An ambitious plan to boost Mexico’s oil and gas production could slow the country’s energy sector reforms and hinder trade opportunities for U.S. refiners and pipeline companies that have ramped up exports to meet growing demand there, according to research firm Morningstar.
Mexican President-elect Andrés Manuel López Obrador announced in late July a plan to invest billions of dollars in Pemex, the country’s state-owned energy company, in an effort to reverse years of declining production. He also reaffirmed his intent to review more than 100 exploration and production contracts awarded to private oil and gas companies since the 2013 reforms, which opened the country’s energy sector to foreign investment for the first time in decades.
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Mexico’s energy reforms are enshrined in its constitution, and López Obrador has said that he will he will honor existing contracts so long as they don’t reveal corruption. But Morningstar noted that any effort to scale back the reforms or increase Mexican energy production could jeopardize some $200 billion in outside investments planned for the country’s oil and gas, power, refining and distribution sectors.
Part of López Obrador’s plan involves investing $2.6 billion to upgrade the nation’s six refineries as well as build an $8.6 billion refinery at the oil port of Dos Bocas in Tabasco. The country’s existing refineries have been operating at less than 70% capacity since 2012, according to Mexico’s energy department, requiring the country to import more gasoline, diesel, jet fuel and other refined products.
American companies have covered much of the shortfall. U.S. exports of finished gasoline products and diesel have more than tripled since 2010 amid a boom in oil and gas production from shale fields in West Texas and elsewhere.
Sandy Fielden, Morningstar’s oil and products research director, wrote that Mexico’s attempt to overhaul its energy sector could have particular ramifications for U.S. refiners and pipeline companies. Both sectors have expanded operations in recent years to support growing demand from Mexico.
“There is no denying that consequences for U.S. refiners could be considerable,” Fielden wrote. “The expansion of Gulf Coast refining during the shale era is closely bound to growing export demand, with Mexico being the largest customer.”
Mexico’s election early last month came during a pivotal time for both North American trade negotiations and the U.S. oil and gas industry. Texas in particular has benefited from the country’s energy reforms, last year shipping nearly $100 billion in goods, including petroleum products, south of the border under the North American Free Trade Agreement.
More than 25 cross-border pipeline projects, headed by major companies including Dallas-based Energy Transfer Partners and Houston-based Kinder Morgan, also are underway as Mexico has emerged as one of Texas’ largest natural gas customers.
López Obrador will take office in December, around the time President Donald Trump is expected to resume NAFTA negotiations.