One industry is holding North America together, no matter what happens with Trump

President Donald Trump just tightened the ties that bind the North American energy industry with his push for the Keystone XL pipeline, making the U.S. potentially less dependent on Middle Eastern oil.

Trump's advancing of the controversial Keystone Pipeline comes just as his administration plans to renegotiate a two-decade-old trade pact with Canada and Mexico.

The president signed an executive order Tuesday advancing Keystone, as well as the Dakota Access pipeline, both of which were opposed due to environmental concerns. Keystone would be a nearly 1,200-mile pipeline that would take about 800,000 barrels a day of Canadian sands oil from Alberta to Steele City, Nebraska, where it would meet up with a southern leg of the pipeline that could send it to the Gulf Coast refineries.

The Dakota Access pipeline would take oil south from the Bakken in North Dakota.

"It's more likely the additional quantities of oil coming down from Keystone will be consumed here in the U.S., competing with alternatives that will be coming from the Middle East," said Andrew Lipow, president of Lipow Oil Associates. "It's 10 percent of our imported demand but Canada is already supplying us with 3.2 million barrels a day."

Canada sands is a "heavy crude," similar to the crude grade imported from the Middle East. "We're still a heavy importer of crude from Saudi Arabia, Iraq and Kuwait," said Lipow.

Trump, in signing the order, required that American steel be used in the building of the pipelines, and said the approvals were subject to renegotiation. But it is the Keystone XL pipeline that would enhance the already very integrated North American energy market, by providing a key artery to take Canadian crude that has been locked in Canada to the Gulf Coast.

The pipeline would be the latest piece of cross-border infrastructure that ties the U.S., Canada and Mexico together, all as importers and exporters of energy.

"It's not only very significant in terms of actual energy trade but it [Keystone] is very symbolic though in radically different ways to U.S.-Canadian trade relations and to the environmental community," said Daniel Yergin, vice chairman of IHS Markit.

"The unbuilt Keystone pipeline achieved the unique status of becoming the most famous pipeline in the world even though it is not completed," he said.

Absent the pipeline, Canadian producers would be forced to send more crude by rail as they also work on getting alternative pipelines heading to Canada's east and west coasts. Canada has the third largest proven reserves in the world after Saudi Arabia and Venezuela.

Regardless of what happens with the North American Free Trade Agreement, the U.S., Canada and Mexico have energy ties that transcend borders and go back decades.

The three countries have intentionally worked to combine the advantages of their energy resources. Viewed as friendly to the energy sector, there are still questions about whether the Trump administration could enact changes that affect the intricate web of energy connections between the three countries. The Republican Congress has already proposed a border tax that could complicate the situation, if approved.

While still seen as a low probability, the border adjustment tax would tax all imports at the border and exports would not be taxed at all. At the proposed corporate tax rate of 20 percent, a number of analysts say the border tax would be expected to make U.S. crude more expensive than international Brent.

Goldman Sachs analysts projected that gasoline prices would jump as a result by about 30 cents per gallon. The analysts said the dollar could adjust and move higher over time, reducing the impact.

"It's not so simple to say we're going to renegotiate the trade deals. We set up the system to create those inter-linkages. You just can't overnight legislate or executive order that away. If you try to do that, it's going to have negative economic impacts, not just for the economies on the border but for these specific industries, like energy," said Scott Anderson, chief economist at Bank of the West, in an interview last month.

Trump's selection of former Texas Gov. Rick Perry as energy secretary is seen as a positive for the oil and gas industry. Perry has spoken favorably about North America as a integrated energy powerhouse, including Mexico and Canada.

Perhaps one of the most surprising recent developments is the boom in U.S. natural gas that's flowing across the southern border, and the ambitious plans by the Mexican government to build more pipelines to take U.S. natural gas throughout Mexico and as far as Mexico City.

"Mexico has become a very important market for U.S. gas producers and without it, we'd be looking at lower prices," said Yergin. U.S. producers, grappling with low prices and record winter supply, would have to cap even more wells if it weren't for the growing demand from Mexico, which now accounts for about 5 percent of U.S. natural gas output.

The energy picture changed dramatically for North America in the last decade. The push by the U.S. energy industry into hydraulic fracking and horizontal drilling unleashed an energy boom, making the U.S. the world's biggest producer of natural gas and placing it firmly among the top three oil producers.

That has changed the situation for all of North America, at a time when Mexico's oil and gas output was in decline and Canada found some of its potential crude output landlocked. The ties between the three countries go way back. In the early 1900s, the U.S. began sharing electricity with its neighbors, and Canada is now a significant net exporter of electricity to the U.S.

One catalyst has been Mexico's program of energy reform, intended to break the hold of state-owned Pemex on its industry and bring new private investment to Mexico's energy industry. The decline in big part was due to a lack of investment by the government in Petroleos Mexicanos, and its increasing reliance on Pemex's revenue stream for its own budget.

"Before shale, the U.S. was importing a lot more gas from Canada," said Anthony Yuen, global energy analyst at Citigroup, in a recent interview. The U.S. was also worried not that long ago that it would need to import LNG, liquefied natural gas. But the shale boom changed everything.

Yuen said Canadian gas is still important to the U.S. West Coast, the Midwest and New England, in part because pipelines don't carry U.S. gas to those areas. Gas imports from Canada fluctuate based on weather, and can go from 5 billion to 7 billion cubic feet a day, he said.

