Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

222. Memorandum From the Executive Secretary of the Department of State (Tarnoff) to the President’s Assistant for National Security Affairs (Brzezinski)¹

Washington, June 29, 1979.

SUBJECT

• North American Energy Community

This responds to your request of May 11 that we examine the concept of a “North American Energy Community” as suggested by several members of the Congress.²

Summary

The proposals currently under consideration by the Congress for some form of North American energy cooperation range from information exchanges to “cooperative planning” and “energy security guarantees.” We do not believe these approaches add to current arrangements. The United States already has in place bilateral mechanisms for extensive cooperation with Canada on virtually every energy issue in which there is significant mutual interest and is beginning to elaborate similar mechanisms for cooperation with Mexico. Adding a trilateral dimension would probably not increase the technical value of the cooperation. Energy security guarantees to the U.S., i.e., price and/or supply commitments, would be political anathema to both Canada and Mexico. It is doubtful they would be given any consideration at all without an offer from the U.S. of powerful incentives in the form of an above market price for energy purchases or other important economic concessions. We think the U.S. should continue efforts to improve bilateral energy cooperation with both neighbors.

North American Energy Community Proposals

There are several bills, including S. Con. Res. 27, S.J. Res. 58, and H. Con. Res. 124, currently under consideration by the Congress proposing some form of multilateral North American energy cooperation. Most of them focus on technical cooperation and information exchanges although some advocate “cooperative planning and mutual energy security guarantees.” These latter two concepts are loosely defined but seem to contemplate supply and price commitments to the U.S. by Canada and/or Mexico and some form of multilateral decision-making on the development of energy resources.

Information Exchanges and Technical Cooperation

Many of these proposals do not take account of the extensive bilateral energy consultation and coordination already underway. Energy cooperation with Canada is a long standing and highly developed process. It includes both government-to-government arrangements and extensive private sector activities in the development, production and trade of energy. Cooperation with Mexico is less well developed but it was given high priority by the two Presidents at their meeting this year and is being pursued actively by the responsible agencies. Taken together, we think these arrangements meet the information exchange and cooperation objectives of the various Congressional proposals.

Canada—

President Carter and former Prime Minister Trudeau recently agreed to establish a consultative mechanism on energy to discuss the range of our bilateral energy relationship. This group will meet regularly to review progress in key energy areas and will act as a useful management mechanism to encourage continued mutually beneficial energy cooperation. Although this cooperation takes place at the initiative and under the sponsorship of commercial entities acting in their own interests, the two governments are actively involved in facilitating and guiding such activities.

Energy trade has been and will be an important element in our relationship with Canada. Canada is currently in the process of phasing down exports of crude oil shipments to the U.S. but we import almost 3.0 billion cubic feet of Canadian natural gas per day or about 4.5 percent of domestic consumption. Also, there are now pending before Canada’s National Energy Board applications for natural gas exports which could eventually add another billion cubic feet per day. Further, we have an extensive electricity exchange with Canada, with the U.S. being a net importer of some 17.5 million megawatt hours per year.

Our most important bilateral energy project with the Canadians is construction of the Alaska Highway Gas Pipeline by private interests. We are engaged in frequent discussions with Canadian authorities on all aspects of the pipeline’s construction, regulation and operation.

We have also undertaken, in conjunction with the Department of the Interior, preliminary discussions with the Canadian Government regarding routes for a crude oil pipeline to supply the northern tier and inland states. We anticipate continued close cooperation with the Canadian Government as the evaluation of route proposals results in a recommendation to the President later this year.

We are involved in extensive information exchanges and technical cooperation with Canada through the International Energy Agency, of which we are both members. A still greater exchange of information and technical cooperation takes place between Canadian and American business entities involved in the energy field. Indeed, with the possible exception of the automobile industry, energy may be the most highly integrated sector in our two economies.

Mexico—

Although our energy relations with Mexico are less extensive than those with Canada, they are growing rapidly, and cooperative mechanisms for discussion and problem management are being developed. During the visit of President Carter to Mexico in February³ several initiatives were taken. The United States/Mexico Consultative Mechanism has been restructured and broadened, and a new Energy Working Group, co-chaired on the U.S. side by the Departments of State and Energy, is coordinating energy cooperation and problem management with Mexico. This Working Group will report to the newly established sub-cabinet Advisory Group to the Consultative Mechanism, which will review its progress.

Discussions concerning possible natural gas purchases are continuing, and a joint study of electricity exchanges has begun. Both governments have reviewed a number of bilateral energy-related science and techology proposals, including solar research, geothermal cooperation and enhanced oil recovery techniques. We fully expect that these initial cooperative activities with Mexico will prove mutually beneficial. We should strive to broaden such activities as our energy relationship matures.

Energy Trilateralism—

Canada and Mexico have distinctly different interests in cooperation with the United States because of the difference in their respective levels of technical and economic development, natural resource bases, climates and overall economic and political policies. Adding a trilateral dimension to these consultations, even if it were acceptable to the Mexicans and Canadians, could probably mean increased complexity without offsetting benefits.

