Oil Dependence Puts Mexico’s Energy Security at Risk

Mexico is losing sight of other natural riches that could improve its energy independence.

Despite having been favored with considerable hydrocarbon resources, Mexico’s energy security is in a dire state. Years of a corporatist and clientelist regime under the Institutional Revolutionary Party consolidated various structural flaws, preventing state-owned company Petróleos Mexicanos or Pemex from being able to adapt to changes in the energy market and the difficulties in upstream activities.

Four main challenges characterize Mexico’s current energy security situation.

The first is the continuous importance of oil for government revenue coupled with a diminishment of its production. Next are the insufficient technological capabilities of Pemex. The vested interests within the industry represent a third challenge. Finally, there is a blind belief in oil as the center of economic development that needs to be changed.

Regarding the first challenge, Mexico’s oil production peaked in 2005 and has since diminished to a stable production of approximately 2.4 million barrels per day. Nonetheless, the percentage of government revenue obtained through oil exports has not varied greatly and, in fact, absolute quantities for 2010 and 2011 were larger than those for 2005 and 2006.

Clearly, the rise in international oil prices has helped the government to counter the diminishment of production. However, prices remain too volatile, as their sudden fall after the 2008-2009 financial crisis demonstrated.

The macroeconomic scenario does not look too promising in terms of stability. According to the World Bank’s Global Economic Prospects 2012 report, developing countries will be hard hit if the eurozone crisis worsens since they have already spent the greater part of their fiscal resources to counter the effects of the downturn in 2008.

Not surprisingly, Mexico’s current administration has tried to revamp oil production and recover its 2005 production levels. This has proven difficult given Pemex’ technological deficiencies on the production side.

The Chicontepec Basin, for instance, in the northeast of Mexico is believed to contain fifteen billion barrels in reserves. Due to its geological complexity, recovery rates range from just 6 to 8 percent.

Pemex also lacks the necessary capabilities to do deepwater drilling, thus preventing it from tapping the resources in the “deep Gulf of Mexico.”

Moreover, Pemex lacks the necessary refining capabilities to process the majority of its heavy oil which constitutes more than half of its total production.

In order to satisfy its domestic demand for refined fuels, Mexico has had to export most of its heavy oil to the United States, one of the few countries with the necessary technology to process the Mexican oil mix, and import it back as a processed product.

While Mexico’s oil exports to the United States represent more than 70 percent of its total exports since 2000 and more than 80 percent in the first months of 2011, they only amount to 9 percent of American total crude oil imports. In other words, the United States have a diversified supply base, which has reduced the vulnerability of its energy security to external shocks. Mexico, on the contrary, has become dependent on American consumption.

Certainly, Mexico should have enough incentives to invest in the necessary technology to be able to refine it. However, as Carlos Dominguez explains in “Beyond Efficiency: The Politics of Investment Policies in the Oil Industry,” (PDF) published in The Future of Oil in Mexico last year, efforts to improve the Mexican oil industry have been hampered by “discretionary policymaking in the infrastructure sector, the role of technical experts and their vested interests, and the interaction between politicians and technical experts that has become open ended and unpredictable as political power is redistributed in Mexico.”

Thus, contrary to other nations, like China, which are also dependent on natural resource imports, Mexico has been inefficiently dependent. The Chinese government understands that it needs to promote efficiency and innovation for its industry to reap all the benefits of the world energy market. For their part, Colombia’s Ecopetrol and Norway’s Statoil are among the most efficient companies in the world.

Because of these vested interests, overcoming the constitutional barrier to reform the country’s energy sector, which is already difficult, seems impossible. (According to the Mexican constitution, oil is the property of the nation, which has granted legitimate monopolistic production rights to Pemex.)

Moreover, any event within the oil industry has immediate public opinion effects. Mexicans have traditionally reacted negatively to any action considered as “foreign intervention.”

Interest groups and politicians have taken advantage of this, politicizing any possible oil issue, shielding themselves in the Constitution and preventing the advancement of necessary reforms in the sector. Hence it will be very difficult to open the oil market to the much needed foreign investment.

Perhaps the biggest challenge that Mexico faces regarding its energy security is its blind belief in oil as the center of economic development. Certainly, current oil prices can justify the emphasis that a government gives to its production. However, it seems as if Mexico treats oil as a mythical product that will solve all of its problems.

It is quite disturbing that before the development of the National Energy Strategy and its publication in 2011, Mexico did not have an official definition of energy security.

The NES sets three objectives to increase Mexico’s energy security: to regain the 2005 levels of production (3.3 million barrels per day) by 2025; to maintain a 100 percent rate of restitution of proved reserves between now and 2025 and to maintain a 15 percent margin of gasoline supply.

The strategy mentions renewable resources but it does not include any measurable objective for them. More importantly, renewable resources and natural gas are seen as conducive to increase environmental sustainability. The strategy report does mention the volatility of energy markets yet it does not set any objective with regards to diversifying the energy portfolio or reducing the government’s dependence in oil for revenue.

This is unfortunate. Mexico has huge potential in other types of resources such as solar, wind and thermoelectric energy. Also, the country currently holds the fourth largest reserves of shale gas. More attention should be paid to the development of these resources.