As Lopez Obrador focuses on oil, U.S. natural gas exports...

  • Dec 06, 2019
  • Spring Observer

MEXICO CITY — Mexico’s president, the left-leaning populist Andres Manuel Lopez Obrador, has roiled the international energy industry by walking back market reforms designed to attract foreign investment, modernize Mexico’s oil industry and end fuel and power shortages.

Instead, Lopez Obrador has canceled offshore lease auctions, pledged to build new refineries and moved to reassert the dominance of the state-owned oil company Petroleos Mexicanos, or Pemex, all with the goal of weaning the country from its dependence on foreign — read American — petroleum.

Those efforts, however, appear to end with oil. In the nationalistic fervor to achieve energy self-sufficiency, Lopez Obrador’s administration has largely ignored natural gas. Mexico already relies on U.S. imports to meet about 65 percent of its natural gas consumption, and that share is only expected to grow over the next two decades as growing manufacturing and power sectors boost demand for natural gas substantially.

By 2025 alone, Mexico’s natural gas consumption is projected to grow 20 percent to 9.1 billion cubic feet a day from 7.6 billion cubic feet.

This is good news for Texas oil and gas companies, which are producing such vast amounts of natural gas at such low prices that many are just simply burning off, or flaring, the gas as they focus on recovering oil in shale plays such as the Permian Basin in West Texas. Ultimately, analysts say, Texas gas producers need to expand foreign markets to lift demand and prices for their product.

“Mexico is an enormous natural gas client,” said Dwight Dyer, a former senior official in the Energy Ministry in the administration of Lopez Obrador’s predecessor, Enrique Pena Nieto. “If you are a fracker in the Eagle Ford or the Permian Basin, your mouth should water over the Mexican pipeline infrastructure coming online, because it is going to be one of your biggest outlets for the next 15 years. For however long you can keep up production, Mexico will buy it.”

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The Lopez Obrador administration’s natural gas approach has been inadvertently shaped by the consequences of other decisions on energy, such as putting up barriers to international investment in renewable generation and new oil and gas fields. As a result, natural gas production is lagging while a lack of wind and solar energy increases the need for natural gas for power generation.

Since becoming president in December 2018, Lopez Obrador has taken several measures in regard to the Mexico’s oil resources, a point of particular pride for a nation that still celebrates the 1938 expropriation of foreign oil companies as a national holiday. Lopez Obrador has canceled oil lease auctions designed to attract private investment, provided a $5 billion relief package to Pemex to help boost sagging domestic production and begun building a $14 billion refinery in Tabasco in southeastern Mexico.

While the stated goal is to achieve energy-self sufficiency, the administration has been largely silent on growing imports of natural gas. U.S. natural gas exports to Mexico have more than doubled over the past five years to 5.5 billion cubic feet a day, according to government statistics.

“They don’t really have a natural gas policy,” said Jose Maria Lujambio, the former general counsel for Mexico’s Energy Regulatory Commission in administration of Pena Nieto’s predecessor, Felipe de Jesus Calderon Hinojosa. “This is a government that speaks a lot about energy security and energy sovereignty, but at the same time, natural gas is kind of ignored. It is not seen as that important.”

That is a departure from the policies of the Pena Nieto administration, which had hoped eventually to meet Mexico’s needs through the development of domestic natural gas resources. The plan was to harness the abilities of international oil and gas companies seeking opportunities in Mexico after the opening of its energy markets in 2014. Natural gas from Texas natural gas would be a stop-gap measure until Mexico’s own shale formations began producing.

“What we thought at the time is that we should take advantage of the cheapest gas in the world and recover national production at the same time,” said Rosanety Barrios, a former senior official in the Energy Ministry in the Pena Nieto administration. “Our strategy for increasing national production was through our rounds of private auctions, to take advantage of all our unconventional reserves.”

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The challenge for Mexico and Pemex has been the expensive logistics of producing shale oil and gas. An estimated 60 percent of Mexico’s natural gas reserves are in shale fields concentrated in the Burgos and Sabinas basins, close to the Texas border, and the Tampico-Misantla basin in Tamaulipas in northeastern Mexico, but these areas lack adequate roads, pipelines and water, which is used by the millions of gallons in hydraulic fracturing to free oil and gas from shale rock.

Above all, Mexico and Pemex lack the technological know-how that unlocked vast quantities of oil and gas from the Permian Basin in West Texas and Eagle Ford shale in South Texas.

At the same time, Pemex’s natural gas output — most of which comes from associated oil production in onshore and offshore Tabasco — is decreasing 7-to-9 percent per year. To bridge the widening gap between slumping Pemex production and growing, demand, the Pena Nieto administration contracted with North American companies to invest more than $5 billion to build 2,800 miles of natural gas pipelines in seven projects to connect Mexico to natural gas produced in Texas.

These pipelines, including the $2.5 billion underwater Sur de Texas-Tuxpan (built by Canadian TC Energy and San Diego-based Sempra Energy) were designed to help meet the natural gas shortages contributing to power shortages in places such as the Yucatan Peninsula. One of the pipelines connects to Kinder Morgan’s Sierrita Gas Pipeline, which runs from Tucson, Ariz. to the Mexican border near Sasabe, Ariz.

The involvement of private companies made the pipeline projects suspect for the Lopez Obrador administration, which in July demanded an additional $900 million for what it said were unfair contracts. The disputes with several companies were eventually resolved through arbitration, but many U.S. investors and producers are likely to think twice about building pipelines, storage and other infrastructure in Mexico, analysts said.

“The impact of the pipeline arbitration issue was huge,” said Nymia Almeida, a senior vice president and natural gas analyst for Moody’s Investor Service in Mexico, likely undermining certainty that future contracts would be honored. Moody’s, she added, is still assessing the impact on investor confidence.

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The Pena Nieto administration also had hoped to expand the country’s wind and solar energy generation, holding contract bidding rounds to attract new investment. But that effort, too, has largely gone by the wayside as Lopez Obrador has canceled auctions and changed key regulations to make the market less attractive for renewable energy developers. In late November, the administration announced plans to build four giant natural-gas combined-cycle power plants.

With the demand for power expected to grow at least 3 percent annually, so will the need for imported natural gas. Meanwhile, Lopez Obrador continues to focus on Pemex and oil, blaming previous administrations for introducing market reforms that he says led to Mexico’s decreased oil and gas production.

“We should never forget that those technocrats deceived us,” Lopez Obrador said in a recent press conference.

As for Texas, while Mexico is a desirable client based on its need and proximity, it is far from the only market where the gas could be placed. Both Europe and Asia, especially China, provide compelling opportunities to export liquefied natural gas.

“That is where the big incremental volumes of gas are likely to go,” said Craig Pirrong, an energy finance professor at the University of Houston. “Our shale sector has kept prices low and it is creating the opportunity for natural gas. That is what makes us competitive on the world market, and not just in Mexico.”

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