The classic image of Mexico’s role in the world of energy imagines the country as a supplier of crude oil to the U.S. — and nothing more. That image, which was accurate for decades, is now drastically out of date.

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Since moving to privatize its energy industry in 2013, Mexico has become heavily dependent on supplies of energy from the U.S., particularly natural gas and gasoline. According to the U.S. Energy Information Administration (EIA), last year U.S. gasoline exports accounted for 80% of all Mexican gasoline imports, growing as a share of total Mexican gasoline consumption from 30% to more than 50% since 2014. In 2015 and 2016, the value of U.S. energy exports to Mexico, including rapidly growing volumes of both petroleum products and natural gas, exceeded the value of U.S. energy imports from Mexico, as volumes of Mexican crude oil exports to the United States have continued to decline. In 2016, the value of U.S. energy exports to Mexico was $20.2 billion, while the value of U.S. energy imports from Mexico was $8.7 billion, according to the EIA.

Given such realities, if the Trump administration pulls out of the North American Free Trade Agreement (NAFTA) — or initiates border taxes or other trade measures that restrict Mexican exports of energy to the U.S. — how much impact will such measures have on the North American economy? (U.S.-Mexico trade in energy is covered by NAFTA.) If such policies did come to pass, Mexico could opt to retaliate by preventing U.S. energy firms from investing in the emerging bonanza in the Mexican energy sector. The Trump administration could wind up effectively shooting itself in the foot, observers say, despite the high-profile role played by energy sector advocates such as former Texas Gov. Rick Perry, who is now Secretary of Energy.

Opening Mexico’s Energy Sector

“Mexico has completed a dramatic, broad-based opening of its energy sector, to the point where it is open to all foreign investment across the board,” says Kirk Sherr, president of Clearview Strategy Group, a Virginia-based energy consultancy. Based on the latest annual data from the U.S. Census, energy accounted for about 9% of all U.S. exports to Mexico and 3% of all U.S. imports from Mexico in 2016. “The reality is that we still import crude from Mexico but it is balanced by a lot of crude we send to them in order to make their refineries run optimally,” Sherr explains.

Lured by Mexico’s energy reform program, “so many of the investments [into Mexico’s energy sector] are coming from the United States,” Sherr adds. Nowadays, “all across the board, American firms have substantial investment plans, not just in natural gas distribution but also power generation, pipelines and downstream firms.” According to Sherr, the opening of the Mexican energy sector has been so broad and so deep, it’s completely transformed the opportunities for U.S. and international companies. “Whereas before, you had to pick and choose what areas to go into, now it’s all open,” he notes. “So from a relatively thin menu of areas to invest in a few years ago, now the menu is quite long in terms of what you, as an energy company, can go to Mexico and do.”

The completion of pipelines built in 2016 combined with others to be completed in 2017 has significantly boosted U.S. natural gas exports at a time of very low gas prices in the United States, helping to keep Mexican manufacturing plants competitive. Going forward, there will be a third wave of U.S. exports, Sherr says, particularly related to natural gas liquids such as propane, methane and ethane. Because the final rollout has been relatively recent in investment terms — the past 18 months — companies are still digesting and deciding on their investment strategies, both within the sector and by geography, adds Sherr. “By 2018, you are going to see lots and lots of [other] investments announced. [Already], Mexico is second only to Canada in energy trade with the United States.”

A U.S. policy that “inhibits exports of natural gas to Mexico could result in fewer coal jobs in the U.S.”–Erik Gilje

The Impact of the Shale Boom

Most notably, the shale boom in the U.S. has made American natural gas extremely attractive for Mexico, which depends on it for nearly 60% of its total electricity generation, a 20% increase from 2005. In 2015, Mexico imported 1052 billion cubic feet (BCF) in natural gas from the United States, an increase of nearly 300% over five years. The EIA recently estimated that between 2016 and 2020, around 60% of Mexico’s electricity additions will come from natural gas. The agency predicts that this demand will be met mostly through imports, as it will take several years before Mexico is able to increase domestic gas production, which has fallen off since the 1990s, according to the BP Statistical Review.

“The U.S. has a significant excess of supply of natural gas, and there is a growing effort to find homes for that natural gas,” Wharton finance professor Erik Gilje says. “You see some of it displacing coal in the U.S. Some of it beginning to be exported elsewhere in the world, outside of North America.” The challenge, he adds, is that to export natural gas to other parts of the world it needs to be liquefied, transported and re-gasified. “That process is very costly and requires huge fixed investments [and] lots of years of lead time. And so to the extent that Mexico is a potential outlet for some of this excess gas, it would certainly be very beneficial to the United States to be able to access that market in an efficient way.”

Thus, at a time when the Trump administration is threatening to restrict exports to Mexico, there is a clear irony, say many observers. Exporting U.S. natural gas to Mexico is lowering electricity costs for Mexican-based utilities — and manufacturers — because natural gas is a cheaper fuel than coal. This, in turn, makes Mexico-based plants more cost-competitive against U.S. manufacturers, and potentially more alluring for some U.S. firms that might want to relocate there. However, President Trump has vowed to take various means — not yet entirely clear — to discourage U.S. manufacturing firms from relocating to Mexico.

“The wind is at the back of the U.S. energy sector in Mexico now.”–Kirk Sherr

Gilje says that, nevertheless, “there is no other foreign alternative” apart from Mexico when it comes to “finding a home” for excess U.S. gas. Certainly, not Canada, which is already exporting its gas to the United States. “Really, the only other place for this [gas] to go is to displace coal [in the U.S.] Somewhat paradoxically, it could be the case that a policy that inhibits exports of natural gas to Mexico could result in fewer coal jobs in the U.S. because that domestic gas will be cheaper and will displace coal.” In such a case, one pillar of Trump’s economic agenda — to “bring back” jobs to the U.S. coal industry — would be thwarted by another pillar — discouraging U.S. firms from relocating to Mexico and elsewhere.

“Cross-border tensions raise many ironies in terms of U.S. politics at the moment,” notes

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