“For Mexico to diversify away from U.S. natural gas imports in the medium to long term, the answer is potentially shale,” W. Schreiner Parker, senior vice president and head of Latin America at Rystad Energy, said in an interview with NGI’s Mexico GPI.
“The other interesting area of domestic supply is offshore gas,” he said. “I think in the near future we will understand how much potential there is in offshore gas with Lakach acting as the test case.”
Parker’s responsibilities include research and consulting in the region, as well as working with national oil companies on the continent and developing relationships with governments, financial institutions and smaller independent exploration and production (E&P), oilfield services (OFS) and renewable firms. He has been with Rystad Energy since 2016, previously based in Mexico City and currently between the Rio de Janeiro and Houston offices.
Previously, he worked at the oil and gas research and consulting firm Wood Mackenzie from 2012-2014 in Rio de Janeiro and was a petroleum landman from 2010-2011.
Parked graduated with honors from the University of Texas with a bachelor’s degree in Spanish and Portuguese and received a master’s degree in International Oil and Gas Management from the Graduate Institute of International and Development Studies in Geneva, Switzerland.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Parker is the 89th expert to participate in the series.
NGI: The central theme of the moment in the Mexico energy industry is the United States-Mexico-Canada-Agreement, or USMCA talks with the United States and Canada. What is your take on the on-going consultations process and how do you see this evolving in the next few weeks?
Parker: This is the first time that President López Obrador’s, or AMLO’s, favoritism or pseudo-nationalism is being taken to task on an International scale, and it’s interesting that it comes down to electricity. What it really feels like is AMLO trying to overturn or reverse the 2014 electric industry law (Ley de la Industria Eléctrica, or LIE), which opened up the sector to private investment during the Peña Nieto energy reforms. I think it’s important to remember the context of why the electricity sector was opened in general. Prior to 2013, electricity generation in Mexico was problematic on a couple of different levels. The overall generating capacity was somewhat limited, Mexico was using a lot of fuel oil in the electricity generation process – which is obviously environmentally problematic – and the electricity rates were rather high. So the idea was that if you open up the electricity sector to private investment, such as foreign and private capital building pipelines from the Permian to supply natural gas fired electricity plants in Mexico, as well as diversifying into wind and solar, that open market would diversify supply, increase productivity and ultimately reduce electricity costs.
AMLO has taken a different view and, in his mind, the entrance of private and foreign companies led to an over-privatization as a result of the 2013 reform and the 2014 LIE law. The 2014 law basically says that whoever is producing the cheapest electricity would have preference in terms of the grid buying that available power. And AMLO’s view is that this allowed for over-privatization in several sectors, and one example is that private firms weren’t obliged to pay any fees to the Comisión Federal de Electricidad (CFE) when they wanted to use transmission lines and distribute power through them, even though the CFE is responsible for the upkeep of those transmission lines, which incurs costs.
So, AMLO is looking at the CFE and seeing that there is a major erosion of their market share in terms of the electricity generation that they’re able to sell into the national grid versus these private firms that are able to produce it at a lower cost. And the idea was that, with the reform law that was passed last year and upheld in the Supreme Court this year, the intent was to reconfigure the LIE to say that CFE produced electricity gets priority over any other producers, regardless of generation costs.
The U.S. and Mexico see the 2021 reform bill as a direct violation of the USMCA, which specifically prohibits member states from passing any legislation that favors state owned enterprises or even domestic producers in the electricity and electricity generation space. And that is the crux of the issue.
I think the Mexican government has expressed a desire to resolve this issue during the consultation phase of the dispute settlement rather than triggering trade sanctions, which is likely if taken to a panel, where Mexico is at risk of losing. AMLO has been adding his own rhetoric to the situation, talking about “interests dedicated to plundering Mexico” and saying that this is a political rather than an economic issue. I’m not sure that argument holds a lot of weight, considering the fact that you have Biden and Trudeau in leadership positions in the U.S. and Canada, which should be ideological allies of AMLO.
[Mexico Matters: Cross-border energy trade between the U.S. and Mexico reached $42 billion last year. Understand this burgeoning trade flow — the projects, politics and natural gas prices — with NGI’s Mexico Gas Price Index. Know more.]
I think that if you look at this from a wider perspective, this is just one manifestation of an underlying current that flows through AMLO’s thinking, which is very Mexico-centric. That’s not necessarily a bad mindset to have if you’re the leader of Mexico, however, we’re living in a much more globalized world than the times where Petróleos Mexicanos (Pemex) and CFE were able to do things independently. The fact of the matter is, cheaper electricity for Mexico means more industry, more jobs, and more growth. So, I think at the end of the day, it’s in Mexico’s best interests to resolve this issue before trade sanctions happen. I also think it’s in Mexico’s best interests to make the CFE the most competitive supplier that it can be.
I do see this issue getting resolved in the consultation phase, and I do see an opportunity for AMLO to take away some political wins in the fact that he’s fighting this, and that is what his political base wants to see it. At the end of the day, I think pragmatism is going to trump politics and there will be an acknowledgement that the 2021 reform bill is potentially a violation of the USMCA and that the entirety of the electricity sector is better off having a diversity of suppliers that are producing electricity at lower costs.
