The recent passage of the U.S.-Mexico-Canada Agreement (USMCA) will impact foreign investments and deals in the North American countries, potentially increasing the risk for both energy companies and investors.

The USMCA was announced Sept. 30 after a long renegotiation of the North American Free Trade Agreement (NAFTA) between the three countries that started in 1994.

The new USMCA does not take effect until after Congress votes on the agreement. The legislatures from Canada and Mexico must also approve the deal. If Congress passes it, the deal could begin on Jan. 1, 2020.

The American Petroleum Institute (API), the largest oil and gas lobbying group, said passage of the agreement would be beneficial to energy companies.

“Having Canada as a trading partner and a party to this agreement is critical for North American energy security and U.S. consumers,” said API CEO Mike Sommers in a statement. Retaining a trade agreement for North America will help ensure the U.S. energy revolution continues into the future.”

The agreement includes continued market access for U.S. natural gas and oil products, and investments in Canada and Mexico; continued zero tariffs on natural gas and oil products; investment protections to which all countries commit and the eligibility for Investor-State Dispute Settlement (ISDS) for U.S. natural gas and oil companies investing in Mexico; requirement that Mexico retain at least current level of openness to U.S. energy investment; and additional flexibility allowing U.S. customs authorities to accept alternative documentation to certify that natural gas and oil have originated in Canada or Mexico upon entering the U.S., the API said.

Three partners from Akin Gump, Justin Williams, Steve Kho and Christian Davis discussed how the implications of the USMCA and other trade policy developments will affect deals and investments as well as litigation and international arbitration, with Hart Energy.

The new USMCA means some oil and gas investors could be exposed to more political risk, said Williams, a partner in the London office of Akin Gump who heads the firm’s international arbitration practice and focuses on energy disputes, including those involving U.S. energy companies. Under NAFTA, U.S. companies making investments into Canada and Mexico have certain protections, for example against expropriation or discrimination on grounds of nationality. When an investor believes those protections had been breached, NAFTA has provided a means for it to bring claims against the host state in international arbitration and to seek compensation. There are a number of examples where U.S. energy investors were able to bring claims against the host state under NAFTA and obtain damages, he said.

“It is important that foreign investors in the oil and gas industry have the degree of assurance that such protection brings,” Williams said.

The USMCA is going to change the landscape quite significantly since the current U.S. administration as well as the Canadian government are quite anti-investor-state arbitration, he said.

“U.S. oil companies lobbied quite successfully to this administration to be able to retain investor-state arbitration under the USMCA for energy investments between the U.S. and Mexico,” Williams said.

Under the new agreement, the availability of investor-state arbitration between the U.S. and Mexico has been narrowed and will be generally available only for covered government contracts in industries such as power, oil and gas, infrastructure and telecommunications.

“U.S. investors contracting with the government in Mexico in those sectors may be able to enforce protection, but others may not” he said. “For Canada, the USMCA does away with investor-state arbitration altogether. This means that U.S. investors into Canada may no longer be able to bring arbitration claims against Canada if their protections are breached.

“This is a really big change,” Williams said. “As a U.S. investor, if you think your rights under the USMCA are being violated, it may be your only option will be to sue Canada in the Canadian courts. Most U.S. investors would feel that international arbitration would be a more neutral forum.”

One consequence of the new agreement is that U.S. investors into Canada might believe they are better off structuring investments through a Mexican company to try to obtain enforceable protections under the Comprehensive and Progressive Trans-Pacific Partnership, he said.

The new treaty is not as robust in protecting investments, said Steve Kho, a partner in D.C. who focuses on international trade policy, investments and disputes in the energy, pharmaceutical and manufacturing industries among others.

“The USMCA has dialed back protections significantly,” he said.

The agreement negotiated by the U.S. has ensured that investors will continue to have recourse for these situations such as energy projects, but only if there is an agreement with a Mexican government entity, Kho said.

Access to investor-state arbitration was requested by American energy companies who said they needed it in order to be able to protect overseas investments.

“This is the best way to do that, especially in developing countries where the domestic courts are not as sophisticated,” he said.

The current U.S. administration do not like investor state arbitration mechanisms because they believe it encourages U.S. investors to invest overseas.

Any investment dispute with Canada after 2020 would lack a recourse for such arbitration under the USMCA, Kho said.

“It’s a big issue for most foreign energy investors when they have to go to these developing countries where the laws are not as robust as they would hope,” he said. “They would like some treaty protection.”

Some people have argued that the USMCA is likely to put both U.S. investors and companies at a disadvantage over the long-term, Kho said.

“If you want to compete globally, you have to look at it from a more practical viewpoint and not force companies in this narrow lane,” he said.

The energy sector is looking at opportunities overseas and relies on the global supply chain and trading community. The administration’s attempt to narrow or limit trade as a “weapon for other purposes does not help the energy industry at all because they rely on the free flow of trade,” Kho said.

In addition, the Foreign Investment Risk Review Modernization Act, which reforms the Committee on Foreign Investment in the United States (CFIUS) process, was passed in August and expands the scope of CFIUS jurisdiction and creates mandatory reporting requirements, said Christian Davis, a partner in D.C. who focuses on international trade law and policy and CFIUS.

CFIUS reviews foreign investment transactions associated with U.S. companies when they can impact national security. These security concerns arise when buyers pose a threat to national security and the U.S. target presents vulnerabilities such as sensitive locations, critical infrastructure and advanced technology. CFIUS has the authority to recommend that the President block pending deals and order divestiture in completed transactions.

Under the new law, certain non-controlling investments involving critical technology, infrastructure, sensitive personal data will be subject to CFIUS jurisdiction and the mandatory reporting requirement may apply, Davis said. CFIUS announced a pilot program earlier in October to implement some of these rules by early November. The remainder of these new rules are expected to go into effect by February 2020.

These new rules can impact energy deals because companies may have to notify CFIUS in advance of the deal to comply with the law and avoid penalties, he said. The sectors that could be impacted in the energy industry include petrochemical manufacturing, nuclear power and turbines. Some of the service providers also could be at risk of falling into this category, Davis said.

“This is more regulation for these industries,” he said. “For instance, if a non-U.S.-based entity tried to acquire a petrochemical manufacturer, it could trigger a mandatory reporting requirement.”

In the future, if a foreign government-backed entity like a sovereign wealth fund tried to acquire a stake of a pipeline, even if it was not a controlling investment, it could trigger mandatory reporting to CFIUS review. In the past, investors filed voluntarily.

“The government is largely attempting to prevent countries of concern, such as China, from acquiring sensitive technology and acquiring critical infrastructure if it presents a national security concern,” said Davis. “The mandatory reporting requirements are intended to ensure that investments are reported and the government is aware of this activity. The idea is to cast a broad net to review deals that could presents concerns even if they involve buyers from allied countries.”

These additional regulations could make the investment climate more complex, but isn't likely to be something that results in foreign investments being blocked altogether,” he said.

Comments