Center for a New American Security

Today marks the 75th anniversary of the nationalization of Mexico’s oil industry.

In a January post on EnergyTrendsInsider.com, I wrote that one of the top energy trends to watch in 2013 will be developments around Mexico’s oil industry. Here is an excerpt from that post:

Mexico’s oil industry has been in a perpetual state of decline. In its heyday, the country was the world’s second largest oil producer, just behind the United States. But when the industry was nationalized in the 1930s, it all began to go south. Private foreign companies – with their capital, skills and technology – left the country and spent years seeking compensation from the government to cover their losses. In their place, the industry was left with the state-owned Petróleos Mexicanos – Pemex. Unfortunately, Pemex never quite brought the same resources to bear as its foreign competitors and has been plagued by technical deficiencies that have contributed to poor management of its oil fields and their subsequent decline. One need only look to Mexico’s Cantarell super-giant oil field as a case in point: production has sharply declined from about 2 million barrels a day (mbd) in 2004 to 400,000 barrels a day in April 2012. It bodes poorly for a government that relies on oil revenue for roughly 35 percent of its budget.

 

But all that is starting to change and Mexico’s moribund oil industry may be on the rebound.  Since his election in July, Mexican President Enrique Peña Nieto started the move toward privatization of the oil industry, which would help bring the necessary capital, technology and skills to onshore oilfields that have been in decline and the deepwater oil fields that have effectively gone untapped. If the industry does turn around, Peña Nieto may singlehandedly be responsible for unleashing the country’s energy potential, potentially adding as much as 1.6 mbd of petroleum to North American output by 2020.

Mexican President Peña Nieto has run into some opposition in Congress, particularly around the future of Pemex. On Sunday, Peña Nieto tried to allay concerns that his support to allow private investment in the country’s oil sector would be the death knell for Pemex, which has long been heralded as a symbol of the 1938 nationalization order and national identity.  Pemex will not “be sold, nor will it be privatized,” he said. Instead, Pemex would be “modernized and transformed.”

President Obama, Canadian Prime Minister Stephen Harper and Mexican President Felipe Calderon met earlier this week at the White House and held a joint press conference in the Rose Garden on April 2, 2012. The three leaders discussed new avenues for multilateral cooperation, including advancing clean energy technology and combating climate change.

Photo: Courtesy of Chuck Kennedy and the White House.

The United States and Mexico have come to an agreement that would allow both countries to drill for oil and natural gas along their maritime border in the Gulf of Mexico. According to a U.S. Department of Interior press release, the Transboundary Agreement “removes uncertainties regarding development of transboundary resources in the resource-rich Gulf of Mexico” and opens up approximately 1.5 million acres of the U.S. outer continental shelf to exploit the estimated 172 million barrels of oil and 304 billion cubic feet of natural gas. “This agreement makes available promising areas in the resource-rich Gulf of Mexico and establishes a clear process by which both governments can provide the necessary oversight to ensure exploration and development activities are conducted safely,” Secretary of the Interior Ken Salazar said.

The U.S.-Mexico agreement was penned a week after Mexican oil regulators cautioned that Petroleos Mexicanos – or PEMEX, the national oil company – is ill prepared to manage a serious offshore oil spill. According to a February 15, 2012 report from The Wall Street Journal:

The regulator's chief, Juan Carlos Zepeda, said Petróleos Mexicanos has relatively little experience with deep-water drilling, much less with the ultra-deep wells—those at depths exceeding 6,000 feet—that it could tackle as soon as next month. Pemex plans to drill as many as six deep-water wells this year, including the two ultra-deep wells, more than at any time in its history. 

The U.S.-Mexico agreement provides a framework for both countries to conduct joint inspection of the others’ oil rigs in the Gulf of Mexico, in part intended to ensure safety standards are met.  The agreement also allows U.S. companies and PEMEX to jointly develop oil and natural gas reserves in the transboundary region, which could provide an opportunity for U.S. companies with a long history of offshore oil drilling to cooperate and share lessons learned with PEMEX. “Coordination and sharing communications, training, personnel, equipment and technology are essential for safe and productive drilling,” said Jorge Piñon, a former president of Amoco Oil Latin America and a current research fellow at the University of Texas, in an interview with The New York Times on Monday.

