Thread: US energy set to cash in on Mexican demand, NAFTA permitting

US energy set to cash in on Mexican demand, NAFTA permitting

BY JAMES O'CONNELL, OPINION CONTRIBUTOR - 08/23/17 04:00 PM EDT 16

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U.S. oil and gas producers are set to reap significant benefits in the short-to-medium term from exploration and production as well as the additional demand that will accompany the liberalization of Mexico’s oil and gas markets taking place throughout 2017. In the longer term, their entry into that market, all along the supply chain, should also have a positive impact on Mexico’s GDP.

Mexico’s oil and gas production is down 40 percent from peak levels, while first-quarter 2017 imports of U.S. petroleum products were up over 125 percent, year-on-year. With oil output and, therefore, revenue shrinking, the state-owned oil and gas producer, Pemex, has lacked sufficient funding to invest deeply in infrastructure, production and even the ability to slow down the rate of decline.

While Mexico does not import crude, cheap prices and easy access through cross-border pipelines has seen greater gasoline and natural gas imports from the U.S. In 2015, Mexico flipped from being a net exporter to a net importer of petroleum products.

U.S. refiners exported 883,000 barrels/day of refined products to Mexico in April, near the record-high 1.2 million b/d in December, the bulk of which was gasoline and distillates, according to the U.S. Energy Information Administration.

ExxonMobil sees Mexico as an expanding market in which fuel demand is expected to grow 40 percent over the next 25 years, a period when the U.S. demand is expected to fall 17 percent.

In order to rebuild its energy supplies, through a series of upstream oil and gas auctions, Mexico has awarded dozens of exploration and production contracts to a number of companies and consortia, which has already led to some significant finds. The most notable comes from U.S. independent Talos Energy unveiling its first offshore Mexico exploration well, which is being called a “world class” oil discovery, holding more than 1 billion barrels of resource.

The decline in Mexico’s oil output has also had a significant direct impact on public finances. Just five years ago, oil-related fiscal revenue accounted for about 40 percent of total government revenue. Today, it accounts for just over 15 percent. Mexico’s government has reacted to the decline in oil-related fiscal revenues by cutting public investment, which has fallen by a cumulative 30 percent over the last five years.

Analysis by S&P Global Ratings suggests that the impact in the oil sector alone has knocked half a percentage point off real GDP growth on average each year for the last three years.

Mexico’s dry natural gas production has slumped to 3.2 billion cubic feet/day (Bcf/d) this year from 5.1 Bcf/d in 2010. However, Mexico’s natural gas demand is growing rapidly, and the industrial and power sectors are leading the charge.

Year to date, total Mexican gas demand has averaged 7.7 Bcf/d, up 1.3 Bcf/d, or 21 percent, from 2010, indicating average 3.5-percent annual growth, or 30-percent faster than total U.S. demand growth over the same period. That puts the total Mexican gas market at about one-tenth the size of the total U.S. market and roughly on par with S&P Global Platts Analytics’ U.S. Southwest Region (California, Arizona, New Mexico, and Nevada).

This imbalance has resulted in a major increase in imports of U.S. natural gas, which now account for almost 60 percent of the country’s total natural gas supply, compared to just 22 percent in 2010. Platts Analytics, a forecasting and analytics unit of S&P Global Platts, expects that U.S. natural gas imports will account for 70 percent of total supply by 2022.

This increased cross-border trade places a spotlight on President Trump’s energy policy and in particular the renegotiation of the North American Free Trade Agreement (NAFTA) among the U.S., Canada and Mexico. According to people familiar with the trade deal, it is unlikely to result in new rules that would substantially impede the current cross-border flows of energy among the three countries.

To that end, at a joint press conference recently, the U.S. and Mexico energy secretaries declared that they have identified common goals for a trilateral agenda with Canada. Rick Perry and Mexico's Pedro Joaquin Coldwell said the three countries would work together to accelerate the development of untapped resources, increase energy trade and enhance the security and reliance of their energy systems.

American Petroleum Institute President and CEO Jack Gerard applauded the Trump administration’s proposed NAFTA renegotiations:

“The U.S. is now the largest producer of oil and natural gas in the world, and this coupled with enhanced energy integration with Canada and Mexico will increase long-term U.S. energy and national security,” he said.

Total energy trade between Mexico and the U.S. amounted to $39 billion in 2016.

http://thehill.com/blogs/pundits-blo...n-demand-nafta

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