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Mexico in the North American oil and gas context

Ahead of the Toluca Summit – which marked the 20th anniversary of the North American Free Trade Agreement (NAFTA) and saw the reunion of US President Barack Obama, Mexican President Enrique Peña Nieto and Canadian Prime Minister Stephen Harper – Petróleos Mexicanos (Pemex) CEO Emilio Lozoya asserted that, “North America will become the world’s cheapest source of energy if Canada, Mexico and the US pool their resources to reduce costs and generate industrial growth across the continent.” He continued to say that the trio should work together on matters such as regulation and infrastructure to make the most efficient use of the continent’s growing energy production, currently reshaping global markets.

Indeed, the energy potential of the North American region has changed dramatically in recent years. In the United States, the rise of shale oil and gas has shifted the debate from one centered on energy security to energy independence and even abundance. In Canada, new technologies are unlocking the vast resources of Alberta’s oil sands, while rising temperatures are opening up potential new finds under the Arctic ice. In the latest turn of events, the regional energy landscape took another sharp turn when, in December 2013, Mexico‘s Congress approved the energy reform, effectively ending the decades-long state monopoly on crude production.

For many years, Mexico and Canada have been the United States’ top oil suppliers. Pemex is the third largest oil exporter to the USA, after Canada and Saudi Arabia, but ahead of Venezuela and Nigeria. Concurrently, Mexico and Canada are buying US natural gas whilst Canada and the US share the largest integrated energy market in the world with energy trade between the two exceeding US $100 billion in 2011.

Over the past few years, a new energy dynamic has emerged between the United States and Mexico. Unable to match domestic consumption with production, Mexico has grown increasingly reliant on imported natural gas. Coinciding with the shale boom in the United States, which catapulted US natural gas production by 22 percent in just 15 years (from 18,856 billion cubic feet (Bcf) to 22,916 Bcf), the US is a key exporter of natural gas to its neighbors. Enabled by expanding infrastructure and driven by new power generation and industrial use, demand growth for natural gas in Mexico is robust and on the rise: according to a report from Barclays Capital, US natural gas exports to Mexico will more than double in three years, from an average of 2 Bcf/d in 2013 to 4.5 Bcf/d in 2016.

With eight major pipelines scheduled to start operations within Mexico from 2013 to 2017, with a total daily capacity of 5.6 Bcf, the country will be increasingly reliant on external sources for natural gas until it starts tapping its own shale gas reserves. Until then, the US is likely to remain Mexico’s main provider of natural gas.

On another front, within days of Mexico’s energy reform approval in December of last year, US Congress finally passed the long-awaited Transboundary Hydrocarbon Agreement (THA) with Mexico signaling their interest in collaborating, particularly in the Gulf of Mexico (GoM). The accord allows, and effectively encourages, US companies to partner with Mexico’s Petroleos Mexicanos (Pemex) to jointly develop transboundary reservoirs across some 1.5 million acres. This has implications for the Perdido foldbelt area: a significant petroleum province with discoveries and production made at Great White, Baha, Trident and Tobago fields on the US side of the boundary. Pemex has also announced the existence of significant resources in the Mexican part of the Perdido foldbelt with interesting potentials for high quality extra-light crude oil.

At current production levels, the US, Canada and Mexico together already represent 18.2 percent of world crude output. By comparison, OPEC member countries produce approximately 40 percent of the world’s crude oil. Guillermo Pineda, energy industry leader at the multinational professional services firm PwC, believes that the North American trio is now closer to mimicking or even rivaling production levels observed in the oil rich Middle East. “Technological advancements, along with the right regulatory environments, will truly allow the North American region to undergo an energy revolution and Mexico is an integral component of that,” says Pineda.

Although no formal discussions have taken place yet, Guillermo Garcíadirector general of exploration and exploitation of hydrocarbons at Mexico’s Secretariat of Energy (SENER, Mexico’s energy ministry), acknowledges that: “we will have to work closely with our North American partners to coordinate a regional energy strategy. […] We are optimistic that the region as a whole will not only develop strong levels of energy self-sufficiency, but will actually become one of the major energy exporting hubs of the world.”

During February’s Toluca summit, Canadian Prime Minister Harper noted that a larger cooperation in the energy sector would make North America “the largest provider of fuel in the world.” In recognition of the opportunities that lie ahead, the so-called ‘three amigos’ concluded the summit by agreeing to organize a meeting of North American energy ministers this year in an effort to advance the talks on cooperation in energy.

Mexico has the opportunity to be the party that extracts the largest benefit from the North American energy revolution, “ believes Ernesto Marcos, founder and senior partner at Marcos y Asociados, the only financial and business development consultant specializing in the Mexican energy industry, and former CFO at Pemex. “The country shares the abundance of resources, both conventional and non-conventional, and has an industrial base which means the country is the largest exporter of manufactured products in Latin America; more than all the Latin American countries combined. There is no previous case in history of a country opening its energy sector as Mexico has, whilst having such a large industrial capacity. The opportunities to attract foreign direct investment at this moment are substantial.” For Mexico and the international energy sector, this is a decisive moment.

Article by Roslan Khasawneh

Photo credit: Simone De Michelis

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