Natural Gas Is The Exception To Mexico’s Push For Energy Self-Sufficiency

Emily Pickrell, UH Energy Scholar

Much of Mexico’s current energy strategy revolves around beating the drum of self-sufficiency  – when it comes to oil.

Yet when it comes to the natural gas that is increasingly driving the country’s economy, not so much.  

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Instead, natural gas hydrocarbons cannot flow south from Texas fast enough.

This comes as Mexico is more dependent on natural gas than ever, including to generate more than half of the country’s electricity supply. The country’s domestic natural gas demand has grown 30 percent to more than 9 billion cubic feet per day (Bcf/d) in the last three years. To meet this demand, it is currently importing record amounts – roughly 5.65 billion cubic feet/day (bcf/d) via pipelines, according to data from Natural Gas Intelligence.

Mexico’s decision to rely on Texas gas was made in the last decade. At that time, Mexico dramatically expanded its natural gas pipelines to take advantage of Texan production. It now uses them to import roughly three-fourths of its natural gas demand.

It’s a strategy that seemed especially appealing back in the days of the $2.00 – $3.00 per million British thermal unit prices last decade.

Yet it flies in the face of the energy self-sufficiency that populist president Andres Manuel Lopez Obrador has built his administration on, calling international private sector projects in Mexico “a big scam”.

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More importantly, it does nothing to protect Mexico’s need for energy security.

As it stands, Mexico currently has next to no natural gas storage, and Lopez Obrador has shelved a 2018 plan to build 45 billion cubic feet of storage – enough for five days of reserves – by 2029.

It has since floated the idea of a single underground storage project in Veracruz state, but little progress has been made.

It’s a hole in Mexico’s energy strategy that the previous Pena Nieto administration planned to fill by developing its own resources through private investment.

Even then, domestic natural gas development was a hard sell to international investment. The challenges of water access, security issues and lack of infrastructure were seen as big challenges.

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This lack of investment by the private sector could have arguably been made instead by Mexico’s state-owned oil and gas company, Petroleos Mexicanos, or Pemex. Yet Pemex has had the same objection as private investment: less immediate bang for buck.

Lopez Obrador’s election in mid-2018 put the hope of future private investment at an immediate standstill. The newly elected president cancelled all private auctions for both oil and natural gas upon entering office.

In the meantime, Texas has demonstrated that low prices should not be the only consideration. Last year’s winter storm left Mexico cut off from Texan gas for a week, so that it could meet its own domestic needs during the crisis.

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Even a temporary cut like this brings up a more important question for Mexico: Are imports from Texas the best strategy for ensuring that Mexico will have the natural gas (or other energy) it needs in the years to come? 

Mexico’s calculations have centered on low Texas prices and the belief that they will not change.

It’s a truism that is beginning to be rethought in some circles in Mexico.

“We got comfortable over the years, thinking that because we are next to the U.S., we are a natural market for the U.S.,” said Manuel Molano, an economics professor at the Monterrey Institute of Technology in Mexico City. “But as the global market goes up in price and the differential grows between Mexico and the global market, that could change significantly.”

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Meanwhile, Mexico appears more tied to natural gas than ever to meet domestic needs. Natural gas generation makes up 60 percent of electricity produced, according to the EIA. And it continues to expand its manufacturing sector, with processing requiring natural gas.

Lopez Obrador has further discouraged private investment in renewable generation by changing laws and undermining the permitting process. These law changes have stifled private investment, making the country more dependent on natural gas generation.

What natural gas Mexico now produces comes from mostly from Pemex. But this production is falling 7 to 9 percent a year, because of a lack of investment to replace aging wells. And it is tough for Pemex make the needed investments at the current time: it has a staggering $115 billion debt hanging over its head.

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And then there is the way politics fits into Mexico’s oil and gas strategy.

Aside from the question of resources, Pemex has its expertise in oil, and that is where it can make the most money, making it difficult for it to financially justify moving resources to natural gas.

Pemex is also a powerful political player in Mexico, and Lopez Obrador has used it as a platform to build his base in Mexico. A shift in Mexico’s energy economy from oil to natural gas would probably require the kind of international investment that would disrupt Pemex’s central role.

Instead, the focus is on oil as the glory of the Mexican nation, with Pemex at the center of it all.

Yet a continuation of the tightening of the global natural gas market might change that.

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Henry Hub natural gas spot prices have topped $5 twice in the last year – a significant but manageable increase for Mexico. But a repeat of the global price increases last fall – setting record highs of $35 in Asia and nearly $40 in Europe – might make Mexico’s bet on Texas a little less secure.

Lopez Obrador himself has recently hinted that even he has reservations about his strategy. He has said that his administration is looking at the possibility of partnering with private firms to develop a deepwater field with significant natural-gas reserves.  

Whether anyone will want to fill Mexico’s dance card is another question.

“I am not sure whether anyone will want to come and explore and extract natural gas,” said Miriam Grunstein, a Mexican energy lawyer who has provided counsel on energy regulations to Pemex and to Mexico’s Senate and Federal Electricity Commission. “Companies have been really rattled by the legal crossroads Mexico is going through in the energy sector.”

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Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CARE. 

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.