Mexico: A Strategic Partner to the U.S. in the Advancement of North American Energy Integration

Bernadette L. Hobson, Policy Professional, Former Fellow at the U.S. Department of Energy Former Deputy White House Liaison and Obama Appointee at the U.S. Department of Agriculture, NLC Washington, DC

Introduction

The three countries that comprise North America (the U.S., Mexico, and Canada) face a unique opportunity to develop an integrated regional energy system that would greatly improve energy infrastructure to mitigate the risks of climate change, and lower energy costs to consumers and manufacturers; whereby strengthening the energy security of the U.S. However, the current political environment in the U.S. has sought to disrupt this opportunity by discrediting and isolating Mexico, its southern neighbor — and its most important energy trade partner. With tensions at an all time high between the U.S. and Mexico, energy trade between the two could potentially be impacted due to infrastructural challenges that are unable to sustain the risks associated with climate change and the rising costs of electricity, which both threaten the energy security of the U.S. These challenges could easily be remedied through North American energy integration.

Challenges Impacting Bilateral Trade & North American energy integration

The U.S. and Mexico share a highly integrated energy system through wire, rail, pipeline, and waterways. According to the EIA, in 2016, Mexican energy exports to the U.S. were $8.7 billion while energy imports from the U.S. to Mexico were $20.2 billion[i]. Moreover, in 2012, energy trade between the U.S. and Mexico was well over $65 billion[ii]. Despite this, the cost for electricity for consumers and U.S. based manufacturing facilities in Mexico remain high[iii]. In fact, manufacturing facilities in Mexico face costs per megawatt-hour of electricity double the cost in the U.S. to produce goods and services[iv]. Additionally, the two neighbors do not maintain the energy system infrastructure necessary to mitigate climate related disruption along the U.S. — Mexico border. The border regions maintain low or insufficient levels of transmission[v] due to the lack of necessary energy infrastructure and integrated energy systems. Therefore, the communities located in Mexican states along the shared border are also home to the lowest population density in Mexico[vi].

Among one of the most highly trade commodities between the U.S. and Mexico is Mexican Maya crude oil, a heavier crude, processed by U.S. Gulf Coast refineries. The export value of petroleum and coal products from the U.S. to Mexico in 2015 was $15.4 billion, while the import of oil and gas from Mexico to the U.S. in the same year was $12.5 billion[vii]. But in 2005, energy trade between the U.S. and Mexico was severely impacted due to Hurricane Rita. The storm caused heavy damages to U.S. Gulf Coast refiners and resulted in 4.9 million b/d of refining shut down[viii].

Similarly, 2005’s Hurricane Katrina rendered comparable impact to trade between the U.S. and Mexico, as 2 million b/d of refining capacities were shutdown[ix]. With U.S. Gulf Coast refineries shutdown, the ability to generate revenue was delayed. Earning potential for U.S. workers operating refining equipment was suspended. As a result, crude oil exports from Mexico to the U.S. Gulf Coast were stalled indefinitely until refineries were repaired and able to resume work. With U.S. Gulf Coast refineries shutdown, revenue from export and import trade with Mexico was lost.

Energy Sector Regulations

Another challenge impacting the bilateral relationship between the U.S. and Mexico, are the high costs associated with the non-alignment of regulations, limited harmonization on emissions standards, and energy system disruption due to the lack of coordination between the two countries[x]. Currently, the cost of for Mexican residential and business electricity consumers is on average 25 percent higher than in the U.S.[xi] With limited alignment between the U.S. and Mexico, the cost for electricity is high for consumers and U.S. manufacturers based in Mexico.

Politics

The current political environment and sentiments on behalf of the U.S. towards Mexico has stalled the advancement of North American energy integration. The new administration has proposed a 20% border adjustment tax that would greatly harm the US oil and gas industry as well as the U.S. — Mexico relationship[xii]. It has also taken the steps to begin to renegotiate the North American Free Trade Agreement and is currently weighing a decision to withdraw from the 2015 Paris Accord.

