The natural gas situation in Mexico is frustrating when considering the country’s ample supply. While Mexico has significant unexplored potential that would benefit power generation, investment is deficient. The country must currently import liquefied natural gas (LNG) from the Middle East and Africa, paying four times the going rate in North America, in order to keep up with domestic demand. Despite the surplus of natural gas in the United States, all of the pipelines coming to Mexico are full, and thus Mexico must import from other parts of the world at a high premium. In order to meet its domestic demand—and potentially export—private investment could engage in exploration and production of the country’s ample natural gas reserves.
Petróleos Mexicanos (Mexican Petroleum—PEMEX) , the Mexican state oil company, holds a monopoly over the energy sector and has not yet been able to fully extract deep water oil and natural gas reserves due to a lack of technical expertise and limited spending on new investments for equipment and research. PEMEX is estimated to be sitting on approximately 500 trillion cubic feet of natural gas reserves. In addition to conventional natural gas, Mexico has significant shale gas capabilities, estimated to be the sixth largest amount in the world. The famed Eagle Ford Shale in South Texas has been a boon to the United States, yet the formation does not end at the border. Rather, it extends south into Northern Mexico and represents a tremendous economic opportunity.
The shale gas boom in the United States demonstrates how unconventional drilling techniques–such as hydraulic fracturing, or “fracking”–are leading to a significant reduction in natural gas imports. If Mexico brings in foreign expertise and investments to develop similar techniques, it would no longer need to import LNG from places like Nigeria or Yemen, and instead be able to enjoy a boom in natural gas production at home.
Prior to the economic crisis that began exactly one year ago with the Lehman Brothers collapse, Latin America was on an economic tear. For over five years the region had enjoyed historic economic growth, reducing poverty and building the small but growing middle class. Growth was based primarily on the commodities trade; Asian nations, particularly China, were sucking up virtually everything Latin America could grow, mine or drill. Many Latins are now looking at the prospects for renewed mid-term growth in Asia as the key to restoring their own economic fortunes. On the surface, that makes sense. But if the idea is simply to return to the previous model exporting primary commodities, with a healthy dose of politics thrown in, the result may not be as lucrative for Latin America as the immediate past proved to be.
Primary commodities face competition no matter where they come from; there is generally little product differentiation absent efforts to add value through processing and refinement, technology, manufacturing, branding, or other knowledge-based inputs. This is particularly true in energy, and a major new project off the west coast of Australia could, in extremis, challenge Latin America’s development model.
The Gorgon Project, according to the Financial Times, among the world’s most ambitious and costly natural gas projects, is set to be given the official go-ahead this week. Once fully on-line, the project will catapult Australia to the top ranks of global producers, changing the pan-Pacific energy profile, particularly with reference to liquefied natural gas, or LNG. The project will help China and Japan reduce their dependence on coal while amplifying Australia’s role in supplying the Asian nations—China, Japan, India, and South Korea—that Latin America has targeted for commodities exports. In contrast, Latin Americans continue to tie themselves in knots over basic questions of ownership, production and basic supply arrangements in the natural gas sector, even to the point of foregoing uncertain gas supplies from immediate neighbors such as Bolivia and Argentina to import LNG from Asia.