Biden’s North American Energy Challenges

As essential trade partners of the United States, Canada and Mexico could be natural allies in President Joe Biden’s quest to accelerate the energy transition and build competitiveness in renewable energy technologies and manufacturing. Both countries will no doubt be pleased to see trade relations return to more stable footing. Yet tensions in the trilateral energy agenda are emerging.

Canada shares many of Biden’s energy priorities, but the cancelation of the Keystone XL pipeline permit is a blow for Alberta and for Prime Minister Justin Trudeau, who has backed the pipeline despite criticism from environmental groups. Still, mindful of the deep integration between their energy systems and a shared emphasis on renewable energy and emissions reductions, the United States and Canada will eventually look beyond this problem and explore areas for collaboration. 

The U.S.-Mexico relationship poses deeper challenges. Biden will likely push back harder than his predecessor on Mexico’s president Andrés Manuel López Obrador, including on alleged discrimination against private investment in the energy sector that violates the U.S.-Mexico-Canada Agreement (USMCA). Energy and climate issues will not be the primary irritant in the U.S.-Mexico relationship, but these disputes will get more attention from the Biden administration.

U.S. and Canada Energy Ties Transcend Keystone XL

Biden arrives in office with a strong focus on rebuilding U.S. alliances around the world and restoring stable relations with key trade partners. Canada is near the top of this list, but canceling the Keystone XL permit is a rocky beginning to the relationship.Keystone XL’s symbolic significance has long outweighed its importance to the oil market. Critics of the pipeline have portrayed it as a climate disaster in the making, while supporters suggest it shows that environmental groups are strangling new energy infrastructure. The 830,000 barrels per day (b/d) pipeline, meant to connect Alberta all the way to Houston and Port Arthur, Texas, has been caught in regulatory miasma for a decade. Keystone XL was a political lightning rod during the Obama administration, with multiple rounds of State Department reviews of its environmental impact, lawsuits in Nebraska, and even a presidential veto of a Senate bill approving its construction. Support for Keystone XL was one of the few areas of common cause between Trudeau and former president Donald Trump. But Biden fulfilled a campaign pledge by issuing an executive order blocking the pipeline on his first day in office, arguing that leaving the permit in place would clash with the administration’s economic and climate imperatives. Alberta’s government took a C$1.5 billion equity stake in the project last March, and may seek damages to recover its C$1 billion ($785 million) investments to date.

Although Keystone XL is a totemic issue, it is a small part of the bilateral energy relationship, and more than 70 oil and gas pipelines already cross the border. The U.S. and Canadian energy systems are highly integrated, with $119 billion in bilateral trade last year. Canada is the largest source of U.S. oil imports, with crude and petroleum product supplies averaging 4.1 million b/d between January and October 2020. Canada also accounts for nearly all U.S. natural gas imports, mainly via pipeline from Western Canadian provinces to the West Coast and Rocky Mountain regions. The United States, meanwhile, exports significant volumes of petroleum products to Canada—mainly light, sweet crude for refineries in Eastern Canada. Bilateral electricity trade is also substantial at 74 terawatt hours in cross-border transmission in 2019, with Canadian net exports estimated at C$1.9 billion ($1.5 billion) in value.When the Keystone XL imbroglio passes, Trudeau and Biden are likely to focus on building upon these deep energy linkages and searching for mutual opportunities. Canada aims to reach net zero emissions by 2050 and shares Biden’s focus on reducing emissions in the electricity sector. Canada sees potential for more hydropower exports that would help meet U.S. emissions targets. Ottawa will also see alignment in the automotive sector, where supply chains between Mexico, the United States, and Canada are highly integrated. The United States and Canada have a shared interest in encouraging electric vehicle production and aligning emissions standards. Canada will be relieved if Biden reintroduces tougher fuel economy standards, reversing the rules introduced by Trump that inhibited a more uniform standard for automakers. Finally, Canada and the United States will be aligned in seeking adherence to USMCA rules, including its environmental and labor standards.

Tension over Mexico’s Energy Policies

López Obrador enjoyed a surprisingly productive relationship with Trump, despite the former president’s inflammatory rhetoric about Mexican migrants and his determination to build a border wall. López Obrador cooperated with Trump’s effort to curtail migration from Central America via Mexico and agreed to renegotiate the North America Free Trade Agreement, handing Trump a win on one of his key campaign issues. By meeting these core demands, López Obrador found he could earn a free pass on other issues that formerly generated pressure from Washington.