Strong leadership on climate change is hard to come by, especially at UN climate negotiations. The United States is too often undermined by the lack of domestic legislation on energy and climate change that would give the U.S. delegation the credibility it needs to persuade states such as China to act. China meanwhile is primarily concerned with sustaining strong economic growth in order to meet living standards for a growing population; so China is not willing to lead unless it gets a big carrot.

But that is not to say that there aren’t states that strongly push for an agreement on reducing greenhouse gas emissions. There are, they just don’t have much to lose with an agreement; indeed, they’re often developing countries that are really at risk due to climate change. In order for a state to secure the credibility it needs to rally other states to action, it has to be willing to make sacrifices in the short term; simply, it has to have something to lose. And that is what makes Mexico such an interesting state to watch during this week’s Cancun conference.

On Monday, The Washington Post reported that Mexico is seeking a leadership role in climate policy, in large part due to Mexican President Felipe Calderon, who apparently is a “climate wonk.” Unlike other developing countries, Mexico has more credibility which helps make it a potentially stronger leader on climate policy: Mexico is a major oil producer, ranked seventh in 2008 by the U.S. Energy Information Administration. Mexico is also the 14th largest economy in the world and “contributes between 1.5 and 3 percent of global [greenhouse gas] emissions, according to The Post. With oil revenues generating approximately 40 percent of Mexico’s state expenditures, it has some skin the game if an international climate agreement means that Mexico’s oil revenues could shrink in the short term as countries make a transition to alternative fuels. But that doesn’t seem to be stopping Mexico.

This morning The Washington Post reported that the United States plans to embed American intelligence agents in Mexican law enforcement units along the border city of Ciudad Juárez in an effort to combat illicit drug trafficking and the strangle hold that the Mexican drug cartels have throughout Mexico. And while combating the drug trade in Mexico – especially along the U.S./Mexico border – is a cornerstone of our bilateral efforts to bring a modicum of stability to the country, the United States is also making environmental cooperation a priority along the border as well.

Last week, my colleagues Christine Parthemore, Commander Herb Carmen and I were on location in Colorado Springs visiting with folks at U.S. Northern Command (NORTHCOM) to discuss all things energy and climate change-related. One interesting program that we learned about during our visit though is an ongoing bilateral, interagency effort that includes NORTHCOM, the Environmental Protections Agency (EPA) and several U.S. and Mexican state and federal agencies around environmental preparedness, protection and response along the southern border.

You couldn’t swing a dead polar bear this weekend without hitting hundreds of reports and commentaries about Copenhagen or Climategate, so I’m going to focus my attention elsewhere.

Last week we CNASers gathered around for an informal lunchtime chat, and several of us voiced concern about the recession, lack of confidence in Wall Street, and – my favorite topic of conversation – informal markets. I don’t consider black markets by necessity threatening, wrong, or bad, but at times less-than-legal dealings become large, interesting, and potentially disruptive.

This weekend, The Washington Post reported on just such an event. It turns out that “Drug traffickers employing high-tech drills, miles of rubber hose and a fleet of stolen tanker trucks have siphoned more than $1 billion worth of oil from Mexico's pipelines over the past two years.”

• Arctic resources and shipping lanes could become a major security issue of the coming years, and The New York Times is reporting on the first commercial voyages through the Arctic's newly-opened sea passages.
• Although several sources have reported on China's growing interest in alternative sources of electricity, Scientific American points out that China's wind power industry has serious infrastructure problems to overcome before it can make a real impact on the nation's energy profile.
• The New York Times reports on Mexico's “worst drought in six decades.”
• Forbes features a story on Japan, which may have trouble fulfilling its own promises to cut carbon emissions with the new prime minister-elect's plan to abolish highway tolls.
• The Times Online reports that some British politicians are getting serious about how the water used for commonly consumed items affects its availability for food production in developing countries.

For the past several months the American media has grown increasingly fascinated with Mexico, with widespread coverage of the swine flu outbreak in April and May as a top news item. However, American media and the policy community – including CNAS’ own Col. Robert Killebrew – have been increasingly focused on Mexico’s struggle to contain drug-related violence and the growing power of cartels. Earlier this year, the violence reached such extreme levels that there was increasing talk of Mexico reaching failed state status. While this conversation has abated, a recent resurgence in cartel-related violence may reignite that debate and offer an opportunity to broaden the discussion to include other issues engaging recent events in Mexico.