NGI: It does seem like if these disputes aren’t resolved before arriving at the panel, Mexico could be slapped with sanctions in sectors such as agriculture, which is entirely unrelated to electricity generation, for example.
Parker: Right, and as I mentioned earlier, it’s politics versus pragmatism. I think there’s an incentive for AMLO and the Morena party to solve this issue. This isn’t the hill for them to die on, particularly as you have elections coming up, where it seems as though Morena, right now, is in a fairly secure position to retain the presidency. And if you begin to cause disruptions for people that are unrelated to the energy sector, that can have a negative consequence on Morena’s ability to retain power in the future. So, I think it’s in everyone’s best interests to resolve this dispute.
NGI: Another topic that is often discussed between the U.S. and Mexico in regards to natural gas is Mexico’s continually increased dependence on U.S. imports to meet national demand. How do you see this relationship evolving in the next couple of years or longer term?
Parker: I think we’re really in a world now where we’re thinking a lot about security of supply and energy security a lot more than we were two or three years ago. And if you consider the concept of the energy trilemma, which is a triangle whose points are denominated as affordability, sustainability and security, for a long time, the world pulse was pulled more towards sustainability. And then there’s an energy crunch and it’s starting to move back to affordability, followed by the Ukraine crisis, which is really pulling the focus of the industry towards security. And you look at Europe today and the fact that they were so dependent on a single supplier for that amount of natural gas really looks kind of foolish, because it’s a single point of failure.
Mexico has a similar situation. Not to say that the U.S. and Mexico have the same sociopolitical dynamics as western Europe and Russia, as they’re two distinct cases, but at the same time, it’s a single point of failure. And if, for whatever reason, the U.S. was unable to supply natural gas to Mexico at the price that they’re supplying it today through the pipe gas that’s coming from the Permian Basin mostly, as well as LNG imports, there would be a major problem for Mexico.
There are no piped gas alternatives for Mexico. The domestic natural gas production is quite low. To think that you’d be able to buy international liquefied natural gas cargos that come from somewhere aside from the U.S. to meet natural gas demand is fairly optimistic, and the price that you’d have to pay to do that, even in the short and medium term, is huge.
It’s hard to say what some of the issues that cause the U.S. to be unable to produce natural gas or send natural gas to Mexico, but if you imagine a World War III scenario where the U.S. has to increase their manufacturing capacity for armaments by a factor of 10 to 20, and then natural gas demand in the U.S. goes up significantly, which might lead to protectionist policies that emerge to prohibit the export of hydrocarbons given they are needed at home. So this is just a hypothetical scenario, though there are a number of scenarios where this could become a major issue for Mexico, given that it’s a single point of failure problem.
NGI: What do you think Mexico could do to avoid such an issue and decrease that dependence on the U.S.?
Parker: For Mexico to diversify away from the U.S. natural gas imports in the medium to long term, the answer is potentially shale. Of course there’s been a lot of talk about shale over the years in Mexico, particularly the Eagle Ford extension and the Pimienta formation in the Tampico-Misantla basin.
Up to now, we’ve seen that early gas wells in the Burgos basin were subpar when compared to the U.S. and we’ve seen that discoveries in the Sabinas basin are in line with Eagle Ford performance, though the overall productivity pales when compared to more established gas modern plays such as the Haynesville or Appalachia.
The idea that there is shale to be exploited and developed in Mexico is something that’s very interesting. I think that if that’s going to happen, you have to be very selective and careful in how you do it, but there is a lot of learning that is available from the U.S. so that Mexico is not just starting at zero when it comes to developing a shale industry. The most important aspects when developing a shale industry are the access to water, access to sand, access to infrastructure and access to capital. There’s a fifth component that in the U.S. you don’t have to worry about but in Mexico you do. In the U.S., minerals are mostly owned by private individuals or entities, minus the federal lands. But in Mexico, you’d have to have consultations with the people that live in the areas where shale can be developed and you’d have to get buy-ins from local communities, and that’s an above ground risk that doesn’t exist in the U.S.
Having said that, growth in shale alone would not necessarily be able to meet the demand that we see in Mexico. So, even in a scenario where we forecast over 100 shale gas wells drilled per year, with productivity remaining competitive, Mexican shale would only be able to replace the legacy declines. So, incremental pipeline imports would still be necessary to meet demand. However, while Mexico would still be relying on imports from the U.S., it could offset some of the demand needs and create some domestic supply that doesn’t exist today.
The other interesting area of domestic supply is offshore gas. I think in the near future we will understand how much potential there is in offshore gas with Lakach acting as the test case. The issue of course with offshore gas is that the infrastructure buildout required to bring gas back to shore is much more expensive compared to onshore gas development, for example. I think the question for Mexico right now is: Who’s going to subsidize that cost? That is a question that is going to have to be answered if offshore gas is going to become a more important feature of the Mexican gas supply from a domestic perspective.
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