Democratic presidential nominee Joseph R. Biden Jr. and President Trump face off on Nov. 3 in a U.S. election being closely watched by Mexico’s energy sector.
Mexico’s energy system, like its economy, is tightly intertwined with its northern neighbor. The country imports around 70% of its natural gas and around 80% of its gasoline from the United States.
As a result of the opening of energy markets and multilateral trade deals, U.S. investors have made crucial investments in the Mexican energy space. Trade with the United States rose to $614 billion in 2019 from $248 billion in 2000, transforming Mexico into the United States’ largest trading partner.
The issue of Mexico, or Latin America, has remained largely absent from each candidate’s campaigning. However, the two presidential candidates have made their stand on energy.
In a second term, President Trump is expected to seek to continue energy deregulation policies.
In the only debate held so far, a chaotic and contentious duel that underlined the gulf between the two candidates, the president celebrated his administration’s decision to withdraw the United States from the Paris climate accord, which President Obama, with Biden as his No. 2, helped negotiate.
Trump also attacked the Congressional Democrats’ Green New Deal, which Biden does not endorse. “I support the Biden plan,” the former vice president said. Biden’s plan is a $2 trillion infrastructure and clean energy plan focused around fighting climate change and transitioning the country from fossil fuels to renewable energy sources over many years.
In his town hall last Thursday, Biden said “the future rests in renewable energy,” citing solar as “the single fastest growing energy source in the world right now.”
Importantly for Mexico, Biden has said he would not ban hydraulic fracturing, aka fracking. Much of Mexico’s natural gas comes from the shale-rich basins in Texas.
Biden has said he would however ban new drilling on federal land, which could potentially impact U.S. oil and gas production. The Permian Basin in New Mexico, for example, has an abundance of federal land under lease.
How and whether either candidate winning impacts oil and gas pricing is unclear. Goldman Sachs analysts are bullish for next year.
“The recent gyration in oil prices, rallying on days of higher expected stimulus and weakening dollar, suggest that a Biden election and blue sweep could in fact prove a bullish catalyst for oil,” analysts said last week. The ‘blue sweep’ refers to the possibility that the Democrats take control of Congress in January.
“While gas would likely rally as well, we already forecast a further rapid appreciation in prices in coming months given the lack of a U.S. gas producer response to high 2021 prices.”
Most natural gas in Mexico is priced off U.S. indexes, and so when prices in the United States rise, so too do gas prices in Mexico.
An Institutional Approach
Surprisingly, given the bellicose rhetoric that President Trump often uses in relation to Mexico, the U.S. and Mexican presidents have proven to be allies.
The United States-Mexico-Canada-Agreement, aka the USMCA, was signed jointly by Mexico President Andrés Manuel López Obrador and Trump in Washington, DC, in early July. Sempra Energy CEO Jeff Martin attended a dinner at the White House after the signing and said “there is true warmth and authenticity in that relationship.”
Sempra is developing the Energía Costa Azul liquefied natural gas plant in Mexico, which is being held up by the lack of an export permit from the Mexican government.
The USMCA is worth $1.2 trillion in annual trade and is the basis for 12 million jobs across North America. López Obrador has praised the treaty as key to Mexican jobs and to the country coming out of its economic crisis. Meanwhile, the Mexican economy is set to shrink by as much as 10% this year, and the country is getting slammed by the coronavirus.
The Trump administration has essentially ignored anti-competitive moves by the government of López Obrador that squeeze out competition in the Mexican energy sector and harm U.S. interests.
This year there have been several formal complaints in Mexico’s business community regarding changes in energy policy that have impacted projects and investment. The U.S. State Department, Mexican business chamber Confederación Patronal de la República (Coparmex), the American Petroleum Institute and the Canadian ambassador to Mexico have been critical of policy changes that favor state companies.
The Wilson Center’s Duncan Wood thinks a Biden administration would be more insistent that López Obrador respect the rules as set out in the USMCA.
“Under President Trump, we have not seen any enthusiasm thus far for pushing the Mexican government on issues related to U.S. companies operating in Mexico, and in particular U.S. firms that have invested in Mexico,” Wood told NGI’s Mexico GPI. “And the big reason for that of course is that President Trump thinks they should not be investing in other countries, they should be investing in the United States. And he has been fairly consistent about that.”
The Trump administration has not intervened on behalf of U.S. companies in investment disputes, such as during the contract renegotiations on natural gas pipes last year.
“Having that has a baseline, a Biden administration would be different,” Wood said. “They would focus on the institutional approach. Biden has much more of an institutional approach than Trump.
“A Biden administration would look at the wording of the USMCA and would look at the mechanisms that are in place in that agreement for investor-state resolutions and state-state resolutions and I would bet they would launch a series of challenges in the eventuality that Mexico is found to have violated the USMCA as it concerns U.S. investors in Mexico.”
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 2577-9966 |