3) to blow up the 1993 North American Free Trade Agreement unless Canada and Mexico agree to major changes that are favorable to the U.S. The CRS report, looking at the continental trade in gas, notes, "Because the United States has free trade agreements with both Canada and Mexico, both countries also have preferential treatment for U.S. gas exports under provisions of the Natural Gas Act. Under these provisions, exports of natural gas to countries with which the United States has a free trade agreement are deemed to be in the public interest; the Department of Energy must permit the export of the commodity without delay."

3. Trump has threatened to dismantle NAFTA. U.S. President Donald Trump has said the terms of the North American Free Trade Agreement (NAFTA) do not favor the U.S., and that he will scuttle the deal-reached in 1993-if major changes are not made by both Canada and Mexico. Analysts say the end of NAFTA could have negative impacts for the U.S., particularly for the energy industry. Source: The White House

An article in The Economist this summer reported that a panel of experts told a congressional committee "that the United States, Mexico and Canada are on track to achieve North American energy independence by 2020 " Cheap, abundant energy will boost the region's industrial competitiveness; it will also reduce its dependence on less stable producers such as Venezuela and the Persian Gulf States." Some in Congress, Republicans and Democrats, have been pushing for liberalized North American energy trade for several years with little success (see sidebar).

Changing Cross-Border Permitting a Challenge Congress has been interested in making legal changes to the process of approving North American cross-border permits for energy infrastructure but so far has failed to put anything into law. The action has been in the House, with the Senate showing no particular interest in the issue. The topic became politically important during debate about the Keystone XL pipeline, which would bring Canadian crude oil into the U.S. Former President Barack Obama rejected the pipeline, but President Trump moved quickly to approve it. The most recent House bill was H.R. 2883. Known as the "Promoting Cross-Border Energy Infrastructure Act," it was co-sponsored by Reps. Markwayne Mullin, an Oklahoma Republican, and Gene Green, a Texas Democrat, in June. Mullin said that his bill "simplifies the construction and operation of energy facilities that cross international borders. It restructures the process so that cross-border pipelines can deliver lower costs to consumers and create additional jobs in the energy field, rather than these energy projects being politicized or hung up in regulatory uncertainty." The bill made it through the House's convoluted committee structure quickly, and passed 254-75 on July 19. All House Republicans and 17 Democrats supported the measure. Senate Republican leadership has shown no interest in the measure, reportedly waiting to see the outcome of North American Free Trade Agreement renegotiations. In 2013, the House passed H.R. 3301, the "North American Energy Infrastructure Act," sponsored by Rep. Fred Upton, a Michigan Republican who was chairman of the powerful House Energy and Commerce Committee at the time. The bill emerged as a direct result of the Keystone XL controversy. It passed by a 238-173 vote, with 17 Democrats in the majority and one Republican opposed. President Obama threatened a veto, saying the measure "would impose an unreasonable deadline that would curtail the thorough consideration of the issues involved, which could result in serious security, safety, foreign policy, environmental, economic, and other ramifications." The bill never came up in the Senate, probably because the Republican leadership knew they could not override a veto.

But the attitude of the Trump administration is worrisome, as The Economist article observes: "The process under way to renegotiate NAFTA could jeopardize energy cooperation if Mr. Trump pulls America out of the treaty, as he has threatened to do." In October, a fourth round of talks among the U.S., Canada, and Mexico about changes to NAFTA was taking place in Arlington, Virginia. At the same time, the Trump administration was proposing heavy tariffs on imports of Canadian softwood timber and mid-sized passenger aircraft, angering Canada.

As the latest round of the renegotiations began, The New York Times commented, "The North American Free Trade Agreement, long a punching bag for President Trump, is edging closer to collapse as negotiators gather for more talks."

But the NAFTA talks could also offer an opportunity to strengthen cross-border trade on the continent. Christopher Wilson, an expert on U.S.-Mexican energy trade, recently wrote in Forbes: "To further reduce the 'border costs' associated with trade in the region, officials from the three countries should use the NAFTA update to encourage much-needed investment in border crossings and other transportation infrastructure to better connect our economies. They should recapitalize and expand the mandate for the North American Development Bank so that it has the resources and ability to finance and coordinate cross-border infrastructure projects. Negotiators could also commit to the development of a North American transportation plan to ensure that new highways built in one country do not simply lead to new bottlenecks across the border."

On the other hand, Trump-during the 2016 campaign and again recently-made clear he wants far greater bottlenecks on the long U.S.-Mexico border, including an impenetrable wall (Figure 4).

4. Increased border security could create bottlenecks for U.S.-Mexico trade. Fences line both sides of the U.S. border with Mexico near El Paso, Texas. U.S. President Donald Trump promised to build a wall along the U.S.-Mexico border to increase security and impede Mexican immigrants from entering the U.S., but some analysts say officials should instead look at ways to improve transportation infrastructure between the two countries, to help reduce the costs of trade. Courtesy: U.S. Congress/Wikipedia

In a presentation last summer, Gary Hufbauer and Euijin Jung of the Peterson Institute for International Economics in Washington laid out what a revised NAFTA should do for North American energy trade-and what could go wrong. "The new NAFTA should strengthen the legal basis for deeper energy integration in North America." To that end, "The new NAFTA should seek full liberalization of trade and investment in Canada, Mexico and the United States even for sensitive energy issues ([such as] renewables)."

But Hufbauer and Jung noted it could go badly for cross-border trade. If the U.S. were to insist on "buy American" and "hire American" for future pipeline and infrastructure construction, which are currently prevented by NAFTA, that "could provoke retaliation by Canada and Mexico." Negotiators also "could face challenges in liberalizing the renewable energy sector owing to U.S and Canadian government subsidies and differing standards." And if Trump keeps pushing for Mexico to pay for his border wall and increases deportations, "Mexican nationalism could hinder energy reforms."

At a conference organized by the Center for Strategic and International Studies in Washington last summer, Jack Gerard, head of the American Petroleum Institute, said "NAFTA has played a critical role in North American energy security by facilitating cross-border trade and investment in energy, supporting millions of U.S. jobs in the oil and natural gas industry. We encourage the administration and Congress to keep this in mind as they consider possible changes to the agreement." a-

-Kennedy Maizeis a long-time energy journalist and frequent contributor to POWER.

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