The Impact

The challenges facing the bilateral energy relationship have significant economic implications on both sides of the U.S. — Mexico border. The direct impact of the aforementioned challenges are felt among civil society who experience the high costs for electricity and for those living on the Mexican side of the U.S. — Mexico border who have limited access to electricity; and in some cases, no electricity at all[xiii]. Additionally, U.S. manufacturers operating in Mexico experience the high costs of electricity, which increases the price of goods and is then transferred onto consumers. As a result, manufacturers experience a decline in revenue, which in turn impacts the economic growth of both the U.S. and Mexico. Similarly, the non-alignment of regulations as well as the limited coordination of energy systems to mitigate the risks of climate change, strengthen energy security, and reduce greenhouse emissions is not only costly, but also directly impact civil society on both sides of the U.S. — Mexico border. Furthermore, the current political climate in the U.S. and its narrow rhetoric towards Mexico provides a challenging environment to resolve the high costs of electricity, the strengthening of energy security, mitigating the risk of climate change, and reducing greenhouse gases for all involved (consumers, commercial businesses, and civil society).

Previous Resolutions Mitigate Challenges

Given these challenges, Mexico has taken the necessary steps to move towards energy system alignment, coordination, and harmonization with its North American partners; and to eventually move towards regional energy integration. With the opening of Mexico’s energy sector, the opportunity to harmonize regulations between North American partners is promising. To advance alignment with its North American partners, Mexico has deepened its bilateral collaboration with the U.S. to exchange best practices data sharing to align regulatory standards, coordination, and cooperation for integrated energy system the two countries share.

An important mechanism to support this regional integration is the U.S. — Mexico High Level Economic Dialogue[xiv] (HLED). Under the HLED, the two countries have agreed to work to enhance communication and collaboration between energy agencies to improve data, promote economic growth, and economic benefits for citizens of both countries, so that a competitive North America is realized[xv]. Essentially, the HLED sets the framework whereby North American energy integration can occur.

As a result of these efforts, the U.S. — Mexico Energy Business Council was launched to deepen economic and commercial ties between the energy industries. Through the HLED platform, increased cross-border coordination has occurred through information sharing on wholesale energy markets, renewable energy, system planning, natural gas, and smart grid development[xvi]. On the regulatory side, increased efforts have been made to meet regularly to ensure energy regulatory cooperation remains a priority in the oil and gas sectors, environment, and renewables[xvii].

Bilateral efforts made under the HLED to improve coordination and cooperation between the two countries already integrated energy system, played a critical role in reaching a North American goal to reduce methane emissions in oil and gas sectors by 40–45% by 2025; as well as 50% clean energy generation by the same year. These goals were announced at the 2016 North American Leaders summit where the three countries also agreed to advance cross-border transmission to assist in reaching their mutual clean energy goals. In addition to this, the submission of Nationally Determined Contributions (NDCs) by the U.S., Mexico, and Canada to reduce greenhouse gases and mitigate the risks of climate change were in alignment in most areas, creating a platform for a coordinated effort during COP21.

By taking these important steps, the goal to achieving North American energy integration is possible. Energy system integration between the U.S., Canada, and Mexico represents an important opportunity to meet the demands of energy production and consumption[xviii] (Resources for the Future), given these challenges, efforts to mitigate high electricity costs, regulatory coordination and harmonization, which would decrease electricity costs. Additionally, by harmonizing regulations, the energy system between the three countries would be more efficient, reduce energy costs for consumers and manufacturing facilities, as well as transition to a mixed energy system that includes renewable energy sources, and more importantly strengthens energy security.

Under the U.S. — Mexico Clean Energy and Climate Task Force, the two countries aimed to develop joint activities to develop early warning systems mitigate the risks of extreme weather, enhance adaptation capabilities, and help vulnerable communities. To date, steps to advance initiatives to develop early warning systems have been limited. Moreover, given the current political climate with regard to climate change and Mexico the future of developing and implementing early warning systems is uncertain.

Lastly, despite significant steps take to deepen bilateral relations between the U.S. and Mexico for the advancement of North American energy integration, new Administration has done little to quell its narrow rhetoric with regards to Mexico. Instead, the new Administration’s sentiment towards Mexico has moved sharply away from efforts to deepen bilateral energy relations on all fronts, particularly climate[xix]. As a result of these actions, the possibility to move towards North American energy integration is at an impasse and will likely impact consumers, business, and the economies of all three countries.

Policy Recommendations to Remedy Challenges

Given these challenges, I propose the following steps to lower energy costs, increase economic growth, and strengthen U.S. energy security:

Lower Energy Costs

The U.S. should work with Mexico at the state-level to share data, exchange best practices, and technical expertise to develop cross-border transmissions. Specifically, Mexico could work with California, Texas, and Arizona to begin this work. By developing cross border transmissions, electricity market disruptions on the U.S. — Mexico border would be minimized and the cost for electricity would be lower for U.S. manufacturers operating in Mexico and along the border.

