The news Dec. 7 that Mexico is on the verge of approving a historic liberalization of its oil industry is an important development on many levels, from Mexico to the Keystone XL pipeline. But many of the broader implications have not been widely reported or understood.
Commentators have often noted that Mexico’s oil output began a severe slide in 2004 that is currently accelerating, and the country could become a net oil importer as early as 2018. What hasn't been reported are the broader links to North American energy trends and environmental controversies. I have followed Mexican energy issues closely for many years, so here is my attempt at teasing out a few of the multiple meanings of Mexico's oil opening.
Fracking. Mexico's state-owned oil company, Pemex, lacks the oil and gas majors’ fracking technology and expertise, which it needs to open up Mexico’s portion of the Eagle Ford shale, as well as the Chicontepec basin and shale deposits in the offshore Gulf. Mexico's liberalization plan gives foreign companies what they want -- production-sharing contracts – but apparently only in the shale formations that require fracking, while maintaining current restrictions in conventional oil producing areas. The shale formations will require densely spaced wells, but many will need to be in areas that are environmentally sensitive and/or are inhabited by indigenous groups.
Keystone XL exports to Mexico. Although it’s widely believed that Keystone XL’s exports would mainly go to China and Europe, federal data show that the principal market would likely be Mexico and its former clients elsewhere in Latin America. The Energy Information Adminstration's data for petroleum product exports (i.e. refined fuels) from PADD 3 (Gulf Coast) in 2010-2013 show 62 percent going to Latin America but only 18 percent to the EU nations and 3 percent to China. Of that 62 percent, 18 percent is to Mexico alone, and much of the rest is to Mexico’s former export markets. Since 2004, when Mexico’s oil production began its sudden decline, PADD 3 exports of refined fuels to Mexico and Latin America have grown 251 percent, while U.S. imports of crude oil from Mexico have fallen by over 50 percent.
Mexican imports of natural gas. Because of its lack of fracking technology, Mexico is becoming a major consumer of U.S. natural gas. U.S. gas exports to Mexico are expected to more than double by 2016, with several new cross-border pipelines either finished or under construction. Mexico has vast shale gas reserves, but Pemex can’t access them at a cost that is competitive with importing gas from the United States.
Efficiency standards weakened. On the demand side, Peña Nieto has buckled to automakers’ pressure (especially a Toyota lawsuit) by weakening the government's proposed vehicle fuel efficiency standards.
Same overall pressures as Keystone XL. The trends mentioned above underline a broader point – Mexico (and, to a lesser extent, Venezuela, which is also declining as an exporter) is becoming a black hole that is sucking in the Western Hemisphere’s energy resources and stimulating the production of other nations’ dirty oil and gas. With or without KXL, huge economic and diplomatic pressure will be put on Mexico to do the same as the Alberta tar sands – produce ever-greater amounts of oil and gas, no matter what the environmental or political cost.