E&E: U.S.-Mexico transboundary agreement mired in Congress

January 9, 2013

by Phil Taylor, E&E reporter

A nearly year-old agreement to allow the joint development of oil reservoirs straddling the U.S.-Mexico maritime border in the Gulf of Mexico stalled last month in the Senate, stranding a widely supported measure many argue would increase domestic energy security and improve the safety of offshore drilling.

The agreement announced by government officials last February in Los Cabos, Mexico, creates a framework for U.S. offshore drilling companies and Mexico’s Petróleos Mexicanos, or Pemex, to jointly develop oil production in an area nearly the size of New Jersey that is outside both countries’ economic waters (Greenwire, Feb. 20, 2012).

Resources in the area have been off limits to both countries under a treaty that runs through 2014.

The Mexican Senate ratified the agreement last April, loosening a decades-long policy that forbids foreign oil companies from developing Mexican oil.

But while the agreement is backed strongly by the U.S. Interior and State departments, major oil companies, and senators on both sides of the aisle, it failed to pass the chamber during the lame-duck session.

Senators on the Energy and Natural Resources Committee on Dec. 18 sent out a “hotline” request to attach the agreement as an amendment to H.R. 670, a Northern Mariana Islands lands bill, in hopes of passing it by unanimous consent, but a Republican senator objected, according to Senate sources (E&ENews PM, Dec. 19, 2012).

The impasse derailed, for now, an agreement that many think could improve bilateral relations and spur much-needed reforms in Mexico’s energy sector.

Moreover, while the Bureau of Ocean Energy Management has offered leases in U.S. waters affected by the agreement, no firms will invest in the area until they are confident the resource can be legally developed.

“There is no way a major company would go out and start drilling on the U.S. side unless this agreement is passed, because that would infuriate Mexico,” said one Senate Republican aide.

That is because even if a U.S. company were to drill within U.S. waters, oil could be siphoned from reservoirs that extend to Mexican territory. Since Mexico nationalized its oil in 1938, its relationship with the United States on energy matters has been extremely sensitive, according to experts.

“The agreement also offers some sense of assurance that the tremendous investments necessary to look in these areas would not be lost in an international dispute,” said Nicolette Nye, a spokeswoman for the National Ocean Industries Association, which urged Congress to approve the measure.

BOEM estimates that the area contains as much as 172 million barrels of oil, a relatively small amount compared to the broader U.S. Gulf, which contains about 48 billion barrels of undiscovered, technically recoverable oil. There are 14 leases within the stipulated area that predate the agreement, the agency said.

For the United States, the boost in domestic production may be insignificant.

But observers say the agreement would set an important precedent of cooperation between the United States and Mexico that could strengthen both U.S. energy security and the safety of Gulf drilling.

“Having [international oil companies] working with PEMEX to boost domestic Mexican production will provide useful commercial opportunities and, importantly, boost confidence that Mexico will have significant oil available to export to the United States,” said a December report by Republican staff on the Senate Foreign Relations Committee.

And while there is no guarantee the agreement will spur systemic improvement in the way Mexico regulates offshore drilling, any improvements could help prevent a spill that would threaten the livelihood of U.S. Gulf economies, the report said.

“Many observers are optimistic that the [agreement] is the metaphorical camel’s nose under the tent, paving the way to broader reform in Mexico,” the report said.

Michael Bromwich, former director of the Bureau of Safety and Environmental Enforcement who currently is managing principal of the Bromwich Group, said Mexico’s offshore drilling regulator, the Comisión Nacional de Hidrocarburos, has shown great interest in learning from U.S. regulators.

The safety regulator was created in 2008, has 60 employees and, as of recently, had yet to conduct any offshore platform inspections, according to the Senate committee report. Some observers are concerned Pemex is not sufficiently prepared, or regulated, to begin deepwater drilling.

While the agreement is unlikely to significantly affect U.S. production, it would improve the working relationship between the two countries, Bromwich said.

“There has been a tremendous amount of back-and-forth between U.S. safety and environmental regulators on the one hand and Mexican regulators on the other,” he said. “They have been extremely eager to learn what the former [Minerals Management Service], [Bureau of Ocean Energy Management, Regulation and Enforcement], now BSEE does, how it goes about regulating everything from the way to review drilling applications to details about inspections.”

He added, “I think Congress should move swiftly.”

Treaty or executive agreement?

It is unclear who in the Senate objected to the agreement’s passage, but sources say it was likely out of concern for the process by which it was being passed rather than the substance of the agreement.

That may stem in part from lingering uncertainty over whether the agreement is a treaty, which would require a two-thirds majority for Senate ratification, or an executive agreement, which would require implementing legislation to be passed by a majority in both chambers.

Regardless, its failure was a surprise to staff on the ENR Committee who had crafted a news release in preparation for its passage but had to delete it after the agreement was blocked.

According to the report by Foreign Relations Republicans, the Obama administration has yet to say whether the agreement is a treaty or an executive agreement but appears to prefer the latter. Mexico’s Senate ratified the agreement, suggesting it was interpreted as a treaty.

If it is a treaty, a formal communication would need to be sent from the president to the Foreign Relations Committee, which would trigger hearings on the matter and allow Congress to interpret any ambiguous language in the agreement.

That is important, because several provisions in the treaty “invite scrutiny and clarification,” according to the committee report.

“The treaty doesn’t have every detail worked out,” said Neil Brown, a former adviser to Sen. Richard Lugar (R-Ind.) who was ranking member of the committee until his retirement earlier this month.

For example, one section of the agreement calls for “common standards,” but it is unclear whether that requires companies to adopt U.S. safety and environmental standards or Mexico’s, which are considered less developed. Another area of the agreement creates a dispute resolution process without saying whether the arbitration is binding, the report said.

The agreement would allow joint inspections by Interior’s BSEE and the Mexican government to ensure compliance with applicable laws.

Some on the Foreign Relations Committee said they were miffed that the administration did not consult with them before pushing the agreement through in the lame duck.

The story is different at the Energy and Natural Resources Committee, where staff say Interior officials have worked with them for weeks to get the agreement passed.

Interior Secretary Ken Salazar last April said the agreement was among three legislative measures the 112th Congress should pass before adjourning, in addition to the extension of clean energy tax incentives and codification of organizational and safety reforms Interior implemented in the aftermath of the Deepwater Horizon spill (E&ENews PM, April 25, 2012).

“Secretary Salazar’s people are all over this and have been for a while,” said Bill Wicker, a spokesman for the ENR Committee’s Democrats. “Industry on both sides of the maritime boundary are eager to move forward, but can’t.”

Wicker said the administration has worked with members of his committee on implementing legislation that would require majority approval in both chambers. That process suggests it would be passed as an executive agreement, not a treaty.

But the Obama administration has yet to officially submit implementing legislation to the appropriate committee for passage through regular order, the Foreign Relations report said.

Blake Androff, a spokesman at Interior, said questions on whether the agreement is a treaty should be referred to the State Department or the Foreign Relations Committee.

“The Secretary looks forward to working with others in the Obama Administration and with both the House and the Senate this Congress to enact legislation to make these areas readily available for oil and gas development,” he said in an email.

Emails and phone calls to State, the White House and Foreign Relations Democrats were not returned in time for publication.