With Mexico’s recent energy reform, the U.S. has the opportunity to increase natural gas exports to its southern neighbor through the development of energy infrastructure. This will assist Mexico in transitioning from diesel to natural gas in electricity generation, which would lower electricity costs for U.S. manufacturers and Mexican consumers. Subsequently, boosting manufacturing output, consumption, and overall GDP for both countries[xx]

The U.S. — Mexico Energy Business Council offers a unique chance to expand the bilateral energy relationship, lower energy costs, and could potentially open new markets for U.S. energy companies and jobs for Americans[xxi].

Early Warning Systems

Mexico should engage with its U.S. colleagues at NOAA to develop and implement the early warning systems needed to mitigate the risks of climate change and extreme weather conditions. By collaborating with NOAA, Mexico will enhance capabilities to also reduce the impact of climate change on its most vulnerable communities[xxii]. This will also assist Mexico and the U.S. in developing methods for data collection and technological analysis to measure the economic impact of extreme weather. This collaboration is critical to the harmonization of policy and regulatory standards to expand trade between the U.S. and Mexico.

Climate Goals

To advance the goal to reduce methane emissions in oil and gas sectors, Mexico should partner with the U.S. Bureau of Ocean Energy Management (BOEM) to build a database on offshore platform emissions similar to the one used in the U.S. to understand Mexico’s offshore emissions, and engage with the U.S. Gulfwide Offshore Activity Data System (GOADS) to develop detailed data on emissions by equipment and platform type, as well as distinguishing between shallow and deep water operations[xxiii]. This collaboration will also expand energy trade between the U.S. and Mexico, drive economic growth, strengthen energy security, and bring broader development benefits to the region.

At the subnational level, Mexico could work with California’s Environmental Protection Agency Air Resources Board to share best practices on legislation on methane emissions[xxiv]. By exchanging best practices at the subnational level, local communities will experience immediate benefits of policies to reduce greenhouse gases emissions, while at the national level it would assist both the U.S. and Mexico to achieve their respective climate goals.

North American energy integration

Steps to advance North American energy integration should continue, as well as bilateral engagement between the U.S. and Mexico to achieve this goal. The momentum for North American energy integration has been driven by market factors. Therefore, energy integration between the three countries has the potential to meet evolving changes to energy production and consumption, lower prices for consumers, strengthen energy security, and expand economic growth for the North American region. Given this, regulatory harmonization is critical to advancing North American energy integration. Therefore, the North American Integration Study should continue, as it would shed light on the economic competitiveness and reliability of integration between the three partners. Currently, the potential of North American energy integration is valued at $150 billion[xxv] between the three countries. Given this, the North American countries have an economic incentive to increase coordination and expand trade as integration can spur economic growth, infrastructure development, technological deployment, environmental protection[xxvi], and job creation.

Politics

Given the current political climate in the U.S. and its sentiments towards Mexico, it is critical for thought leaders, academics, and policymakers who maintain bipartisan support and respect to demonstrate on a consistent basis the strategic importance of Mexico to U.S. energy security through multiple mediums (social media, television, Op-eds, conferences, etc.). These leaders should highlight the revenue generated due to energy trade with Mexico and the jobs this relationship creates and maintains. Moreover, thought leaders should also work collaboratively to organize conferences that highlight the importance of NAFTA to U.S. energy security and the opportunity it presents by adding energy to the agreement. Similarly, the same steps should be taken with regards to the 2015 Paris Accord. It represents a unique opportunity to build a new market to mitigate the risks of climate change while concurrently creating new jobs and generating revenue to spur economic growth in the U.S

Conclusion

In conclusion, Mexico is a critical and strategic partner to the U.S. and the advancement of North American energy integration. With such an already strong revenue-generating energy trade relationship and opportunity for expansion, the U.S. has much to lose by overlooking Mexico as a strategic energy partner. By disregarding Mexico, the U.S. is not only risking the stability of its own energy security, but also losing significant revenue that would go toward overall economic growth. If this continues the energy security of the U.S. would be severely impacted, trade would decrease, opportunity for future energy partnership with Mexico would decline, and the chance for North American energy integration would end. As a result, U.S. manufacturers operating in Mexico and consumers on both sides of the border would be greatly impacted by the high cost for electricity, and the initiatives to mitigate the risks of climate change and extreme weather would be null and void. That said, it is imperative that policy makers, academics, and thought leaders work collaboratively to provide a strategy that demonstrates the important economic value that Mexico plays in sustaining the U.S. energy market, its economy, and the North America energy market.

