Memo to Washington: Don't mess with the booming US-Mexico energy trade
Relations are on the rocks in the early days of the Trump administration. Jeopardising the energy relationship would be a loss for both sides
Sharing one of the world's longest and busiest land borders, the relationship between the US and Mexico is complex and critical to both nations. In recent years, growing amounts of energy flowing across that border have helped draw the nations' economies closer together and delivered benefits to both sides.
Over the last three years, historic reform measures in Mexico have coursed through the bilateral energy agenda, breaking down old barriers and opening new binational possibilities. But harsh rhetoric from the new administration in Washington threatens to drive a wedge through the US-Mexico relationship.
Against this backdrop, the hard-won gains in the energy trade are worth defending. The relationship now is one of flourishing trade and commercial engagement. Mexico and the United States have grown increasingly interconnected in terms of oil and natural gas but also electricity. And despite the rhetoric in the campaign, and now from the new administration in Washington, it is important to distinguish those positions from investors in the US who have a keen eye on Mexico.
Fortunately, the energy relationship is well-positioned to weather the storm thanks to its maturity and the extensive levels of cooperation that define today's relationship.
Most notable in the last several years has been the growing natural gas trade, where the countries have discovered a symbiotic relationship. In the US, the well-known advances in hydraulic fracking led to a dramatic increase in shale gas production; Mexico has set forth a policy of "gasification" which has at its core a shift from oil to natural gas for power generation. Estimates indicate that 57 gigawatts of new power generation capacity will be needed in Mexico in the next 15 years to meet energy demand, and more than 30% will come from natural gas-fired generation.
Betting on gas
Mexico is betting on abundant and cheaper US natural gas to help meet this soaring demand. To that end, it has rolled out major infrastructure and pipeline plans.
The growth have been remarkable. US natural gas exports to Mexico have doubled since 2009, growing at an average annual rate of 26% over the last five years. Supplies from the US now meet roughly 40% of Mexico's natural gas demand. These record exchanges are thanks to an ever-growing network of cross-border pipelines. Today, there are 17 lines with the capacity to ship approximately 50 billion cubic meters (bn cm) per year of natural gas to Mexico. But that appears to be just the tip of the iceberg. Several new pipelines on tap will soon bring the total to 20 cross border pipelines, and Mexican government estimates say capacity will double, to 100 bn cm by 2019.
Oil, long the defining element of the binational energy relationship, has in many ways, now taken a backseat to the amount of natural gas trade and investment. But that should not diminish the scale of oil and refined products that are traded between the countries.
The size and scope of the flourishing bilateral energy trade between the US and Mexico today argues for the new administration in Washington to tread lightly
Indeed, the oil trade has gotten more complex in recent years as Mexican crude exports have plunged while the US started sending more crude and oil products abroad. Today, Mexico's northern neighbour exports just under 1 million barrels a day (b/d) of crude and petroleum products across the border. This is double what it was sending to Mexico in 2010. While Mexico exports between 0.6m b/d and 0.7m b/d of crude to the United States, half what it was sending in 2010. Mexico's exports largely go to Pemex's jointly owned Deer Park refinery in the Houston ship channel, an important foothold for the company in the US market.
As the numbers underscore, the directions and size of the oil flows have changed significantly in the last few years reflecting Mexico's pernicious downward spiral in overall crude oil production at the same time as the US unleashed its shale bonanza.
To date, the electricity trade has lagged behind oil and gas. There are five important connections sending power across the border today, but the amount of electricity exchanged is tiny in comparison to the size of the two nations' respective markets.
That could be changing. Energy ministers from Mexico, the US and Canada signed the Clean Energy Working Group memorandum of understanding in February 2016. By most accounts, it is the first ministerial working group and recognition of the energy relationship beyond oil and gas and will underpin cooperation on low-carbon electricity grids, energy efficiency for equipment, appliances, and buildings, and the deployment of clean energy technologies.
The size and scope of the flourishing bilateral energy trade between the US and Mexico today argues for the new administration in Washington to tread lightly. However, the relationship has undoubtedly entered a rocky patch for reasons that have little, if nothing, to do with the energy sector in either country. While some have argued to keep calm and take deep breaths, it may be more prudent and useful to continue to emphasise how much is at stake between the US and Mexico if major policy reversals threaten to jeopardise the fruitful energy relationship.
US on top: US and Mexico oil trade ('000 b/d) Source: EIA
Jeremy Martin is Vice President of the Energy & Sustainability programme at the Institute of the Americas