The North American Free Trade Agreement is now in a final stage with the U.S. team looking over the “energy chapter,” which has been approved by Canada and Mexico. The Administration's position, with a revisionist-protectionist core, offers President Trump a withdrawal-from-NAFTA option, at least a tactical move to shake up Canada and Mexico in the interest of American merchandise and agricultural exports. However, not much is known from the inside on plans for natural gas exports to Mexico.
In 1992, the beginning of NAFTA, Mexico's oil and gas industry was government owned and operated so it fell outside a free trade agreement. Today, Mexico permits private capital to build, own and operate oil and gas exploration, production and transportation (pipelines) under its Energy Reform Law. This admits natural gas into the NAFTA framework. Nearly $6 billion of Southwest natural gas was sold (exported) to Mexico last year. Mexico imports 53 percent of its natural gas from the United States – with 60 percent on track. Needless to say, Mexico is dependent on American natural gas for its power generation.
Texas natural gas pipeline entry points dominate the trade, while the Delaware and the San Juan basins are next as business and strategic sources. The Mancos Shale natural gas below the Four Corners must access the expanding Mexican market in any revision of NAFTA terms. The Trump Administration's understanding of American natural gas trade with Mexico should include regional economic integration. Energy is required for Mexican industrial growth, and Mexico has constructed the pipelines on its side border to receive and transport natural gas from the Permian and the San Juan Basin.
NAFTA revised should make natural gas exports from the U.S. Southwest a natural resource exemption from narrow foreign trade objectives. Natural gas reserves in the Southwest can be accessible to Mexican importers if pipelines to cross-border points attract American investment long-term. NAFTA changes would create risk disincentives.
U.S. NAFTA negotiations can be aligned with the Trump-Zinke energy policy of world domination if the export “New Mexican natural gas” is designated a “win – win.” If the Mexican market for American natural gas is lost, New Mexican natural gas would be mostly “stranded” without offset storage; and, it would push back on the Permian with an oil-only reality as the output of gas from Pennsylvania and Ohio output expands.
Unless Texas and New York media understand the history behind the oil price collapse history of 2014-2016 the industry and public will be compelled to repeat that history soon. Oil prices are coupled into a “bubble”; or worse – speculation in a “coin” which exists as a product of computer software. Is Bitcoin speculation infecting the value of oil in commodity trading at least momentarily? Will hedging create a trade? With New Mexico oil production over 500,000 barrels per day (323,000 four years ago), the coming 30 days in Santa Fe (Legislative Session) should see a Democratic Party state budget expansion or plain spending offensive which would mirror 2018 primaries and general election conflict between progressives and centrists.
There is no threat from off-shore (Atlantic and Pacific Ocean) to New Mexican oil and gas development. President Trump is right to remove off-shore prohibitions, but now the market takes over. The cost of San Juan Basin natural gas is 80 percent less than exploration and production 50 miles out in North Carolina's Atlantic Ocean. Three or four dimensional seismic investments—yes; production—no; not as long as there is economic shale natural gas on-shore in New Mexico and the Southwest.
Daniel Fine is the associate director of New Mexico Tech's Center for Energy Policy. The opinions expressed are his own.
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US 02 Apr 2020
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