[i] “U.S. energy trade with Mexico: U.S. export value more than twice import value in 2016.” U.S. Energy Information Administration, February 9, 2017, https://www.eia.gov/todayinenergy/detail.php?id=29892

[ii] “Integrating North American Energy Markets.” U.S. Department of Energy, April 2015, https://energy.gov/sites/prod/files/2015/08/f25/QER%20Chapter%20VI%20North%20America%20April%202015.pdf

[iii] Claire R. Seelke, Angeles M. Villarreal, Michael Ratner, and Phillip Brown. “Mexico’s Oil and Gas Sector: Background, Reform Efforts and Implications for the U.S., Congressional Research Service, September 28, 2015, https://fas.org/sgp/crs/row/R43313.pdf

[iv] “Integrating North American Energy Markets.” U.S. Department of Energy, April 2015, https://energy.gov/sites/prod/files/2015/08/f25/QER%20Chapter%20VI%20North%20America%20April%202015.pdf

[v] Ibid.

[vi] Ibid.

[viii] “The Impact of Tropical Cyclones on Gulf of Mexican Crude Oil and Natural Gas Production,” U.S. Energy Information Administration,” 2006, https://www.eia.gov/outlooks/steo/special/pdf/2006_hurricanes.pdf

[ix] Ibid.

[x] Integrating North American Energy Markets.” U.S. Department of Energy, April 2015, https://energy.gov/sites/prod/files/2015/08/f25/QER%20Chapter%20VI%20North%20America%20April%202015.pdf .

[xi] “Mexico Energy Reform Spurs Larger Scale Cross-Border Electricity Transmission.” University of Texas at Austin, Energy Institute, May 2017, https://energy.utexas.edu/2017/05/25/mexico-energy-reform-spurs-larger-scale-cross-border-electricity-transmission/

[xii] Lee, Mike, Edward Klump, and Nathanial Gronewold. (2017, March 9.) Big Oil frets about Trump’s border tax, Mexico policies. E&E News, EnergyWire. Retrieved from http://www.eenews.net/energywire/2017/03/09/stories/1060051191

[xiii] “Integrating North American Energy Markets.” U.S. Department of Energy, April 2015, https://energy.gov/sites/prod/files/2015/08/f25/QER%20Chapter%20VI%20North%20America%20April%202015.pdf

[xiv] “Joint Statement U.S. — Mexico High Level Economic Dialogue,” Obama White House, February 25, 2016, https://obamawhitehouse.archives.gov/the-press-office/2016/02/25/joint-statement-2016-us-mexico-high-level-economic-dialogue

[xv] “U.S. — Mexico High Level Economic Dialogue Progress Report,” International Trade Administration, 2016, http://trade.gov/hled/hled-progress-report.asp

[xvi] “Joint Statement U.S. — Mexico High Level Economic Dialogue,” Obama White House, February 25, 2016, https://obamawhitehouse.archives.gov/the-press-office/2016/02/25/joint-statement-2016-us-mexico-high-level-economic-dialogue

[xvii] Ibid.

[xviii] “North American Oil and Gas Report.” Resources for the Future, 2017, not yet published.

[xix] “North American Oil and Gas Report.” Resources for the Future, 2017, not yet published.

[xx] “Enhancing Electricity Integration in North America,” U.S. Department of Energy, January 6, 2017, https://www.energy.gov/sites/prod/files/2017/02/f34/Chapter%20IV--Ensuring%20Electricity%20System%20Reliability%2C%20Security%2C%20and%20Resilience.pdf

[xxi] Bernadette Hobson, “Overlooking Mexico an Enormous Risk to U.S. Energy Security,” TheHill.com, March 17, 2017, http://thehill.com/blogs/pundits-blog/energy-environment/324476-overlooking-mexico-an-enormous-risk-to-us-energy

[xxii] Bernadette Hobson, “Mexico, a Global Climate Leader,” TheHill.com, http://thehill.com/blogs/ballot-box/311325-mexico-a-global-climate-change-leader

[xxiii] Ibid.

[xxiv] “North American Oil and Gas Report.” Resources for the Future, 2017, not yet published.

[xxv] “North American Energy Ministers Take Further Action on Energy Security and Environment,” U.S. Department of Energy, July 23, 2007, https://energy.gov/articles/north-american-energy-ministers-take-further-action-energy-security-and-environment

[xxvi] Alan Krupnick, Daniel Shawhan, and Kristin Hayes, “Harmonizing the Electricity Sectors across North America, “ Resources for the Future, February 2016, http://www.rff.org/files/document/file/RFF-DP-16-07.pdf

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