North American Energy Outlook: Capitalizing on Cross-Border Collaboration

Alan Krupnick, Amin Asadollahi, Juan Carlos Belausteguigoitia Rius, and Isabel Echarte

How can Canada, Mexico, and the United States maximize the benefits of further cooperating on key environmental and fiscal policy areas related to oil and gas development across the continent?

Across Canada, Mexico, and the United States, energy markets and policy have undergone remarkable change in recent years. With renegotiation of the North American Free Trade Agreement (NAFTA) underway, several opportunities exist to enhance trilateral, bilateral, and subnational energy-sector cooperation and policy alignment. Envision a world where the three North American countries act as a bloc to trade freely among themselves in all things energy, are regulated in a cost-effective and coordinated system—and rival every other nation or bloc in its ability to influence world markets for oil and gas. While an unlikely outcome, the three countries have much to gain from increased cooperation and alignment.

Despite the result of the US presidential election and related uncertainties about trade and hemispheric cooperation, a number of economic realities are likely to favor a free trade agenda—at least for energy commodities and related investments, which are likely to be resistant to political winds. Indeed, on the political front, the Trump administration’s Summary of Objectives for the NAFTA Renegotiation (released ahead of the first round of talks) emphasized furthering energy-market access and “support[ing] North American energy security.” Beyond trilateral cooperation on the national scale, significant opportunities exist for collaboration among subnational actors in a number of areas, especially regarding water and climate policy.

For example, participants at a three-country stakeholder workshop hosted by RFF and held prior to the US election agreed that differences in economic regulations across borders (e.g., royalty rates and pipeline rates and rules) do not seem to pose major impediments to freer trade in gas and oil (learn more about the workshop at the end of this article). Rather, environmental regulations and policies are of greater concern—including environmental impact assessments, permit approval processes, deepwater drilling rules in the Gulf of Mexico, and regulations aimed at reducing emissions of carbon dioxide and methane. We outline 10 key recommendations for ensuring that existing efforts to harmonize energy policy across North America continue and are expanded, and touch on two of these areas below.

Infrastructure Permitting Processes

New energy infrastructure is fundamental to the efficient integration of North American energy markets. National policies that cause delays in siting and construction should be a prime target for benefit–cost analysis. If necessary, Canada, Mexico, and the United States could explore opportunities for reform and coordination. In particular, the three nations should examine the similarities and differences in infrastructure permitting processes across borders, including those related to environmental impact statements.

New energy infrastructure is fundamental to the efficient integration of North American energy markets.

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Each country conducts assessments of major proposed siting and infrastructure projects before a decision on them is made. Civil society groups have voiced concerns about what they believe is a short review process, although industry finds the entire process to be too lengthy; this issue of differing views among various stakeholder groups is common across the three countries. In Mexico, along with energy policy reforms, responsibility for environmental impact statements related to oil and gas development has been consolidated within a new regulatory agency established in 2014, the Agency for Safety, Energy, and Environment (ASEA).

In Canada, a 1992 law governing environmental impact statements was recently repealed and replaced—cutting the number of reviewing agencies from 40 to 3. Over the years, environmental organizations have taken issue with what they see as a reduction of environmental stringency in favor of expediency. Canada is currently in the process of reviewing environmental acts, regulatory processes, and the National Energy Board (a federal regulatory body), with the intent of restoring lost environmental protections and public trust in major project approvals.

Construction of an oil rig on Texas’s Gulf Coast.

The process for environmental impact statements in the United States, under the National Environmental Policy Act, has come under intense criticism for its complexity, length, and use following the Obama administration’s decisions and their reversals by the Trump administration regarding the Keystone XL and Dakota Access Pipelines. The Trump administration’s further elimination of climate change consideration in environmental impact statements has attracted additional criticism of the process (for the opposite reason)—placing the United States at odds with the other two countries. Congress has expressed interest in streamlining the permitting process (including reviews of environmental impact statements) by, for example, using a more rigorous public interest test to deny pipeline siting or placing the Federal Energy Regulatory Commission in charge of permitting for cross-border oil pipelines, instead of the existing presidential review process overseen by the State Department.

Potential exists for the three nations to strike a balance among these competing interests, by not only providing certainty for industry and regulators—in terms of the length and breadth required for environmental impact statements—but also conducting consistent and thorough reviews to ensure that environmental and societal interests are adequately taken into account. At minimum, Canada, Mexico, and the United States would benefit from learning from each other’s best practices in this area. In the longer term, coordinating policies regarding environmental impact statements could improve outcomes while decreasing the regulatory burden on the oil and gas industry.

