The U.S.-Mexican Oil And Natural Gas Alliance Will Remain Strong

First off, congrats to Andres Manuel Lopez Obrador (AMLO) for easily winning the Mexican presidential election on July 1. He will serve one six-year term. Also, a quick shout-out here to the U.S. Energy Information Administration for its publicly available graphics.

No, despite some previous nationalistic talk, President-elect AMLO will not bring regression to Mexico's critical 2013 Energy Reforms that are required to evolve the country's oil, natural gas, and electricity sectors. In particular, the U.S.-Mexican oil and natural gas alliance will hold tough.

Besides the physical connections (e.g., pipelines and transmission lines), the partnership is built on three market pillars: Mexican crude oil to the U.S., U.S. gasoline to Mexico, and U.S. natural gas to Mexico. This strong trade is bolstered by an equally strong NAFTA, which AMLO has promised to "respect." The reforms are now written into the Mexican Constitution. The contracts already signed with state-owned Pemex (oil and gas) and CFE (gas and power) are going to be almost impossible to erase. Although he could slow new offerings, AMLO knows that Mexico's newly opened energy sector for outside private investment has been a clear success, with over $200 billion in new investments.

As the basis of deregulation, Mexico's oil production peaked in 2004 at 3.5 million b/d, steadily declining to 2.1 million b/d last year. This has cut crude exports to the U.S.: Mexico supplied just 8% of U.S. crude imports in 2017, compared to 16% in 2004. It's unlikely that Mexico will ever retain its previous position, but as the country seeks to tap into its own massive shale reserves, production should regain a steady upward trend within five years. The U.S. refining system along the Gulf stands to gain because its built to process heavier crudes like those from Mexico.

Focused offshore, oil and gas block auctions have been a success under deregulation, with "new production coming online in 90 awarded blocks among 68 operators." And there will be even more interest as oil prices rise and/if AMLO can reign in the drug violence and corruption that often makes companies hesitant to operate in the country. For all interested parties, "Mexico's Emerging Oil Opportunities Are Great," with Energy Minister Joaquin Coldwell reporting that $640 billion in investment is needed to expand crude production 50% back to over 3 million b/d. Simply put, major U.S. investments and shale/deepwater expertise is the only way that Mexico's fading oil industry could enjoy an about-face. 

Source: Forbes
Date: Jul 6, 2018