As the fifth round of negotiations of the North American Free Trade Agreement (NAFTA) starts on Friday, energy has remained out of the limelight.
The strategic tendency to see North America as one self-sufficient, integrated, energy producing area is generally prevalent within the three governments and the energy sector. The United States is interested in its energy independence from hard-to-control nations far away from home, the Mexican government is interested in cementing the Energy Reform in the international treaty and the Canadian and Mexican governments are interested in maintaining their oil exports to the United States. This alignment of interests has led to energy being generally seen as one of the easiest topics for the NAFTA renegotiation.
Mexican Energy Minister Pedro Joaquin Coldwell’s comments after the fourth round in October collapsed, namely that leaving NAFTA would be suicidal for the United States because Mexico is the destination of 80% of the United States’ natural gas exports, accentuate one of the most important negotiating points of the energy chapter, Article 605. Article 605 seeks to guarantee freedom of energy imports and exports from government control by stipulating that any decrease in exports to a member country must be linked to a proportional decrease in supply to the internal market.
The post-energy reform Mexican government has said it will sign on to Article 605. If Mexico signed Article 605 its natural gas supplies from the United States would also be guaranteed by treaty. Coldwell’s comments seem to indicate that natural gas flows have been mentioned in negotiations and that United States’ negotiators may have expressed an interest in maintaining the strategic superiority presented by the control of natural gas exports to Mexico, thereby keeping energy on the NAFTA negotiation table as a bargaining chip
A second item of importance is sovereign immunity. Sovereign immunity regards the immunity that governments enjoy from legal prosecution by other governments. In the context of the Mexican energy sector this topic is pertinent to PEMEX, which as a part of the Mexican government does not necessarily have the same legal liabilities a private company would. In its 2016 20-F with the SEC Pemex notes:
“We are public-sector entities of the Mexican Government. Accordingly, you may not be able to obtain a judgment in a U.S. court against us unless the U.S. court determines that we are not entitled to sovereign immunity with respect to that action. Under certain circumstances, Mexican law may limit your ability to enforce judgments against us in the courts of Mexico.”
A precedent regarding this topic was set in 1985 when Michael Zernicek a foreman on Pemex rigs sued in the United States after suffering radiation sickness after being exposed by a Pemex sub-contractor. A district court in Houston ruled that PEMEX had sovereign immunity and therefore that the court did not have jurisdiction. A second ruling in 1992 also placed PEMEX outside of a US district court’s jurisdiction.
According to law firm Haynes & Boone several upstream operators have voiced their concern over sovereign immunity for PEMEX in the context of NAFTA negotiations.