"This speaks to how extensive the energy cooperation is between these countries," said Yuen. "It's almost as if the borders aren't really there. If you look at Canada and the U.S., they are part of the same cross-border electricity reliability councils for some regions. … It's not just natural gas, it's power lines, hydroelectricity and those are long-standing agreements and trade."

The U.S. energy boom has also been Mexico's gain, and Mexico, in turn, has changed the dynamic for the U.S. gas market. "Without exports to Mexico, the U.S. market would not be where we are right now. It would be way lower. Producers may not be drilling as many wells. Without Mexico, it would be tough," said Yuen.

According to Citigroup, new cross-border pipeline capacity of 7 billion cubic feet per day is expected to come on line by 2020, adding to the current capacity of 6 billion to 7 billion cubic feet per day. Energy Transfer Partners, seeking to build the controversial Dakota Access pipeline in North Dakota, has approval from the Obama administration to build two pipelines to take gas from Texas to Mexico.

Trump's pick for energy secretary, Perry, had been on the board of Energy Transfer Partners before resigning.

Citigroup said the added pipeline capacity will come as Mexico undergoes a dramatic build out of power generation capacity and transmission lines. Mexico's energy secretary, speaking at an industry conference in Houston last spring, said there is a 75 percent savings from U.S. natural gas.

"Mexico had a pretty high cost of power in the past, because the country used oil as a power-generation fuel, and natural gas there is more expensive because of pipeline bottlenecks," said Yuen. "We would not be surprised if exports to Mexico by 2020 by pipeline would still be larger than U.S. LNG exports." Liquefied natural gas is currently being shipped from just one terminal in the United States, but the capacity is expected to expand.

According to the U.S. Department of Energy, the U.S. exported 4.2 billion cubic feet per day of natural gas to Mexico, through pipelines in August. The average daily exports through August were running at a yearly average of 3.6 billion cubic feet per day, 25 percent above last year and 85 percent above the five-year average. The U.S. produces 90 billion cubic feet per day of natural gas and consumes about 70 billion cubic feet, according to the Energy Information Administration.

Mexican demand can also help offset weather-related declines in U.S. demand, and for that reason it has helped support the price of natural gas.

"Mexico can serve as a balance," said Michael Cohen, head of commodities energy research at Barclays. "It's important regionally because right now you have a whole bunch of growth in production in the Northeast, and now you have constraints on that production getting out. The fact you have Mexican demand increases can balance out where the supply might come from in the medium term."

Mexico, in fact, now imports almost as much natural gas from the U.S. as it produces, and the U.S. in recent months has become a net exporter of natural gas for the first time in a sustainable way.

"It could very well be a case where there's some tweaking around on [NAFTA], as opposed to a big breakdown. Certainly, I am concerned a little bit about the Mexican economy. It's been a big driver of demand for U.S. gas," said Francisco Blanch, Bank of America Merrill Lynch head of global commodities research and derivatives, in a recent interview. "The supply chains are very well integrated between the three countries. Changing the rules of the game on account of NAFTA would be pretty challenging not just for Mexico but for U.S. companies."

Mexican oil output has been in decline and is now at its lowest point since the early 1980s. The U.S. is producing about 8.8 million barrels a day of oil, down from a high of 9.6 million barrels a day last year, a direct result of lower crude prices. But the U.S. also imports another approximately 8 million barrels a day, and in September, about 520,000 barrels a day of that came from Mexico.

Canada is the biggest crude exporter to the U.S., sending 3.2 million barrels a day this year to the United States, of the 3.8 million barrels a day it produces, according to the Canadian Association of Petroleum Producers. CAPP expects Canadian production to increase to 4.9 million barrels a day by 2030.

"People just don't realize how integrated we are with these two countries," said Lipow. The U.S. is now a net exporter of refined products, and its biggest market for formulated gasoline and blend stocks is Mexico, which imported 390,000 barrels a day in September, about a third more than last year.

"Instead of Mexico spending a fortune building new refineries, they are buying from the U.S., and it turns out energy exports are now an important contributor to the jobs in our economy," said Yergin.

Canada, meanwhile, buys some U.S. crude to refine while sending the U.S. both oil and refined products. The U.S. imported 171,000 barrels per day of finished gasoline and blend stocks and 87,000 barrels a day of diesel fuel. Canada refines the crude in New Foundland and Nova Scotia.

"If it wasn't coming in, Maine would run dry," said Lipow. While it's not a lot of refined product, the Canadian fuel does supply gas stations from Maine to Boston. "It's pretty steady, but the point is, it keeps coming."

Electricity also flows back and forth over the border, and the U.S. imports more electricity than it exports.

In a 2015 report, the Department of Energy said there were 30 active transmission connections between the U.S. and Canada, trading about $3 billion worth of electricity in 2014.

The exchange of electricity with Mexico is less developed though it started back in 1905, when privately owned utilities in remote areas struck cross-border deals to share power over low voltage lines.

In 2015, the U.S. government granted Blackstone Group permission to export electricity from the Frontera power plant in the Rio Grande Valley to Mexico's newly opened electricity market this year. Mexican customers pay nearly twice as much as U.S. customers do for the power.

"Mexico is building some renewable projects along the border and that power is going to the U.S.," said Alex Wood, DOE policy analyst, in a recent interview.

"It really is becoming more and more integrated," said Wood of the North American market. "Virtually all of Canada's surplus oil goes to the United States. The United States is producing surplus crude oil. … It's refined and it goes to Mexico."

Wood added that Sempra's Energia Sierra Juarez wind farm in Mexico provides power to southern California.