Sparks About Gas

Mexico’s energy revolution with natural gas

 By Robin Wylie
About gas

Mexico is in the midst of an unprecedented upheaval of its energy sector…

After decades of government monopoly, the country has opened up its energy reserves to private investors, in an attempt to meet its rising power demands, while also advancing an ambitious goal of carbon reduction. Natural gas is at the forefront of both of these aims.
In August 2014, Mexican president Enrique Pena Nieto ratified a sweeping energy reform, which put an end to almost 80 years of government monopoly over the country’s energy market, while also mandating greater energy efficiency and lower emissions. Practically overnight, Mexico’s sizeable hydrocarbon and renewable energy reserves were opened up to private and foreign investors.
In fact, given their scale, Mexico’s energy reforms might more accurately be called a revolution.

Cleaner and leaner

Generating power using natural gas is cheaper, more efficient and less polluting than other fossil-fuel alternatives such as coal or oil, which has historically been the main fuel used in Mexico for power generation.
Mexico has estimated conventional natural gas reserves of around 3 trillion cubic meters, and by offering these up to outside developers, the government hopes to help meet the rising energy needs of its developing economy in an efficient, more environmentally friendly way.
Mexico’s energy reforms include a plan to increase its power generation capacity by 60 percent in fifteen years, from around 68,000 megawatts (where it stood in 2015), to around 109,000 megawatts in 2030. These extra 41,000 megawatts will be met almost entirely by a combination of natural gas combined cycle power plants, and renewable sources. (Alongside the energy reforms, Mexico is also pursuing its 2012 commitment to obtain 35 percent of its energy from non-fossil source by 2024).
The growth of natural gas for power generation will likely come at the expense of oil. In a 2016 report, the International Energy Agency (IEA) predicts that by 2040, the share of oil will fall from 51 percent to 42 percent, while that of natural gas will rise from 32 percent to 38 percent.
This displacement of dirtier oil power generation by natural gas, coupled with the spread of renewables, would allow Mexico to increase its energy output while simultaneously cutting carbon emissions. In the same report, the IEA forecast that by 2040, the joint adoption of natural gas and renewables could allow a 52 percent reduction in the carbon intensity of the Mexican power sector relative to 2014 levels, while also allowing electricity generation to increase by 70 percent.
With Mexico’s ambitious energy reforms in place, the tapping of its gas reserves is already underway. As Eniday reported, auction of Mexican offshore oil and gas parcels — largely located in the Gulf of Mexico — have attracted large investments, with 2016 seeing high bids of $156.4 million, and 2017 top bids of nearly $275 million.

Hydrocarbon rigs in the Gulf of Mexico (Chad Teer, Flickr)

Adopting natural gas could also benefit Mexico’s future development in another way, by reducing its notoriously high energy costs. Electricity rates in the country are an average of 25 percent higher than those in the United States (or 73 percent if subsidies are discounted). The relatively lower cost of combined cycle natural gas power plants could help bring down energy prices, giving a boost to the Mexican economy.
A 2016 study by the International Monetary Fund predicted that, based on plausible reduction in energy prices brought on by the substitution of fuel oil for natural gas, Mexico’s manufacturing output could increase by up to 3.6 percent, or more if Mexican electricity prices converge to those seen in the U.S.
The impact of natural gas power on Mexican energy prices could already be taking effect. Between 2013 and 2015, the price of electricity fell by approximately 13 percent, from $80 per megawatt-hour to $70. The IEA attribute this change largely to the switch to natural gas for fuel generation.

Curbing an addiction

Opening up Mexico’s natural gas reserves to outside investors could also benefit the economy in a different way.
Mexico’s natural gas production has been decline since 2010, and in that time, the county has become highly dependent on gas imports from the southern United States. Much of this has been substituted for imported natural gas from the southern United States, which now supplies more than 50 percent of Mexico’s gas demand (Bloomberg even went as far as to call Mexico’s dependence on U.S. gas an “addiction”).
These imports are vital to the Mexican economy, and have allowed the country to displace some of its fuel oil power generation for natural gas in recent years. But Mexico’s increasing dependence on U.S. imports is also making the country more vulnerable to supply shortages from across the border. For example, a 2017 study in the journal Energy Economics found that in 2013, natural gas shortages in Mexico caused by disruptions to imports from the U.S. caused an appreciable reduction in the growth of Mexico’s GDP.
By helping Mexico to better tap its own natural gas reserves, the new energy reform has the potential to protect the country from supply intermittencies from the United States — which, given the current diplomatic relations between the two countries at the moment, are far from predictable.

Moving forward

Mexico’s energy reforms offer tremendous promise for its people, but there are obstacles to this progress.
The effects of the declining peso on achieving competitive energy prices could be a major barrier to the economic benefits of the Mexican energy reforms. The same is true with corruption, which has historically plagued Mexico’s energy sector in particular. The international competition allowed by the new reforms should help remedy this, but such change will not happen overnight.
There are also worries that tensions could arise within Mexico’s state-owned energy organizations as they adjust to a competitive environment. For instance, frictions might emerge as the country increases production of more cost-effective natural gas, lowering demand for the oil extracted by Pemex, the Mexican state-owned petroleum company.
Mexico will face these challenges and more as it pursues its ambitious energy evolution. But the benefits offered by natural gas and renewables are worth the effort. Provided the benefits are transferred to its people, Mexico’s drive for clean development should be well served.

READ MORE: Mexico seeking private natural gas partners by Chris Dalby

about the author
Robin Wylie
Freelance earth/space science journalist. Currently finishing off a PhD in volcanology at University College London.