Canada hasn’t exactly welcomed Mexico’s announcement that it is going to liberalize its state-controlled oil and gas industry. Moments after news broke on Monday that Mexican President Enrique Pena Nieto had introduced plans to open the door for foreign companies to invest in the country’s energy sector, a top headline on the website of the Globe and Mail read: Mexico’s oil policy change challenges Canadian energy sector. One day later, Mexican Ambassador Francisco Suarez was at pains to explain that Canada and Mexico aren’t “energy rivals.” He could be right.
A more competitive Mexico intuitively seems like bad news for Canada’s Keystone XL, which would transport heavy crude from Alberta to U.S. Gulf Coast refineries, where supply of heavy oil from Mexico, among other countries, has been dwindling. The U.S. shale revolution has already nullified the original case for the pipeline (i.e. to supply an oil-poor America with oil from a reliable neighbour). But piping crude from the oil patch to Texas still made sense because refineries there are geared toward heavy crude, not the light oil coming out from the U.S. shale plays. Could new supply from Mexico now eliminate even that rationale for Keystone? Perhaps, but it’s too early to tell.
Foreign capital and expertise could help Mexico’s government-owned oil monopoly, Petróleos Mexicanos (Pemex), step-up production from its existing offshore oil fields along the coast of the Yucatan Peninsula. That could beef up exports of Mexican Mayan heavy crude to the U.S. Gulf Coast, but the boost would probably be temporary, since many of those plays are believed to be mature. More importantly, foreign oil majors could also help Pemex reach more out-of-hand resources in deep-water Gulf of Mexico, which Pemex believes could hold as much as 29 billion barrels of crude oil equivalent. The sclerotic Mexican oil giant has been poking around in the area for years with little success and lacks the technology and know-how to explore unconventional oil resources properly. Still, what little deep-water oil Pemex has found so far has been light crude (see here and here), which wouldn’t be a direct competitor to Canada’s oil sands production.
Besides, there’s a subtle way in which President Pena Nieto’s reforms, if approved by legislators, might help the case for Keystone. A more dynamic Mexican oil and gas sector would lend more credibility to the concept of North American energy security that Canada is trying to promote in Washington. Healthier production from Mexico would add to the continent’s ability to soften the punch of oil supply shocks, and thus to the rationale for further integrating the energy markets of the three NAFTA members.
Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy.