As Shale Output Grows, U.S. Oil and Gas Exports to Mexico Boom

For decades Washington politicians have evoked the dream of a North American energy alliance that would deliver Mexico’s abundant hydrocarbons to factories and motor vehicles in the U.S. That dream seemed closer to reality when Mexico last year passed historic energy reforms to open its oil and gas fields to private investment.

Today that alliance vision is a reality, but the flow of energy is confounding expectations. It’s the booming U.S. energy sector that is powering Mexican factories and cars. “Energy integration between the U.S. and Mexico is more important than ever,” says Lisa Viscidi, a program director at the Inter-American Dialogue, a Washington-based think tank, and author of a March report on the impact of the U.S. energy boom on Latin America. “But it has turned out very differently than people expected.”

Texas shale producers are exporting natural gas south of the border that will soon generate most of the electricity consumed by Mexican industry. Meanwhile, thanks largely to the Mexican market, the U.S. has become the world’s biggest exporter of refined oil products.

The U.S. began exporting gasoline and diesel fuel to Mexico 15 years ago. But what began on a small scale has grown dramatically in size, thanks to abundant American shale oil production, declining domestic demand and a continued ban on U.S. petroleum exports. Awash in crude, U.S. refiners have tripled their sales of refined oil products, such as gasoline and diesel, to Latin America over the past decade. Mexico is the single biggest market, taking 29 percent of U.S. oil product exports last year, according to Viscidi.

This bonanza has pitted U.S. upstream and downstream industries against each other. Petroleum producers say they are being hurt by the U.S. ban on crude exports, which Congress adopted in 1973 to keep Alaskan oil from going to Japan, and they are lobbying hard to lift it. Hydraulic fracturing of shale oil fields has propelled U.S. crude production from 5.5 million barrels a day in 2010 to 9.4 million bpd in April, the most since the U.S. government began keeping records, in the early 1980s. Because of the export ban, this glut is depressing the price of West Texas Intermediate, the benchmark U.S. crude, to some $7 to $12 below the international benchmark, Brent, according to a March report by IHS, an energy and economics consultancy. The report contends that free trade in crude would generate 124,000 U.S. jobs annually and boost the country’s gross domestic product by $26 billion a year between 2016 and 2030.

Refiners beg to differ. They insist that they add value to oil exports and improve the U.S. trade balance. Lifting the ban would help foreign refiners gain market share and raise the cost of WTI relative to Brent, they argue. “Why repeal the law now?” asked Jeffrey Warmann, president and CEO of Monroe Energy, a Trainer, Pennsylvania–based refiner, at a Senate hearing in March on the crude export ban. “We are on the cusp of developing true energy independence, where we can produce — and refine — virtually all of our petroleum needs here at home.”

On one issue, there is no debate: The shale revolution has made U.S. refineries among the world’s most competitive. They have access to cheap crude for making refined oil products and cheap natural gas to power their refineries. Already benefitting from better pipeline networks and bigger tanker fleets than rivals abroad, refiners like Marathon Petroleum Corp. and Phillips 66 are cutting out middlemen and gathering crude supplies directly from independent shale oil producers such as Chesapeake Energy Corp. and Pioneer Natural Resources Co. Crude deliveries direct from wells to refineries were nearly 400,000 bpd in 2013, or double the 2010 total, according to the U.S. Energy Information Administration.

The increasing efficiency of U.S. refiners is in stark contrast to the declining productivity of Mexican refineries. State oil and gas monopoly Petróleos Mexicanos has been unable to make the investments needed to upgrade its aging refineries or build new ones. The government depends on Pemex revenues for about 30 percent of its budget, and the fall in oil prices has led to cuts and delays in plans to expand refining capacity. Mexico already depends on U.S. refineries for half of its gasoline, and imports seem certain to rise.

“Mexican domestic supply of gasoline has been in decline for years, and even with energy reform, that’s unlikely to change anytime soon,” says Bob Brackett, New York–based oil and gas analyst at Sanford C. Bernstein. “You have to expect gasoline imports from the U.S. will continue to increase.”

So will natural gas imports, which are playing a crucial role in power generation for Mexican industry. Currently, Mexican factories rely heavily on electricity generated by fuel oil and diesel, which are three times as expensive as natural gas. As a result, manufacturers pay on average 80 percent more for electricity than U.S. factories do. A switch to gas-generated electricity would close the gap and increase the competitiveness of Mexico’s manufactured exports, which reached $304 billion in 2014, more than the industrial export revenues of all other Latin American countries combined.

In 2014 Mexico imported a third of its natural gas from the U.S., mainly from Texas shale producers. Those imports will rise by 45 percent this year, thanks to the completion last December of the 70-mile-long first phase of the Los Ramones pipeline running from the Texas border into the northern Mexican state of Nuevo León, home of the industrial city of Monterrey. This first phase of the $2.5 billion pipeline is a joint venture of Pemex and San Diego–based Sempra Energy.

A second phase, which will extend Los Ramones another 390 miles south to the motor vehicle and auto parts factories in the central state of Guanajuato, has drawn an additional $900 million investment from New York–based BlackRock and First Reserve, a $30 billion energy-focused investment firm based in Greenwich, Connecticut. When completed in December 2016, Los Ramones will have the capacity to pipe 2 billion cubic feet of gas per day from the Texas shale fields, equal to the total of U.S. natural gas exports to Mexico in 2014.

Mexican energy reforms pushed through last year by President Enrique Peña Nieto will put up for auction both conventional oil and shale gas deposits. Mexico’s so-called Burgos Basin is a continuation of the same shale formation as Eagle Ford across the Texas border. But a lack of pipeline infrastructure and water essential for fracking makes development of the Burgos Basin a low priority for investors. “Most U.S. shale oil and gas companies have incredibly full plates at home and no desire to go elsewhere just now,” says John Padilla, Mexico City–based managing director of IPD Latin America, an energy consultancy.