US and Mexico pledge to cooperate more on energy

President Bush and Mexican President Vicente Fox are pledging to cooperate more on energy, but despite its large oil reserves and proximity to electricity-short California, Mexico cannot significantly ease US shortages in the next few years. The long term offers more hope, but only if enormous financial and legal obstacles are overcome.
While Mexico has large energy reserves and would benefit from greater energy production and exports, it has severe self-imposed constraints that effectively prevent that from happening. The biggest is a constitutional prohibition against foreign investment in the energy industry, which blocks Mexico from getting the money and technology it needs for energy development.

Anything that Mexico can give the United States in oil, gas or electricity is a drop in the bucket for at least Bush's first term, said Scottish-born Mexico City energy consultant David Shields. During that time, the state-owned oil monopoly, Pemex, could increase crude oil exports to the United States by 150,000 or 200,000 bpd if technical problems in the field are solved. That is a small fraction of US daily consumption of about 16 mm barrels, but would be a significant increase over the 500,000 or so bpd Mexico sends now.
Also, Mexico imports natural gas from the United States, as it burns off the natural gas it produces itself as a by-product of crude oil production because it lacks pipelines or liquefaction facilities to bring the gas to market. Mexico's best short-term contribution to North American supplies and prices may be to build those facilities.
Fox, who wants changes in a range of US immigration and trade policies, appears willing to try to help out Mexico's northern neighbour. Since taking office Dec. 1, he has steered surplus electricity to California from Baja California, which is on a different power grid from the rest of Mexico. But even if there were adequate transmission lines, what Mexico can spare is mostly symbolic. On a good day, it is less than 1 % of California's consumption.

In the longer term, the outlook for boosting Mexico's energy exports encounters a sobering number of ifs. For example, no one knows how much oil is deep under the middle of the Gulf of Mexico, where the two neighbours agreed last fall on which country can drill where.
While there could be large amounts of oil down there, drilling would require technology and financial resources that Mexico lacks, as it must start in 6,000 feet of water. Under the best-case scenario, Shields doesn't expect significant Mexican production there for 10 or 15 years.
Mexico also lacks the capital to search for and exploit new oil and natural gas reserves, modernize Pemex facilities or build new electric-generating plants in places that could serve Mexican and US consumers. Mexico introduced its constitutional ban on private investment in oil and natural gas production, refining and distribution when the government took over foreign oil interests in 1938.
Most observers doubt that Fox would seek a change in the constitution to allow private investment before the 2003 congressional elections. And he might not get it if he did. The legal barriers on private investment in electricity are less stringent, and on a small scale, several private companies are generating electricity in Baja California, selling part to the federal power utility and exporting part to the US Southwest.

But the practical obstacle to significantly expanding those facilities is a shortage of fuel. Hydroelectric power isn't an option in dry Mexico, and the country's oil and natural gas fields are mostly far to the southeast.
There's interesting talk, but so far only talk, energy consultant Shields said -- of building terminals for LNG on Mexico's Pacific and Gulf coasts, where tankers would bring in enough gas to meet Mexico's own shortfall and to export it through pipelines to the United States, especially California.
The gas also could supply fuel for generating electricity near the US border, with a substantial portion going to the United States. Such an arrangement would circumvent constitutional restrictions because it would involve non-Mexican gas. The environmental approval process for LNG terminals and pipelines also would probably be quicker and easier in Mexico than in the United States.
Shields said the facilities would be economically feasible if the price of natural gas stayed above about $ 3.50 per mm Btu. Last winter, the price in California topped $ 16. He said several large US and multinational energy companies, which he declined to name, are looking into building such terminals, one just south of the California border in Ensenada. The plans would take three to five years to reach fruition.