{"id":26667,"date":"2017-11-15T22:47:01","date_gmt":"2017-11-16T03:47:01","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/donald-trump-and-natural-gas-an-explosive-combination-examining-the-natural-gas-industrys-response-to-nafta-renegotiations\/"},"modified":"2017-11-15T22:51:12","modified_gmt":"2017-11-16T03:51:12","slug":"donald-trump-and-natural-gas-an-explosive-combination-examining-the-natural-gas-industrys-response-to-nafta-renegotiations","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/donald-trump-and-natural-gas-an-explosive-combination-examining-the-natural-gas-industrys-response-to-nafta-renegotiations\/","title":{"rendered":"Donald Trump and Natural Gas \u2013 An Explosive Combination? Examining the natural gas industry\u2019s response to NAFTA renegotiations"},"content":{"rendered":"

The past 35 years have seen unprecedented growth in international trade.1<\/sup> Much of this growth was facilitated by free trade agreements, which reduced or eliminated international trade restrictions such as tariffs, regulations, and protectionist policies.2<\/sup> Perhaps the most domestically well-known of these agreements is the North American Free Trade Agreement (NAFTA). Signed in 1994, NAFTA streamlined trading rules and eliminated most trade tariffs between the USA, Canada, and Mexico. This agreement had a significant impact on trade between the three countries, as overall trade volumes between them grew from $290Bn in 1993 to $1.1Tn in 2016.3<\/sup><\/p>\n

Following President Trump\u2019s election victory, where he repeatedly railed on \u201cunfair\u201d trade deals such as NAFTA, his administration has engaged with Mexican and Canadian counterparts in an attempt to renegotiate NAFTA \u2013 though he has not taken scrapping NAFTA entirely off the table.4<\/sup><\/p>\n

One of the largest beneficiaries of NAFTA in recent years has been the natural gas industry. Taking advantage of NAFTA\u2019s free trade provisions along with a large increase in domestic US gas production, the US has increased exports to Mexico dramatically in recent years and now supplies more than 25% of Mexico\u2019s natural gas needs. Mexico is the single most important export market for US natural gas, representing 60 percent of all exports.5<\/sup> President Trump\u2019s recent posturing on NAFTA has raised alarms throughout the natural gas industry, which risks heightened supply chain costs in the event that cross-border tariffs increase.<\/p>\n

Some of the key players in the natural gas supply chain are pipeline builders such as Energy Transfer Partners (ETP), which build and operate the pipelines used to transport natural gas. ETP builds, owns, and operates multiple domestic and international pipelines, including four gas pipelines to Mexico they have completed over the last two years.6<\/sup><\/p>\n

Many organizations in the industry, including ETP, are taking proactive steps to mitigate any potential effects of a NAFTA renegotiation or repeal. The most prevalent short-term strategy for doing so has been to lobby the US government for favorable treatment for the industry in any NAFTA renegotiation. In the short run, ETP has been working through the American Petroleum Institute (the trade association for the American oil and gas industry) to redouble its lobbying efforts in an attempt to influence pending NAFTA renegotiations. ETP hasn\u2019t stopped there, however \u2013 they are also leveraging personal connections with Rick Perry, the current US Energy Secretary. Mr. Perry formerly served on the board of ETP and remains close with ETP\u2019s current CEO, Kelcy Warren.7<\/sup><\/p>\n

Over a somewhat longer time frame (3-10 years out), Energy Transfer Partners and the oil and gas industry broadly have indicated a commitment to remaining diligent in observing the current political climate in all of the countries in which it operates, redoubling or redirecting lobbying efforts as necessary. There are also ancillary political goals that ETP and others will seek to lobby for in any additional trade deal the US signs with Mexico and\/or Canada; chief among them is an effort to lock in recent Mexican reforms that open up Mexico\u2019s energy market for foreign investment.8<\/sup><\/p>\n

