Two U.S.-Mexico energy integration, with wildly differing impacts on

Two recent shifts have created new opportunities and requirements for U.S. energy security:

1.    
Mexico’s constitutional reforms in
2013 privatized its energy sector
and liberalized its energy
markets, raising the
prospect of major U.S.-Mexico energy integration for the first time.

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2.    
The shale revolution transformed the U.S. into an
energy exporter, requiring
not just security
of supply for imports (oil) but also security of demand for
exports—natural gas and refined
products (gasoline
& diesel).

The result is a developing integration
of
U.S.-Mexico energy markets—the disruption of which would cripple U.S.
energy security, and the expansion
of which,
by various means, will strengthen it.

Energy integration with Mexico has
already taken place, according to EIA data, and
it is rapidly deepening thanks to Mexico’s reforms
and market forces. While Mexican crude oil exports to
the U.S. have fallen since
2006, it remained
the 4th largest supplier in
2015. During December’s auction of Mexican deepwater assets, American
firms invested billions to increase the country’s
oil
production. The Texas refiners that import Mexican crude
oil
send back an almost equivalent amount of gasoline and diesel,
representing 15% of U.S.
products exports. Natural gas exports to Mexico have multiplied tenfold since
2000, representing 6% of U.S. production and
60% of exports, and will only increase
as
American companies invest heavily in pipelines
to and within
Mexico. Mexican
gas-fired electricity generation capacity, counting
on these imports, is expected to double
by 2030.

Energy security for importers means
a reliable, diversified,
and affordable energy
supply, sourced domestically or from a close
ally. Energy exporters require the
reverse—security of
demand. Energy integration with Mexico currently provides the U.S.
with both forms of security,
and offers the potential for even
more. Mexican oil production,
with the help of American investment, can further
increase the ratio of
U.S. oil imports from NAFTA countries, (43% of which already
comes from Canada due to integration). Mexico’s demand for natural
gas and products reduces short-term price
volatility in the U.S. and
supports optimistic price projections, which both are critical to the
industry.

There are several potential
courses of actions
the U.S. government can take towards
U.S.-Mexico energy integration, with wildly differing impacts on U.S.
energy security:

1.)  Disrupt: Disruption, whether through commercial or
political aggression, would precipitate
a collapse
in natural gas
prices, increased imports
from OPEC, and higher prices
at
the pump.

2.)  Do
Nothing: The Mexican administration
has enthusiastically supported its centerpiece
reform and championed the
cause of energy
integration. Market forces
agree. Cross-border trade and
investment in fossil fuels would
certainly increase regardless of
a neutral response from D.C.

3.)  Deepen: (Unlikely
in the current political environment,
but
possible). Comprehensive integration of energy
markets offers even greater security and diversity
to both markets, as
well as greater
economies of scale,
improved grid resiliency, and cheaper energy costs. A deepening could entail:

a.    
Electricity: Connecting electricity grids across borders is
especially important to enable major renewables
projects which otherwise strain local grids. Exporting overly-abundant wind
energy from West Texas and
increasing wind/solar imports
to Los Angeles are only the most obvious
opportunities. Obama’s administration signed non-binding documents supporting electricity integration through sharing
energy information and improving reliability.
Harmonizing electricity regulations
is the next step.

b.    
NAFTA Negotiations: The Mexican reforms offer the opportunity to remove the carve- out the country enjoys
from the NAFTA
Chapter 6, secure protection of energy investments
under Chapter 11, and add a survival
clause to protect
investments.

c.    
Environment & Climate: Thoroughly integrated energy markets necessitate
harmonized environmental regulation beyond
NAACE, and eventually unified
climate policy.

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