The Lone Star State and its south-of-the-border neighbor have a relationship built on, among other things, energy. There is a dynamic there that is changing and, in some ways, becoming more reciprocal than in earlier times.
By Paul Wiseman
Trade between Texas and Mexico has always been sort of a tap dance, starting with the fact that Texas owes its existence to its immediate southern neighbor. During the years of the Republic of Texas—1836-1845—Mexico refused to trade with the Republic at all because it considered the new nation as not a separate entity, just a renegade territory that would soon be returned to the fold.
As we are now less than 20 years shy of the bicentennial of that separation, the two share a lot of economic interests, with energy being high on the list.
A bit of recent history would be a good starting place. Mexico nationalized its oil production in 1938 after about 40 years of what it considered foreign intrusion. Petroleos Mexicanos, or Pemex, was the result.
As is often the case, nationalization creates its own set of issues. Using profits as a sort of government piggy bank instead of reinvesting them into exploration and development is common to most nationalized oil companies, and Pemex is in that category The company is more than $100 million in debt as as a result of this piggy banking.
Mexico currently ranks 11th, globally, in production, as of 2018 figures. Since its peak in 2004, annual production has dropped by about 50 percent. A 2018 report by international bank HCSB ranked Texas, if it were still a country, at number three in production. The report credited the Permian Basin and the Eagle Ford with the majority of the output. If Texas and Mexico were still one, those numbers would be even higher.
In 2013 the Mexico government instituted Energy Reform, in which it amended the constitution to reintroduce foreign investment, with those changes taking effect in 2014. “They basically opened the market for competition—not only in oil and gas but also in electricity,” said Kent Williamson, director of Refining and Marketing, Latin America, for research firm IHS Markit.
“Most of the changes in the oil and gas side of things have been on the two ends of the spectrum,” he continued. “There have been quite a few foreign companies entering the upstream, E&P, production side of things [but] this obviously takes years to develop, especially the offshore wells.” So there has been only limited progress in increasing production levels.
In midstream, pipeline theft has been a huge issue that the new President, Andrés Manuel López Obrador, or AMLO, has vowed to fight. Along with that, most refineries are greatly in need of repair/upgrades, and many are running at about 25 percent capacity due to the drop in domestic production. This has created export opportunities for Texas, which will be detailed later in this article.
On the downstream end, Williamson has seen 30-40 new retail brands spring up in Mexico since 2014.
López Obrador has promised to invest the equivalent of $3.9 billion in Pemex, including $200 million in tax relief. Some kind of investment is greatly needed because Pemex is the world’s most heavily indebted oil producer, public or private.
This spring, Pemex CEO Octavio Romero announced plans to triple the number of wells drilled in 2019 over 2018 numbers, to about 506. The expectation is for those wells to yield 300,000 barrels per day in new output by 2022.
Many experts doubt, even with the influx of cash, that Pemex has the budget or expertise to accomplish this lofty goal.
There are also concerns that López Obrador, a vocal opponent of the 2013 energy reforms, could undo them. Williamson said it would be hard to reverse them on paper, but that they could be de facto undone by simple inaction.
“We don’t think he and his administration are going to reverse it completely, but they definitely have thrown a shadow over things with some of their words and actions. They [previous administration] changed the constitution [so] to totally reverse it they would have to change the constitution, and his party controls both houses of the legislature, but it’s not enough [to reverse the constitutional changes]. They would have to get some other parties to go with them.”
In the first quarter of 2019 Moody’s and other credit agencies downgraded Pemex’s credit rating, revealing that they consider the company to be in dire straits, Williamson noted. “The administration realizes that Pemex is in dire straits. They are $100 million in debt, with a lot of that due in the next 2-3 years, so they need investors. They’re not publicly traded, but they regularly put bonds out there and they need that money to reverse the decline in their crude production, to invest in their refineries and infrastructure and other things.” So while Lopez Obrador has made some threats about cutting off outside investment, Williamson also sees a pragmatic side of the new leader that may temper the actual implementation of such policies. “It seems pretty far-fetched that he would totally reverse everything.”
With refineries down and gasoline pipeline theft yet to be controlled, Mexico has been importing both light crude and refined products from the Texas Gulf Coast in recent years. And, said Williamson, gasoline consumption in the United States appears to have peaked in 2018 and diesel consumption is expected to do the same in the next year or two, so Gulf Coast refineries are feeling the need to boost exports to places like Mexico to stay at peak productivity.
Said Williamson, “Their refineries are in bad shape and they’re not suited for the relatively heavy sour crude slate, so they don’t make enough gasoline and diesel, and they put out a higher fraction of heavy fuel oil. So this new president, AMLO, has said they’re going to produce more gasoline and diesel, reduce imports from the United States, and they’re also going to build a new refinery.”
U.S. imports of oil from Mexico have decreased in recent years, according the U.S. Energy Information Administration (EIA). This is due to a combination of factors, the top two of which involve increasing production in the United States and falling production south of the border. Said Natalie Kempkey, economist, Office of Integrated and International Energy Analysis at the U.S. Energy Information Administration, “The United States has increased production from offshore and from the shale boom,” and production in Mexico has been falling since its 2004 peak.
“U.S. refineries are complex, so they can handle heavy and light [crude], which works really well for Mexico, because they [United States] can take their [Mexico’s] heavy crudes, refine it, then export it to Mexico as refined products. That’s why Mexico really wants to export that crude. Their refineries were not built to handle heavy crude.”
Much of the refined product headed to Mexico is gasoline and distillates. Most of the volume goes across the Gulf by tankers, with some going by pipeline and by rail, although exact numbers on each type of transportation are not available. Pipelines in the country are limited by the mountainous terrain, Kempkey said.
Natural gas is even more of an import issue for Mexico. “Ninety percent of their natural gas comes from the United States,” Williamson stated. Since these imports have become a politically sensitive issue, Williamson wonders if Mexico plans to reduce the use of gas for electric power generation and burn instead the too-abundant heavy fuel oil, which would negatively impact their carbon and other environmentally-sensitive emissions.
As of January 2019, the United States has been a net exporter of natural gas for 12 consecutive months, with much of that export going to Mexico in pipelines and as compressed natural gas (CNG) and liquefied natural gas (LNG). The U.S. Energy Information Administration Natural Gas Weekly Update 4/3/19 reports, “U.S. pipeline exports of natural gas to Mexico in January 2019 were 4.8 Bcf/d, a year-on-year increase of almost 0.4 Bcf/d. Much of the year-on-year growth is attributed to increased U.S. exports out of the Permian Basin in western Texas as new pipelines and natural gas-fired power plant projects within Mexico entered service. In addition, several existing pipelines in southeastern Texas completed expansions during the past 12 months, increasing cross-border capacity.”
Kempkey added, “We’ve been shipping natural gas to Mexico, mostly through pipelines—that’s the main way to do it—and we expect that amount of pipeline gas to increase as more natural gas infrastructure on the Mexico side comes online. A lot of that has been delayed so we haven’t seen that happen yet, but we do expect there to be an increase. We’ve also been shipping it through LNG from the Gulf Coast. Mexico was the number one importer of U. S. LNG, at the beginning (of LNG exports)…” but with the construction of more export terminals we’ve seen them fall to number two and South Korea has become number one.” She added that South Korea is the number one importer of U.S. LNG in the world.
Some gas is transported by truck in the form of compressed natural gas (CNG).
Williamson believes a proper balance of international energy trade can be a positive thing. That way, various grades of crude go where they can be processed, and the refined products go where they’re needed. Some of that is already happening in North America.
Paul Wiseman is a freelance writer in Midland.