Energy is Canada’s ace if NAFTA reopened; political leaders warn U.S. against opening Pandora’s Box

Twenty years ago, when negotiations were getting under way for the Canada-U.S. Free Trade Agreement (known as FTA and forerunner of the subsequent North American trade pact that includes Mexico), doubting Canadians were being urged by their political leaders to accept a “leap of faith” and take the plunge.

They may soon be asked to repeat the exercise, if Barack Obama wins the U.S. presidency and carries out his pledge to either opt out of NAFTA or renegotiate the agreement.

If that happens, nationalist sentiment in Canada is sure to demand a complete overhaul of the energy provisions that now see 66 percent of Canada’s oil production and 54 percent of its natural gas delivered to U.S. markets, while Mexico, under a NAFTA exemption, can curtail its energy exports. Under existing rule, Canada has largely unfettered access to U.S. markets, but NAFTA terms prevent either Canada or the U.S. from lowering the proportion of their energy exports to the other relative to the “total supply” of the exporting country during the prior 36-month period.

That “total supply” covers shipments to both domestic and foreign users.

Oil sands a new element

What wasn’t a factor 20 years ago, but is now a vital element of North American energy security is the rise of the oil sands, currently at about 1.5 million barrels per day and expected to add 2 million bpd by 2015.

But the Canadian industry is increasingly troubled by the prospect of these volumes of heavy oil and bitumen flooding U.S. refineries to the point where they can only be sold at heavily discounted prices.

To buy insurance and keep the market competitive, more producers — including oil sands heavyweight Suncor Energy —want to open routes to Asia, notably China, Japan, Korea and Taiwan.

What stands in the way is that NAFTA, assuming Canadian consumption remains fairly constant, prevents exports to any country other than the U.S. under the proportionality maintenance obligation.

It is the price Canada has paid for its concern 20 years ago that the U.S. pursuit of energy self sufficiency could limit Canadian energy shipments across the 49th parallel while the U.S. stimulated its own production.

J. Michael Robinson, an adjunct professor of law at two Ontario universities, believes the “prospect of the U.S. walking from NAFTA and watching China and others scoop Canada’s energy exports is slim to nil.”

Energy, he said, is the “ace in the hole for Canada and we should not agree to maintaining this commitment without major concessions elsewhere. Canadian industry would probably support removing the commitment, so that it can sell energy unrestricted to the highest bidder.”

Former Canadian deputy Prime Minister John Manley said the rhetoric from U.S. Sen. Barack Obama, D-Ill., about NAFTA, echoed by U.S. Sen. Hillary Clinton, D-N.Y., ignores the obvious energy benefits to the U.S.

He said that if renegotiation of NAFTA is proposed by the next administration in Washington Canada should make the point that during times of possible energy shortages “we may prefer the flexibility to look to Canadian requirements first, before satisfying the insatiable appetite for energy” in the U.S.

Manley suggested that if illegal immigration across the US-Mexico border is at the root of Washington’s free-trade concerns, Canada and the U.S. may see an opportunity to de-link Mexico from the pact and return to the bi-lateral FTA.

“The U.S. and Canadian economies are much bigger, so let’s get on with the work of making our economies strong and competitive in a renewed Canada-US agreement,” he said.

“After all, we have the natural resources you want and need, while you have the market that is important to us, so let’s make a deal,” he said.

NAFTA reopening worries Mexico; cancellation seen likely

“We need to change the perception that it would be good to renegotiate (NAFTA),” he said. “Any reopened negotiation would lead to its cancellation,” because a “Pandora’s box” of special interests would all want the deal changed in their favor.

David Wilkins, the U.S. ambassador to Canada, said U.S. election talk should be taken with a grain of salt, suggesting that “rhetoric on the campaign trail is not the policy that you adopt when you are the leader.”

“I believe, when all is said and done, whoever is president, he or she will understand the full benefits of NAFTA and understand that you can’t unilaterally renegotiate a trade agreement — and that they will support it and it will not be changed.”

Wilkins, appointed to his job by President George W. Bush, gave a nod of approval to Prime Minister Stephen Harper’s decision to play the energy card in warning future U.S. leaders against putting NAFTA back on the table

Harper issued a blunt warning that U.S. dependence on Canadian oil gives Canada a strong trade bargaining hand.

“We are a secure, stable energy supplier,” he said. “That is of critical importance to the future of the United States.”

If Canada is forced into a new round of NAFTA talks “we’ll be in an even stronger position than we were 20 years ago. And we’ll be in a stronger position in the future.”

Bush has also noted that Canada and Mexico are reliable suppliers of oil at a time when the U.S. is paying the price for not stepping up exploration.

He argued that those “who say get rid of NAFTA as a throwaway political line” are playing with fire because dumping the agreement would cost the U.S. even more jobs and investment.

—Gary Park