NAFTA can work both ways: Mexico starts to privatize energy

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The North American Free Trade Agreement, now over twenty years old,  has been very good for Canada and, even more, for Mexico with both countries’ enjoying highly favorable balances of trade with the U.S.  Mexico is increasingly replacing China as a source of our imports, since the cost of Chinese labor keeps increasing and the proximity of Mexico provides the advantage of lower freight costs and quicker delivery. But a very recent development in Mexico will now become a boon to U.S. energy and related companies, which are already transporting and selling huge amounts of natural gas to our neighbor South of the border. This may help to quiet some of the people here who have been opposed to NAFTA from the start.

After almost eighty years of inept management of Mexico’s vast hydrocarbon resources, the country’s senate last month voted to allow outside companies to participate in the exploration and production of natural gas and crude oil. Readers may know that President Cardenas in 1938 expropriated Standard Oil and other U.S. oil companies’ assets and denied outside oil companies the right to operate in Mexico. Petroleos Mexicanos (Pemex), the country’s national oil company, at that time received the monopoly to explore for, produce, refine and distribute hydrocarbons. A combination of lack of expertise and corruption has seen Mexico’s output of oil and natural gas fall sharply, with oil output decreasing almost a third over the last ten years and refining capacity unable to meet refined fuel demand, causing Mexico to import gasoline.

A particularly dire situation on natural gas may have speeded the process of liberalization. While doubling its spending to $ 20 billion on trying to increase crude oil production, Pemex chose to neglect investment to enhance production of natural gas from the world’s sixth largest natural gas reserve (545 Tcf).  With its economy booming, in part due to steadily increasing exports to the U.S. and elsewhere, natural gas demand rose rapidly, leading to huge imports of gas from the United States. When these flows of gas reached the limit of pipeline capacities, Pemex started buying LNG at $ 19.45 per million Btu (!)

The new privatization directives  Pemex will partner with private foreign companies, with profit-sharing agreements, production sharing agreements and licenses. Ownership of the resources will stay with Pemex. The reform will also liberalize production of electricity in Mexico. Both Pemex and Mexico’s Federal Electricity Commission will be transformed into “productive state companies” with control over their budgets.  This will allow them to act more like corporations and become more competitive. The private sector will now also be allowed to build, operate and finance electrical transmission and distribution facilities.

With Mexico now anxious to greatly increase its oil and gas production, U.S, companies i9nvolved in exploration, drilling, production and transmission will soon start to export various kinds of equipment to Mexico, creating jobs on both sides of the border.

 

 

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