(Natural Gas Intelligence, Carolyn Davis, 14.Jun.2018) – Mexico’s historic energy reform launched four years ago may hit a few bumps if, as expected, left-wing presidential candidate Andres Manuel Lopez Obrador is elected on July 1, but there’s no turning back now, experts said last week.
At the 4th Mexico Gas Summit organized by Industry Exchange LLC, cautious optimism prevailed about the outlook for the oil and gas sector. During the campaign for president, Lopez Obrador, who has a huge lead in the polls, has threatened to disrupt energy reform by freezing bidding rounds and possibly reviewing contracts with private operators already in place.
However, there’s growing evidence that the new president, who would take office Dec. 1, may become more pragmatic as he gains an understanding of how the energy sector’s growth will benefit the country.
Duncan Wood, who directs the Mexican Institute at the Woodrow Wilson Center, helmed the first day of sessions and offered his take on the road ahead. Wood, who has worked on Mexico issues for more than 22 years, including as an analyst on energy policy, told the audience he was unsure “where the heck we’re going” in regards to the next administration. However, he remains cautiously optimistic.
“We’re very much at an inflection point, and I tend to be an optimist. So I tend to think that in the long-run, everything’s going to be fine. The fundamentals are good.”
He suggested the audience not “listen to all of the noise about what’s going on right now” regarding the election or what’s happening in the United States as President Trump threatens to impose more tariffs on Mexico and potentially upend the North American Free Trade Agreement (NAFTA).
“Focus on the long-term,” Wood said. The United States and Mexico “that are coming inexorably together, and if you look at Mexico in the long-term…Mexico is on its inexorable path to openness. It doesn’t mean that there won’t be setbacks. It means that there are going to be very, very interesting times. But the fact is, that in the long term, Mexico is actually on the right path. The reason for that, I think, is looking at the potential of the country and what its people are going to demand.”
Wood co-authored a paper with IPD Latin America Managing Director John Padilla that was published in May, “Mexico’s New Hydrocarbons Model: A Critical Assessment Four Years Later,” to “give politicians, policymakers, and other relevant stakeholders a clear assessment of what has been achieved so far and what remains to be done.”
The report relied on the results of a series of forums with participants from a broad cross-section of local industry, including executives from upstream to downstream, with lawyers, academics, former senior government officials and individuals with decades of experience in Mexico’s energy sector and abroad.
“What was really remarkable, in a series of four consultations with industry and experts in Mexico City, is that they were incredibly positive about the reform, so much so that when we came to write up the report, I had to stop John and say, ‘look, we actually need to go back to take a really cool headed analysis of this to say it’s extraordinary what has happened in Mexico’…
Four years on from beginning energy reform, and, “the fact that we have seen such a bold, dramatic and profound opening in Mexico is a huge achievement,” he said.
“We should never forget where we’ve come from because there are voices out there that want to take us back to that distant past. So that report that we wrote up I had to rewrite it…to make sure that it begins with a very optimistic opening about how much has been achieved through this reform process, because it is remarkable, and it is extraordinary, and I would argue that it’s unmatched anywhere else in the world.”
There are challenges for the energy sector ahead, however. Regulatory processes still need to be finessed, and more investments have to be made to ensure there is adequate infrastructure.
“In the short term, we deal with a great deal of uncertainty,” Wood said. “Even if we know who’s going to win the election, we don’t know what that particular candidate’s policies are because he’s laid out a whole bunch of policies that are very vague and a lot of people in Mexico don’t believe that’s what he really wants to do anyway. I tend to be a little bit more optimistic because I think that pragmatism will kick in…”
The other short-term anxiety centers around the future of NAFTA. If, as Trump has signaled, it ends up in the dust bin, “there are real and profound implications for the oil and gas sector…That is one of the issues that’s on the top of people’s minds as they’re investing in Mexico at this political moment.”
Without NAFTA, Mexico’s economy may suffer, which in turn could hamper energy demand, and in particular natural gas consumption, directly from a decline in the industrial sector and indirectly through electricity demand.
“But the long-term future, as I said, is very, very bright,” Wood said. “Think about the potential of Mexico in terms of its gas reserves, 15.3 Tcf of proven reserves…If you look at the technically recoverable shale gas reserves, in the Burgos Basin alone there is 343 Tcf. Mexico is a country of 545 Tcf of technically recoverable reserves.”
On the demand side, Mexico’s growing middle class also is consuming more natural gas, which means more power plants.
“All of the headlines for the past couple of years have been on the renewables front,” Wood said. “It’s been about solar and wind. But the reality is that those two kinds of new power plants are going to contribute a significant but not overwhelming percentage of new power in Mexico.
“It’s going to be natural gas plants that are really going to do the trick.”
U.S. gas pipeline exports also are paramount.
Some infrastructure projects still are experiencing challenges connecting on the Mexican side of the Texas border, Wood said. “But we’re looking at a situation where now, Mexico is responsible for 60% of U.S. natural gas exports…In the not-so-distant future, Mexico’s gas imports will account for one-tenth of all U.S. gas production.”
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