* As energy boom lessens US reliance on neighbor...
* Mexico imports record amounts of US natural gas
* Foreign investment a political risk for Nieto
By Edward McAllister
NEW YORK, May 2 When the conversation between
President Barack Obama and his newly elected Mexican counterpart
Enrique Pena Nieto turns to the controversial topic of energy
during their meeting this week, both are apt to step carefully.
The two countries have abruptly changed positions over the
past decade: Mexico, once the growing energy power, is
struggling to maintain production; the United States, once a
guaranteed importer, is enjoying a lucrative energy boom.
However, the thorny issues of foreign investment in Mexico's
oil production sector or swapping different types of crude oil
between the two nations will likely only be brought up in
private, if at all.
Although Mexico's aging refineries could operate more
efficiently using some of the light crude emerging from U.S.
oilfields, state oil and gas monopoly Pemex has long avoided
incremental imports in order to maintain its reliance on the
heavier crude produced domestically.
Meanwhile, U.S. pipeline exports of natural gas to Mexico
have surged, and could double within a few years as new projects
link Latin America's second-largest economy with major U.S.
producing regions, despite concerns in the United States that
exports could push prices higher at home.
Less divisive topics, such as climate change and how to
improve cross-border energy efficiency, are expected to be
discussed, Sergio Alcocer, Mexico's deputy foreign minister
responsible for the United States, told Reuters.
"This is more like the first dance of the season," said Bill
O'Grady, chief markets strategist at Confluence Investment
Management. "You get to see each other, get to know each other.
But Mexico is still trying to figure out how to reform its own
state oil company."
SOME KIND OF A SWAP?
Mexican oil and gas output remains flat while national
demand increases, creating a dilemma for Pena Nieto, whose
opponents vigorously oppose foreign investment in the country's
Although Mexican crude is a staple for Gulf Coast
refineries, crude oil imports from Mexico have dropped a third
over the past decade, sinking below 1 million barrels per day
last year for the first time since 1994, according to government
Mexico has duly shifted its focus. A month ago Pemex touted
a new two-year deal to boost crude exports to China by 30,000
Talk of some kind of oil "swap" has also circulated, based
on the idea that U.S. producers could get a better price for
their light-sweet crude in Mexico while Texas and Louisiana
refineries built to run on heavy-sour grades could get more of
that type of oil from Mexico, albeit at lesser rates than in the
There is little indication yet that Pemex is angling for
U.S. shale oil, or that U.S. companies are pressing to sell it.
As lawmakers engage in an increasingly fierce debate in
Washington over whether natural gas exports would drive up fuel
prices at home, foreign companies are racing to export more to
Mexico, where demand is growing fast.
U.S. natural gas exports to Mexico rose by 24 percent in
2012 to all-time highs, according to U.S. government data.
The capacity to export will double by the end of 2014 as
Mexican power plants hook up to pipelines running from the giant
Eagle Ford play in Texas and further afield.
Companies like Sempra Energy, Japan's Mitsui and
Kinder Morgan are all planning to build new pipelines in
Mexico, potentially reducing its dependence on imported LNG from
Alejandro Martinez, the top natural gas executive at Pemex,
said exports of U.S. gas to Mexico and Mexican oil to the United
States present "a natural exchange" for the two countries.
"I think we have to have a much greater integration," he
said in an interview with Reuters this week.
Whether Obama and Nieto will discuss the more delicate
matter of Mexico's allowing foreign investment in its struggling
oil sector is unclear. Development of the country's large shale
formations is still on hold as it considers its options.
Mexico has the fourth-largest shale gas resources in the
world after the United States, China and Argentina, according to
a U.S. government report on global shale deposits in 2011,
though it remains to be seen how they will be developed.
Pena Nieto has pledged to open up Mexican oil production and
exploration to more outside investment in order to ramp up
"When push comes to shove, it's U.S. companies that have the
technology and experience to help Mexico develop its deepwater
and onshore unconventional resources," said Ed Morse, managing
director of commodity research at Citi Group.
Traditionalists who view Pemex as a symbol of Mexican
self-sufficiency strongly oppose the prospect. Jorge Buendia,
political analyst and director of polling firm Buendia & Laredo,
said Mexico was therefore likely to avoid open talk of oil and
gas with the United States for now, though "back-room"
discussions would no doubt take place.
Raising the subject frankly would lay the new president open
to accusations that he was selling Mexico out to those looking
"to steal" its oil, and imply that the industry was falling
behind, Buendia added.
"The current situation doesn't lend itself at all to
bringing this subject up in public."