Mexican Reliance On U.S. Natural Gas Is Due To Policy Missteps

Fears that the U.S. will use its exports of natural gas to Mexico to pressure them over border security, drug smuggling, and the trade imbalance have led Mexico to target increased domestic production. The new goal is to increase it from just under 4 billion cubic feet per day (bcf/d) to 5 bcf/d by 2030. While this might appear laudable, the reality is that Mexico could do much more but political constraints have hindered natural gas development for many years.

The figure below contrasts Mexican gas production with imports from the United States, the former being anemic, the latter, robust. Part of the difference lies in the varying resource endowments of the two countries, however, much of the dismal performance of Mexican natural gas lies in political decisions taken over many years. The biggest failure come from a desire to maximize political control over the industry despite the economic losses involved.

Although Pemex has had a number of upstream successes over the decades, it has often been hampered by political decisions and the government’s excess taxation that left the company heavily indebted. More recently, the Administration of President Lopez-Obrador (known as AMLO) decided to reverse earlier reforms that had allowed some private sector upstream investment. Those reforms proved successful, leading to the discovery of the giant Zama oil field, the largest in years. But AMLO objected to private investment on ideological grounds, embracing instead government-led operation of the field.

Resource nationalism might seem to conflict with the massive imports of natural gas from the U.S., but they are clearly economically viable, ignoring the domestic potential. The price of gas to Mexico has been far below that of residual fuel oil, which it mostly displaced, for the past two decades, when fracking reduced U.S. gas prices while supply disruptions raised world oil prices. At least in this instance, Mexican policy was a triumph of economic rationality over ideology.

Could Mexico increase gas production? In all probability, yes. The U.S.G.S. estimated in 2012 that the three primary petroleum basins in Mexico held nearly 60 Tcf of undiscovered conventional natural gas, which is only a fraction of what the U.S. holds. (Over 2,000 Tcf of technically recoverable resources, including shale.) FS12-3069.pdf

But the Mexican estimate refers to conventional resources, and the country has significant shale gas potential, especially given that the Eagle Ford shale basin extends into Mexico. Although Mexican shales have not been extensively studied, estimates of its resource range from 100 to 500 Tcf. This suggests that Mexico could greatly increase production with the use of fracking; the figure below shows the record of the Eagle Ford basin in the U.S. compared to total Mexican gas production. Even if the Mexican shale basin is less productive than the U.S. Eagle Ford, it could easily increase Mexican production by 50% or more in a few years—if the government permitted it.

Aye, there’s the rub. The Mexican government under AMLO spoke against fracking without officially banning it, but now, President Sheinbaum appears more open to the practice and has authorized investment in the practice, which will probably enable the government to meet its 2030 goal. But given the current state of the U.S. shale industry, it should be very easy to import idle equipment and workers from the U.S. shale patch to accelerate production well beyond the present goal. Allowing private sector operatives to invest would mean a much more rapid response than the government is likely to achieve.

The downside: U.S. gas exports to Mexico could drop notably, which would depress natural gas prices—all else being equal. In reality, this would free up more gas for LNG export projects while maintaining the current market balance.

Hopefully, Mexican president Sheinbaum will learn the lessons of both past failures of government energy policy and the U.S. era of deregulation, started under President Carter. The government will maintain a large degree of control over the industry even if private companies are allowed to invest, and the economic benefits, in terms of more economic activity, an increase government revenue from taxes and royalties and an improved trade balance. There may be some political cost, which President Sheinbaum could easily weather, and the economic benefits should make this very appealing.