Methane Emissions

Methane is both an energy commodity itself and an intense climate pollutant with significant global warming impact. Both environmental and economic cases can thus be made for regulating methane emissions with comparable approaches across the three countries—for instance, under a single North American cap-and-trade system. Improving regulatory alignment and information sharing in this area—including on finding and fixing methane leaks while ending the wasteful practices of intentionally venting (directly releasing) and flaring (burning) methane emissions during energy commodity development can benefit all three countries. Regulatory alignment could reduce compliance costs, end wasteful practices, and improve environmental outcomes.

In 2016, the three nations announced the North American Climate, Clean Energy, and Environment Partnership Action Plan, which includes commitments to reduce methane emissions from the sector by 40–45 percent by 2025 and collaborate on implementation of the World Bank’s Zero Routine Flaring by 2030 Initiative.

Canada published its proposed methane regulations for the oil and gas sector earlier this year. These would require facilities to limit venting, address emissions from pneumatic controllers and pumps, implement programs for leak detection and repair, conserve or flare gas in well completion, and repair compressors with high emissions. At the same time, Canada also published proposed regulations to cover emissions of volatile organic compounds, which could further reduce methane emissions. Alberta, which has a comparable methane reduction target, is in the process of developing its own regulations.

Mexico, the fifth-largest methane emitter in the world in 2015, published regulations in 2016 for methane emissions in its upstream oil and gas operations, and addressedmethane in recently published guidelines for unconventional oil and gas development. The rules prohibit venting of natural gas except in emergency situations. The flaring of natural gas is likewise permitted in only a few situations. Furthermore, in order to repair leaks, the guidelines for hydraulic fracturing require operators to detect methane leaks and suggest several options for doing so.

Cooperation among state governments could help harmonize methane policy despite US federal inaction.

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In the United States, methane regulations established under the Obama administration are currently slated for elimination or modification, including the Environmental Protection Agency’s (EPA’s) rules for managing methane from new oil and gas sources as well as the Bureau of Land Management’s (BLM’s) rules for reducing methane from oil and gas operations on federal land. Eliminating or modifying these rules, however, will be a difficult process and likely subject to litigation. Currently, requirements under the BLM rule are delayed—with a proposed rulemaking to delay the entire rule until 2018. On the flip side, a court recently rejected EPA’s attempt to suspend for two years its methane regulations for new sources.

But cooperation among state and local governments could strengthen efforts to harmonize methane policy despite federal inaction . A number of states are making advances on this front—Colorado, California, Wyoming, Utah, North Dakota, and Ohio all have implemented statewide methane rules, and Pennsylvania has proposed rules. Some of these states are Republican-led, indicating bipartisan interest at state and local levels to reduce emissions and conserve an energy commodity. For methane in particular, sharing data as well as approaches for cost-effective regulation would aid subnational jurisdictions. Province- and state-level governments also have the opportunity to commit to the World Bank’s Zero Routine Flaring Initiative.

Climate Change Policy and Looking Ahead

Similar opportunities exist beyond the federal level for climate change policy. Considering that increased cooperation with the US federal government is currently unlikely, US cities and states may share interest in collaborating with Canada, its subnational governments, and with Mexico. Irrespective of the state of US national climate policy, North American governments at all levels should not lose sight of the longer-term opportunities and benefits of harmonizing policies to address climate change.

Where NAFTA is concerned, the growing mutual benefits derived from energy trade between the United States and Mexico as well as long-established relationships between the United States and Canada argue for a very careful and deliberate renegotiation of the agreement—recognizing that the current accord has worked to the advantage of all countries with regard to energy. Figures 1 and 2 (illustrating US trade in natural gas with its neighbors to the north and south) give a snapshot of one key aspect of these connections. The US exports almost all of its natural gas to Mexico and Canada, while Mexican and Canadian crude oil have increasingly replaced US imports from other countries throughout the past two decades (Figure 3; note that the scale of volume differs across the three figures).

Figure 1. US Natural Gas Imports, 1973–2016

Note: Import volumes in MBOE (one thousand barrels of oil equivalent). Data from the US Energy Information Administration.

Figure 2. US Natural Gas Exports, 1973–2016

Note: Export volumes in MBOE (one thousand barrels of oil equivalent). Data from the US Energy Information Administration.

Figure 3. US Crude Oil Imports, 1973–2016

Individually and together, Canada, Mexico, and the United States have much to gain from increased energy policy harmonization and coordination—including on other infrastructure and climate issues as well as water, transportation and safety, and well abandonment policies. The ongoing NAFTA talks may provide more opportunities for continuing and expanding these efforts.

The themes and recommendations discussed here as well as others emerged from an RFF workshop that brought together stakeholders from all three North American countries. The workshop was developed with our partners in Mexico (at the Instituto Tecnológico Autónomo de México [ITAM]) and Canada (at the International Institute for Sustainable Development [IISD]). A related RFF report includes detailed findings and all 10 key recommendations for efforts to better integrate energy markets and harmonize related policy across North America.

A version of this article appeared in print in the Fall 2017 issue of Resources magazine.

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