“The energy and economic welfare of the United States and Mexico are intertwined by our shared geography, geology, and peoples. The Transboundary Hydrocarbon Agreement will help to tie our countries together and grow our economies.”
– Daniel Simmons, Testimony before House Natural Resources Subcommittee on Energy and Mineral Resources, “U.S.-Mexico Transboundary Hydrocarbon Agreement and Steps Needed for Implementation,” April 25, 2013.
Mexico is America’s third largest trading partner and has been one of the largest sources of oil exports to the United States. Mexico is the largest recipient of U.S. gasoline exports and the second largest recipient of our natural gas exports.
The energy trade between the United States and Mexico is growing, especially for America’s finished petroleum and natural gas exports. Mexico’s heavy oil production is falling, but that means more spare refining capacity on the Gulf Coast if Canadian oil sands can be transported to the Gulf Coast.
The Gulf of Mexico is one of the most prolific hydrocarbon-producing areas for both the United States and Mexico. Oil production, especially in deepwater on the U.S. side of the border, has moved closer to the U.S.-Mexico maritime border in recent years. Until last year, however, there was no agreement on how to divide resources between the United States and Mexico for resources that straddle the border.
The Agreement
A Fact Sheet released by the U.S. Department of State on February 20th announced and described the Transboundary Hydrocarbon Agreement.
The United States and Mexico today signed an agreement concerning the development of oil and gas reservoirs that cross the international maritime boundary between the two countries in the Gulf of Mexico. The Agreement is designed to enhance energy security in North America and support our shared duty to exercise responsible stewardship of the Gulf of Mexico. It is built on a commitment to the safe, efficient, and equitable exploitation of transboundary reservoirs with the highest degree of safety and environmental standards.
Elements of the Agreement
- · The United States and Mexico jointly announced their intention to negotiate a transboundary hydrocarbons agreement on June 23, 2010, following the Joint Statement adopted by Presidents Obama and Calderon at the conclusion of President Calderon’s State Visit to Washington on May 19, 2010.
- Upon entry into force, the current moratorium on oil exploration and production in the Western Gap portion of the Gulf of Mexico will end.
- The Agreement establishes a cooperative process for managing the maritime boundary region that promotes joint utilization of transboundary reservoirs.
- The Agreement provides a legal framework for possible commercial activities at the maritime boundary and sets clear guidelines for transboundary developments. It establishes incentives for oil and gas companies to voluntarily enter into arrangements to jointly develop any transboundary reservoirs. In the event such an arrangement is not achieved, the Agreement establishes a process by which U.S. companies and PEMEX can individually develop the resources on each side of the border while protecting each nation’s interests and resources.
- The legal certainty created by the Agreement will enable U.S. companies to explore new business opportunities and carry out collaborative projects with PEMEX.
- The Agreement also provides for joint inspections teams to ensure compliance with applicable laws and regulations. Both governments will review all plans for the development of any transboundary reservoirs.
Evaluation
The Transboundary Hydrocarbon Agreement, enacted after decades of indecision between Mexico and the United States, allows oil and natural gas production on 1.5 million acres that was previously off-limits because of border issues. The extent of incremental production, however, depends cooperative relations between the United States and Mexico and American companies and PEMEX. The great promise is for Mexico to reverse decades of declining production–and double its estimated 10.5 billion barrels of proven oil reserves.
The potential is certainly there with robust estimates of in-place oil and gas reserves and (U.S.-side) newly developed hydraulic fracturing technologies. For example, one of America’s most prolific shale fields, the Eagle Ford, extends into Mexico, but all of the activity is on the U.S. side of the border. This is similar to areas throughout the U.S. where production is skyrocketing on private and state lands but remaining dormant on federal government lands.
Potential Problem: Article 20
In an otherwise good agreement, one potential problem is a conflict between Article 20 of the agreement and the Security and Exchange Commission’s Rule 13q-1 regarding Resource Extraction Payments.
Article 20 states:
To the extent consistent with their national laws, the Parties shall maintain confidential, and obligate their Licensees to maintain confidential, all Confidential Data and other information obtained from the other Party or its Licensees in accordance with this Agreement.
Together with Rule 13q-1, requiring “resource extraction issuers” to disclose payments made to foreign governments, Article 20 can create an impossible situation for American companies operating on transboundary hydrocarbon resources.
For example, Mexican confidentiality requirements may forbid the disclosure of the very information that Rule 13q-1 requires American companies to disclose. This would lead to a situation where companies regulated by the SEC have, at very least, uncertainty about compliance with both Mexican and American disclosure laws. This uncertainty and potential disclosure conflict would place foreign state-owned oil companies, who are not regulated by the SEC, at a competitive advantage to the companies which operate in the United States are regulated by the SEC.
Because much of the transboundary area is deepwater, it would require multi-billion dollar investments to produce the hydrocarbon resources. Any legal uncertainty brought about by disclosure law could easily dissuade American companies from undertaking what is already an expensive decision, in turn reducing opportunities for new jobs for Americans.
Rule 13q-1 also creates a different type of competitive disadvantage for American companies operating in the Gulf of Mexico Transboundary area. The rule would allow foreign state-owned oil companies with a competitive advantage to consider business-sensitive information about American companies’ operations.
If Mexico were to allow foreign-owned companies to extract oil along the deepwater transboundary area, there could very well be competition between U.S. private companies and foreign-state owned companies. Even though the deepwater technology was developed in the U.S. deepwater, the U.S. companies would be at a disadvantage. This is like playing poker but being required to show your cards to your fellow card-players.
Therefore, the authors of HR 1613 are to be commended for recognizing this and taking proper steps to isolate this unique agreement from the uncertainties surrounding 13q.
Conclusion
The energy and economic welfare of the United States and Mexico are intertwined by our shared geography, geology, and peoples. The Transboundary Hydrocarbon Agreement will help to tie our countries together and grow our economies. North America does not lack energy resources, but what we do lack, at times, is the necessary political will that could lead to greater economic growth and prosperity.
North America is an energy rich continent. [1] Our energy issues are not issues of a lack of supply, but a lack of access to energy resources. The Transboundary Hydrocarbon Agreement is one way the federal government should be moving forward to grant more access to taxpayer-owned energy resources. The agreement is a good agreement and should expeditiously move forward, but it should not have taken more than a year for the Administration to submit Transboundary Hydrocarbon Agreement to Congress.
Affordable, reliable energy is critical for the welfare of all Americans and Mexicans. Hopefully our countries will work better together in the future to enhance our energy security and our economic welfare as well.
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[1] As I explained in my full testimony, total recoverable oil in North America exceeds 1.7 trillion barrels. The total recoverable North American natural gas is approximately 4.2 quadrillion (4,244 trillion) cubic feet and North America has over 497 billion short tons of recoverable coal.
For comparison’s sake, the U.S. uses roughly 7 billion barrels of oil, 24 trillion cubic feet and 1 billion short tons of coal annually. North America is not limited by energy resources, but instead by access to these vast energy resources. Trade between the United States and Mexico only makes our nations stronger and raises our combined economic welfare.