Mexico’s Energy Reforms Could Trigger Cross-Border Boom

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Courtesy of the Office of the United States Trade Representative.

Public Domain / Office of the United States Trade Representative

Courtesy of the Office of the United States Trade Representative.

Each year around this time, the University of Incarnate Word’s Raul Rodriguez gives a local state of the union on the previous year’s changes in Mexico and the current outlook on the country’s development.  While each year’s talk provides valuable information and insight on our country’s nearest neighbor, this year’s conversation was especially relevant given the Peña Nieto administration's commitment to historic energy reformation.

How We Got Here 

Raul Rodriguez. Courtesy photo.

Raul Rodriguez. Courtesy photo.

“Mexico has the most tight-fisted control over their energy of any country in the world," Rodriguez said in an interview before he delivered his lecture. "The government’s current monopoly over the energy sector is even more controlled than what we see in countries like North Korea and Cuba. This is why these latest talks of energy reform are so important and promising. They represent a radical new opportunity for both Mexico and the North American Block as we move forward.”

While these reforms are certainly a long time coming, the first question to be asked is why we are where we are.

As one of the United States’ largest trading partners and a country with a wealth of natural resources, Mexico has had the potential to be a world leader in energy production for decades. However, as with most things, their current policies are a reflection of complicated political and cultural turmoil that dates back to the revolution of 1910 and the U.S. invasion of Mexican territory a century ago.

This incursion into Mexican territory during a period of time in which 1/10th of the population was killed left a deep scar in the pysche of many Mexicans who believe the United States, a country that a half century earlier had won control of 57% of Mexican territory, was bent on taking the country’s natural resources.

While the picture is clearly more complicated, this national mindset definitely played huge role in Mexico’s 1938 expulsion of all foreign energy companies and nationalization of the oil and gas sector-then the second largest in the world. That led to the creation of Petróleos Mexicanos, widely known as PEMEX, as the government-owned energy monopoly. The 1976 discovery of the massive oilfields in Cantarell led to an uncontrolled increase in government spending with little investment in technologies that would support the future growth of the sector. These policies ultimately proved economically disastrous once the Cantarell fields peaked in production in 2003 and began a precipitous decline from 2.1 million to 408,000 barrels, an 80 percent decline.

In 1976, Mexico discovered one of the world’s truly great oilfields, Cantarell, in the Bay of Campeche west of Yucatan. The discoveries vaulted Mexico to No. 1 among all suppliers of oil to the U.S. during 1982-86. Mexico has been among the top three suppliers ever since, averaging about 1.5 million b/d since 2000 and 1.8 million b/d in the first half of 2006. Cantarell’s phenomenal production made this possible. The figure below shows Mexico’s oil production since 1965 and the dominance of these discoveries.

In 1976, Mexico discovered one of the world’s truly great oilfields, Cantarell, in the Bay of Campeche west of Yucatan. The discoveries vaulted Mexico to No. 1 among all suppliers of oil to the U.S. during 1982-86. Mexico has been among the top three suppliers ever since, averaging about 1.5 million b/d since 2000 and 1.8 million b/d in the first half of 2006. Cantarell’s phenomenal production made this possible. The figure below shows Mexico’s oil production since 1965 and the dominance of these discoveries.

Ultimately, it was these declines coupled with Peña Nieto’s rise to power that has brought Mexico, its government and society to the first serious reform of the country’s energy policies since nationalization.

Where we are going 

According to Rodriguez, these reforms are both encouraging and important to the North American region. If all goes well, he said, it will outstrip the Middle East as the largest energy producing region in the near future.

“These reforms are necessary,” Rodriguez said. “Currently, Mexico, an energy rich country, imports one-third of its natural gas, half of its gasoline, and two-thirds of all of its petrol chemicals. The reforms will allow it to regain some of its economic independence which is beneficial to the whole North American block. If it all goes well, we are likely to see an economic impact akin to NAFTA.”

To get a little more detail about the current state of these reforms and what they mean both for the U.S. as a whole and South Texas, I spoke with former U.S. Ambassador to Mexico Antonio "Tony" Garza, who said a truly energy independent Mexico would have a massive impact on the region.

Attorney and former U.S. Ambassador to Mexico Antonio "Tony" Garza

Attorney and former U.S. Ambassador to Mexico Antonio "Tony" Garza

“We’re talking about a block-- Mexico, the United States, and Canada -- representing nearly 550 million people , united by a commitment to democratic values , free and fair trade and the potential to be truly energy independent," Garza said. "There is no other region, or block of countries, better situated or aligned to provide the engine for global growth than the NAFTA partners. It's critical that our leaders assert that vision, commit to that agenda and then do all possible to allow for the type of investment that will make that vision a reality.”

Garza, who divides his time between Mexico City representing White & Case, an international law firm, and Texas, also writes regularly on the subject. You can subscribe to his free newsletter here.

The prospect of an even more economically unified North America means a lot to San Antonio and South Texas, already several years into a major il and gas boom in the Eagle Ford Shale Play, which has led to the creation of 116,000 new jobs and $61 billion in economic impact in the region, according to a recent study by the University of Texas at San Antonio.

The next wave of voting on the reforms takes place in April. U.S. energy companies, many of them based in Texas, are eagerly preparing for the opportunity to establish operations south of the border.

“Abundant, cheap natural gas benefits the U.S. economy in a number of ways, by helping lower manufacturing costs (it is used both as an industrial energy source and as a raw material in the sector) and boosting economic competitiveness," Garza said. "This, in turn, helps attract investment and creates new jobs. The shift to natural gas from coal, in industry and electric power generation, has also yielded environmental benefits associated with reduced emissions of harmful gases such as CO2 and sulfur dioxide (the cause of acid rain). In turn, this reduction in energy costs will likely continue to aid the increase of manufacturing jobs this side of the Pacific, which reduces our dependence on countries like China in favor of regional partners."

Some observers predict mexico's looming energy sector reforms could lead to cross-border economic activity that exceeds that triggered by NAFTA.  The opening also would allow the U.S. to reduce its dependence on imports from less politically stable trading partners in favor of enhanced hemispheric trade.

Graphic courtesy of Raul Rodriguez.

Graphic courtesy of Raul Rodriguez.

The reforms also could have a favorable impact on immigration with more job creation on both sides of the border. Both Rodriguez and Ambassador Garza see this growth as a major opportunity for cross-border collaboration and investment in a region that has been primed to experience economic growth for a long time.

“Mexico’s energy reform may at last force the recognition that the border is even more critical to the country’s economic fortunes and, increasingly, allow Mexicans to seek opportunity at home,” Garza said. And while all of that sounds promising for the future, the trend of Mexican and Mexican Americans seeking work south of the border might actually leave the U.S. with “the challenge of attracting a younger. able-bodied demographic to our country.  Quite the turnaround from the realities that have typically informed discussions about immigration.”

Rodriguez advises cautious optimism until the April vote in the Mexican Congress. “The relative ease with which all of the major reforms were passed in December should give us confidence moving forward but there are still a lot of challenges that will need to be addressed," he said. "Multi-party democracy is still a very new reality for Mexico, so these kinds of conversations are uncharted territory." 

*Featured/top image: Courtesy of the Office of the United States Trade Representative. (Public domain.)

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One thought on “Mexico’s Energy Reforms Could Trigger Cross-Border Boom

  1. Hope Mexico’s energy reforms result in a major upgrade of income, economic well-being and quality of life for millions of people in Mexico. Otherwise, its’ an opportunity gone to waste.

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