Energy Security Commitments

It is in the areas of price and/or supply commitments and the joint development of potential energy supplies in Canada and Mexico that many Americans, including certain members of Congress, see the greatest possible U.S. benefit from “North American energy cooperation.” But it is precisely in these areas that sensitivities in Canada and Mexico are most pronounced. It is possible that those sensitivities could be overcome, but we believe the political and economic price that would be required would be more than the U.S. would be willing to pay.

Mexico—

Mexico’s potential interest in long term price and supply commitments to the United States is called into question by two factors. First is Mexico’s longstanding and extremely strongly held policy of resisting any foreign influence over its energy development decisions. This position dates back at least to 1938 when foreign (principally U.S.) oil holdings were expropriated, an event which is commemorated by a national holiday. Mexico’s current efforts to reduce its dependence on the U.S. as the principal market for its petroleum exports from 80% to 60% notwithstanding, normal commercial considerations tend to direct Mexican crude to the U.S. Their decision to sell natural gas to the U.S. also required high level political review because it involved increased economic ties to the U.S. in the energy sector.

The second factor which could limit the prospects for a Mexican energy supply commitment to the U.S. is the policy that hydrocarbon exports will be based solely on Mexico’s need for foreign exchange to implement its development objectives. This policy, if sustained, would preclude any energy development decisions motivated by satisfaction of U.S. demand. However, the internal political pressures to expand development plans and hence foreign exchange requirements may prove irresistible to the Mexicans and necessitate a substantially higher level of petroleum exports than is currently evisaged.

These current energy policies may also be subject to modification by the initiatives on the rationalization of world energy economics which Lopez Portillo is currently contemplating, but probably only in a global context. Domestic Mexican sensitivities and suspicions on this issue are too great for Lopez Portillo to be able to consider such a move if the U.S. would be the sole consumer beneficiary.

Canada—

Similarly, in Canada, which is a significant net importer of oil, the policy objective, embodied in legislation, is to attain self-sufficiency and export energy only to the extent it is surplus to Canadian needs. Canada’s energy export policy includes tying prices to world levels. In 1974 the Government imposed an officially determined export price, which is now linked to world oil prices, on the commercial contracts governing gas trade with the U.S. A variable tax on oil exports is used to keep the cost of Canadian oil to U.S. buyers in line with world prices. While in general Canada is wary of too close an economic involvement with the United States, there have from time to time been proposals from Canadians for greater economic integration with the United States in particular sectors; energy resources, however, have always been specifically excluded.

U.S. Interest—

The U.S. could potentially benefit from long term energy supply cooperation with Canada and Mexico of the type we believe is contemplated by the Congressional proposals. However, we believe that prevailing attitudes and political conditions in both countries are such that a trilateral arrangement acceptable to the U.S. could not be made at this time.

By far the greatest part of the cost of a bilateral energy security arrangement would be the quid pro quo the U.S. would have to pay to Canada and Mexico for supply access. As mentioned above, domestic political opposition to any such agreement would be substantial in both countries and would remain substantial regardless of how much we were willing to pay. Under these circumstances it is virtually certain that the U.S. would have to agree to some significant compensation in addition to the market value of the energy, such as a price premium, preferential trade arrangements or other economic or political payments.

Further, it may not be in the U.S. interest to discuss supply arrangements with Mexico and Canada on a trilateral basis. To some extent, particularly with respect to natural gas, these two countries have been competitors as sources of energy supply to the U.S. and we would like to maintain that situation. Trilateral discussions might well facilitate development of a concerted stance by Mexico and Canada which could weaken the U.S. bargaining position on some issues.

Finally, any long term supply/price arrangements which suggested that the U.S. was seeking a bilateral solution to a substantial portion of its energy needs would be in violation of at least the spirit of our commitments in the IEA, especially if such arrangements involved above market prices. They could weaken that organization and encourage a return to the counter-productive scramble for energy supplies which followed the 1973–74 embargo. We recognize that some of the other IEA countries have sought long term supply agreements but we believe there would be a quantum difference if the U.S., the founder of the IEA, tried to lock up North American supplies as a private preserve. A modest arrangement which merely recognized the mutual interests of three neighboring states and the natural transportation economies inherent in their geographic proximity to each other would not necessarily have a severe effect on cooperation in the IEA.

Recommendation

We do not believe that proposing a North American Energy Community as contemplated in congressional proposals would make a constructive contribution to the solution of our energy problems. Its objectives, to the extent they are politically feasible, are already being discussed in existing consultative mechanisms, where the overriding purpose is to explore areas of mutual interest and further those interests within the context of respect for national sensitivities and political differences. The energy security commitments which might offer some benefits to the U.S. run contrary to the basic energy policies of Canada and Mexico and might well end up costing more than they were worth, even if they were possible.

Peter Tarnoff

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 49, Mexico, 5–6/79. Confidential.
2. In his May 11 memorandum to Vance, Brzezinski asked that the Department of State prepare the study in consultation with the Department of Energy and that it “examine long-term energy supply and pricing agreements and include a recommendation on whether or not an initiative in this area by the U.S. Government would be desirable.” (Ibid., Staff Material, International Economics File, Box 1, Subject File, Mexico, 5–12/79)
3. See Document 190.