In addition to the steps outlined above, there are several additional actions that ETP could take to strengthen their competitive position and minimize risk in a new world with strong nativist sentiments. Although ETP appears to have done a good job up to this point in coordinating its lobbying activity through the API, there is more internal work they can do to mitigate the downside risk of an unfavorable NAFTA renegotiation (or worse, a straight-up repeal of the agreement). In the short term, ETP should consider exploring alternative areas to construct new pipelines \u2013 expanding domestic pipelines and pursuing additional international operations outside North America. They could also explore establishing a Mexican subsidiary to mitigate the tax implications of a NAFTA repeal.<\/p>\n

Over the longer run, ETP should continue the push to diversify geographically \u2013 reducing dependence on business with Mexico, and seeking a broader combination of international and domestic projects. ETP will also face an existential moment in the future as alternative energy (e.g., wind, solar) gains momentum and market share. In the face of this new market reality, ETP would also be well served by seriously asking themselves if they can enter into the distribution market for these new forms of energy. Although it may prove difficult, ETP has significant logistics and operational expertise they could leverage to evolve their business model.<\/p>\n

One important open question on this issue where I would welcome comments: Just how \u201creal\u201d is the risk to US natural gas companies from NAFTA renegotiations? Given energy\u2019s importance to the US economy and the industry\u2019s favorable relationships with the Trump administration, is there a real threat of supply chain disruption or are these concerns simply political posturing?<\/p>\n

(789 words)<\/p>\n

 <\/p>\n

1 Donnan, S., \u201cTrade: Into uncharted waters,\u201d Financial Times (Oct. 24, 2013)<\/p>\n

2\u00a0Shujiro, Urata, and Okabe Misa. \u201cThe Impacts of Free Trade Agreements on Trade Flows: An Application of the Gravity Model Approach.\u201d\u00a0RIETI Discussion Paper Series<\/em>, 07-E-052, July 2007<\/p>\n

3 \u201cNAFTA\u2019s Impact on the U.S. Economy: What Are the Facts?\u201d Knowledge @ Wharton, 6 Sept. 2016, knowledge.wharton.upenn.edu\/article\/naftas-impact-u-s-economy-facts\/.<\/p>\n

4 \u201cTrump Renews Threat to Scrap NAFTA Going into next Round of Talks.\u201d Reuters, 27 Aug. 2017, www.reuters.com\/article\/us-trade-nafta\/trump-renews-threat-to-scrap-nafta-going-into-next-round-of-talks-idUSKCN1B70NA.<\/p>\n

5 Goldberg, Shelley. \u201cU.S. Natural Gas Market Sees Big Benefits From Nafta.\u201d Bloomberg, 16 Aug. 2017, www.bloomberg.com\/view\/articles\/2017-08-16\/u-s-natural-gas-market-sees-big-benefits-from-nafta.<\/p>\n

6 Krauss, Clifford, and Azam Ahmed. \u201cTrump\u2019s Anti-Nafta Stance Is on a Collision Course with Natural Gas.\u201d NY Times, 26 June 2017, www.nytimes.com\/2017\/06\/26\/world\/americas\/rick-perry-mexico-gas-energy-industry-electricity-natural-gas.html.<\/p>\n

7 ibid.<\/p>\n

8 Dlouhy, Jennifer. \u201cOil Companies That Cheered Trump’s Regulatory Rollback Are Quaking about Changing NAFTA.\u201d Calgary Herald, Bloomberg News, 1 Sept. 2017, calgaryherald.com\/business\/energy\/oil-companies-that-cheered-trumps-regulatory-rollback-are-quaking-about-changing-nafta.<\/p>\n","protected":false},"excerpt":{"rendered":"

An overview of the natural gas industry's response to current NAFTA renegotiations.<\/p>\n","protected":false},"author":10019,"featured_media":0,"comment_status":"open","ping_status":"closed","template":"","categories":[3239],"class_list":["post-26667","hck-submission","type-hck-submission","status-publish","hentry","category-isolationism","hck-taxonomy-organization-energy-transfer-partners","hck-taxonomy-industry-energy","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nDonald Trump and Natural Gas \u2013 An Explosive Combination? 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