Biden is more likely to raise the pressure on Mexico in several areas. Biden has promised to prioritize border security issues and address the root causes of migration from Central America. His government is also likely to focus on narcotrafficking and law enforcement issues, especially after a serious flareup in tensions in recent weeks.

These concerns over migration, border security, and drug trafficking are likely to take precedence in bilateral talks, but there will be friction over energy issues as well. U.S. energy companies argue they have been harmed as López Obrador has forced the country’s regulatory agencies to support Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE), the state electricity company. López Obrador claims that regulators should only be concerned about the welfare of state firms rather than private investors.

In the run-up to his 2018 election, López Obrador assailed the constitutional reforms that allowed foreign investment in the oil and gas industry for the first time since it was nationalized in 1938. He has halted new licensing rounds, frozen new opportunities for companies to farm into licenses held by PEMEX, and ended the migration of older service contracts. He has also directed regulators to deny permits and licenses to investors in the upstream and downstream sectors, harming those competing with PEMEX. And the president frequently portrays the new regulatory agencies that were created in the energy reform as unaccountable bureaucrats and has threatened to dissolve them. These policies have led to brain drain and low morale at the regulatory agencies and have frozen Mexico’s oil and gas opening before it could bear fruit.

The picture is similar for renewable energy. Following the energy reforms of 2013-14, Mexico’s first three renewable energy auctions were very successful, drawing a range of investors and securing some of the world’s lowest prices. But López Obrador abruptly halted the fourth auction and imposed serious obstacles to private investors. In October 2019, Mexico changed the rules for clean energy certificates that had supported renewable energy players, diluting the value of those certificates and benefiting CFE. Last April, citing concerns over the risk that renewables posed to Mexico’s power supply during the Covid-19 pandemic, the national grid operator CENACE barred companies from conducting pre-commissioning tests for wind and solar facilities. The move effectively blocked renewable energy companies from accessing the national grid, leaving 44 projects with a total of 5.34 gigawatts (GW) in generating capacity in limbo. Shortly afterwards, Mexico’s energy secretariat passed a resolution that abandoned the principle of prioritizing lowest-cost electricity sources in the national grid, instead favoring power generated by CFE. Several other measures have favored CFE over independent power producers, making it harder for them to commission their projects (and to service their debt). Foreign investors argue that through these actions, Mexico is ignoring its obligations under bilateral investment treaties and free trade agreements including USMCA, and arbitration cases are possible.

In October, more than 40 lawmakers sent a letter to Trump complaining that López Obrador’s energy policies are discriminating against foreign investment. And on January 11, the U.S. secretaries of state, energy, and commerce wrote to Mexican officials that regulatory actions favoring state-owned energy companies were harming U.S. companies and adversely affecting U.S. public investments in Mexico’s energy sector.

López Obrador Likely Unmoved by U.S. Pressure

The Biden administration has many other competing demands, but at some point it is likely to raise these energy concerns and demand that Mexico adhere to its USMCA obligations. The administration is likely to criticize Mexico’s refusal to issue permits to renewable energy companies. Biden could potentially earn some small wins by offering concessions on immigration and border security issues in return for specific cases of relief for U.S. investors. He could certainly make a case for Mexico’s potential role in boosting clean energy manufacturing in North America. Mexico’s solar panel manufacturing capacity is currently quite limited, and the travails of renewable energy investors have not helped, but the potential for growth as well as greater integration with the U.S. market is clear.

However, in reality Washington has limited ability to influence López Obrador’s energy policies. The Mexican president’s strong support for PEMEX and the CFE, his skepticism over renewables, and his suspicions of private investment reflect a deeply ingrained worldview. Like Biden, he ran for office with a strong focus on energy issues, and he is personally invested in enacting his particular vision for the sector. Just as importantly, López Obrador is not surrounded by dissenting voices; instead, his key advisors, including Energy Minister Rocio Nahle, share his views. Indeed, the president has suggested repeatedly that depending on the outcome of this year’s general election and the result for his Morena party, he could seek to reverse the constitutional reforms that opened the energy sector. (Amending the constitution would require a two-thirds majority in both houses of the legislature as well as a majority vote in all state legislatures. Morena would have to build its majority or seek support from other parties, but such an outcome is not out of reach.)

The trilateral energy agenda in North America is robust enough to outlast diverging policies by one administration or another. But Biden’s task will be to reorient the focus toward boosting renewable energy, building transmission capacity, and expanding electrification. For at least the next few years, he is more likely to find a willing audience in Ottawa than in Mexico City.

Ben Cahill is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). 

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Ben Cahill
Senior Associate (Non-resident), Energy Security and Climate Change Program