Report

North American Energy Integration: Assessing Oil and Gas Policy Issues ahead of NAFTA Renegotiation

Aug 16, 2017 | Alan J. Krupnick, Amin Asadollahi, Juan Carlos Belausteguigoitia Rius, Kristin Hayes, Isabel Echarte, Philip Gass, Daniella Echeverria

Summary

Mexico, Canada, and the United States stand to benefit from increasing energy sector interconnectedness and coordination. What key environmental and fiscal policy areas related to oil and gas development provide opportunities for further harmonization?

Key Findings

  • Simplifying some aspects of oil and gas fiscal policies could provide the public with transparency and fair returns while functioning more efficiently for the oil and gas sector.
  • Defining what constitutes a subsidy to the oil and gas sector presents an important first step to their removal as part of a G20 commitment.
  • While US federal cooperation on regulating greenhouse gas emissions is unlikely in the short term, there are quite a few opportunities for subnational US and Canadian governments as well as the Mexican government to explore harmonization.
  • Opportunities may exist for the three countries to work together to set coordinated standards on well decommissioning, water use and disposal, and safety.
  • Infrastructure siting processes should be improved and better aligned to decrease transaction costs and delays, as well as to better address national and cross-border environmental and indigenous/First Nation concerns.

Abstract

Further integration of energy markets and policies across the three North American countries can only contribute to economic development and may well improve its sustainability. This report reviews a number of key policy areas, including NAFTA, related to oil and gas development in and across the three major North American countries and explores opportunities for enhanced trilateral and bilateral cooperation and policy alignment. It contains descriptions of existing policies, legislation, and regulations on transportation, climate change, royalties and fiscal structures, decommissioning and abandonment, water, and environmental safety, as well as more detailed discussions of harmonization opportunities in each of those areas. The report also highlights several fundamental differences in the broader regulatory frameworks across the three countries, as these have an impact on efforts to harmonize. An October 2016 workshop attended by major stakeholders and held by Resources for the Future—in concert with the Department of Energy’s (DOE’s) Office of Energy Policy and System’s Analysis (EPSA) and two partners in Canada and Mexico (the International Institute for Sustainable Development and Instituto Tecnológico Autónomo de México)—significantly contributed to this report. The workshop had several purposes: first, to identify gaps, best practices, and inconsistencies with economic and environmental regulations and markets across the three countries; second, to inform the creation of legal, regulatory, and policy roadmaps for harmonizing regulations and markets; and third, to bring together individuals who can help implement greater harmonization, and also others who can offer helpful input. This report places the discussions at this workshop in the context of the three countries’ regulations and policies as well as current political climates to summarize both the workshop participants’ and the authors’ recommendations for harmonization. The recommendations include action items for different levels of government in the three jurisdictions, research groups, academics, stakeholders, and others to move toward greater harmonization of policies and markets affecting the oil and gas sector.

Figures

Figure 1. US Natural Gas (Pipeline, LNG, and CNG) Exports, 1973-2016

Source: Authors calculations based on 2016 US Energy Information Administration (EIA) data.

Figure 2. Relative Value of Four Key North American Oil and Gas Flows in 2016

Source: Authors calculations based on 2016 US EIA data. See Table 1 for the amounts of imports and 2016 average prices that informed this figure.
Note: The minimal oil and gas traded between Mexico and Canada directly are excluded from this chart. This chart also excludes a number of other energy products traded focusing on the four most salient for this discussion. The relative widths of lines indicate the relative values of these fuels exchanged in 2016.

Figure 3. Canada-US Rail Networks for Energy Trade

Source: CAPP (2015).

Figure 4. Number of Railroad Incidents Compared to Number of Railcars Used in Oil Shipments

Source: Calculations by Charles Mason, professor of Petroleum and Natural Gas Economics, University of Wyoming, and H.A. "Dave" True Jr., visiting fellow, Resources for the Future.

Figure 5. Natural Gas Infrastructure and Projects, 2016

Source: IEA (2017).

Figure 6. Royalty Structures over the Life Cycle of a Well

Source: Government of Alberta (n.d.a)

Figure 7. Fossil Fuel Production Water Consumption

Source: IEA (2012). Note: Ranges shown are for “source-to-carrier” primary energy production, which includes withdrawals and consumption for extraction, processing and transport. Water use for biofuels production varies considerably because of differences in irrigation needs among regions and crops; the minimum for each crop represents nonirrigated crops whose only water requirements are for processing into fuels. EOR = enhanced oil recovery; toe = tonne of oil equivalent. For numeric ranges, see http://www.worldenergyoutlook.org.
* The minimum is for primary recovery; the maximum is for secondary recovery.
** The minimum is for in situ production; the maximum is for surface mining.
*** Includes CO2 injection, steam injection, alkaline injection, and in situ combustion.
**** Excludes water use for crop residues allocated to food production.