Clean Energy and Intelligent Interconnections

Mexico & United States’ Energy Future: Toward Binational Shale Gas Development and Enhanced Cross Border Electric Interconnection

by Jeremy Martin and Tania Miranda

 

I. Introduction

In a bilateral relationship characterized by dozens of issues that merit policy attention, energy stands out.  Energy costs have an outsized impact on productivity and competitiveness in both economies and energy issues are routinely a key element of the bilateral policy discourse and agenda. Indeed, many of the energy challenges facing both nations do not stop at the border. But it also bears noting that the bilateral energy agenda has faced a great – positive by most accounts – upheaval in the form of Mexico’s historic energy reform composed of a 2013 Constitutional change and its 2014 implementing legislation.

 

Against a rapidly changing energy panorama in both nations, and within the broad expanse of our complex energy systems, three issues are of particular importance for both countries in the coming years: The so-called energy transition taking place that has seen a boom in the use of renewable energy, but also the continued development of unconventional energy resources and cross border electric interconnections. In both countries there has been an increased use of wind and solar energy for power generation, but natural gas continues to dominate their unconventional energy resources.  In the United States, this reflects technological advances that have led to a dramatic increase in shale gas production; in Mexico it reflects a growing shift from oil to gas as feedstock in power generation. Estimates indicate that 57 GW of new generation capacity will be needed in Mexico in the next 15 years to meet energy demand, and more than 30% of this added electric capacity will come from combined-cycle gas-fired plants.

 

1-2

2-2

(Source: SENER)

 

Embracing the ongoing energy transition, one that has been speeding up since the December 2015 signing of the Paris Agreement on climate change , as well as developing a broader network of cross-border interconnections to distribute electric energy more efficiently are, of course, related to shifting energy production and consumption profiles.

 

By focusing on these three core aspects of national and bilateral energy development, the U.S. and Mexican governments are supporting economic growth and enhancing energy security by furthering the development of electric markets based on a more diversified array of environmentally friendly fuel sources.  Moreover, in a bilateral energy relationship historically burdened by polarized discussions, these issues have the added advantage of providing officials an opportunity to speak the same language about energy, and thereby to have productive, non-polemical conversations about energy cooperation. Creating the most advantageous framework for expanded development of renewable energy sources, unconventional resources and of cross-border electric interconnections is thus in the mutual interest of Mexico and the United States.

 

The resulting coincidence of interests creates an advantageous context for increased bilateral energy cooperation.  Indeed, a trilateral commitment, the pledge by the United States, Mexico and Canada to reach 50% clean energy in their power sectors by 2025, is a clear reflection of the issues delineated in this chapter.

 

II. Energy Transition

The global economy is going through a full-fledged energy transition that is modifying the industry entirely: from a handful of large energy producers to thousands of smaller independent ones, from a one-way producer-consumer relationship to one that is a two-way street, and from a fossil fuel-based system to a renewable one.

 

Even before the landmark Paris Accord on climate change and emissions reduction was signed last December, the world has been undergoing a deep energy transformation. What many refer to as the 3 D’s—decarbonization, digitalization and decentralization—have been increasingly embraced by industry and government alike as solutions to the vexing challenges of a modern energy sector that supports economic development in a sustainable manner. The renewable energy industry saw record investment levels in 2015, and for the sixth consecutive year renewables outpaced fossil fuels for net investment in added power capacity.

 

The United States is at the forefront of this transition towards a post-carbon economy for a number of reasons including business opportunities in technology innovation and a political motivation to move away from fossil fuels, and this has brought renewable energy to center stage. Just last year, for instance, jobs in the solar industry overtook those in oil and gas for the first time in history. In addition, employment in this sector grew 12-times faster than overall job creation.

 

Mexico’s energy transition, however, is in its infancy. It has only been three years since Mexico passed the sweeping energy bill which authorized private participation in the industry and liberalized markets. This change provides extensive opportunities for American businesses to export technology and expertise, invest in projects, and provide services to the vast new markets currently developing in Mexico around this industry. A factsheet by the U.S. Department of Commerce explains that, “Should Mexico develop a strong and thriving clean energy market as a result of these combined factors, it is likely that no other market would support more U.S. exports.”

 

In fact, investment and market development in renewables are booming. A Bloomberg article recently reported that investment in clean energy projects in Mexico broke a new record, reaching $3,900 million USD in 2015. This investment was $1.6 billion dollars higher than the year before. This growth was largely due to new and innovative financing mechanisms, and the bets large companies (many of them American) operating in Mexico, like Wal-Mart and Coca-Cola, made on the future of renewables leading to millions of dollars of investments in solar, wind parks, and biofuel plants.

 

untitled

 

(Source: SENER)

 

In September 2016, a government auction awarded contracts for the generation of 8.9 million MWh of electricity, the vast majority of which were awarded to solar and wind power generation, equivalent to around 3% of the country’s current electricity consumption. This single auction, the government estimates, will bring up to $6.6 billion dollars in investments.

 

Furthermore, Mexico is attracting not only independent power producers but also manufacturers. SunPower Corp, solar company based in California (that won a fourth of the solar contracts awarded in the last auction), announced this past July that it is planning to move its solar panel manufacturing facility from the Philippines to northern Mexico to “optimize our supply chain and move the final assembly of our panels closer to our key markets”.

 

As this infant industry becomes more competitive relative to conventional energy generation systems, there is an array of instruments and policies Mexico’s government is using to encourage the deployment of renewable sources.

 

  1. General Law on Climate Change (Ley General de Cambio Climático – LGCC), approved unanimously by the Mexican Congress in April 2012.

Mexico was one of the first developing countries to pass comprehensive climate change legislation , through which it committed to reduce its greenhouse gas emissions by 30% by 2020 and by 50% by 2050. It also committed to generating 35% of its electricity from renewable sources by 2024. The electric power sector was specifically targeted because it is the country’s number one greenhouse gas emitter, producing over 60% of the total.

 

  1. Electric Industry Law, part of Mexico’s broader Energy Bill, signed by President Peña Nieto in August 2014:

This amendment to the Energy Reform Bill opened electricity generation and distribution to the private sector, deregulated the market, and created an independent system operator.

 

  1. Energy Transition Law (Ley de Transición Energética), approved by the Mexican Congress in December 2015.

This law set Renewable Portfolio Standards (RPS) at 25% by 2018; 30% by 2021 and 35% by 2024. It also created a carbon-offset market through the introduction of Clean Energy Certificates (Certificados de Energía Limpia- CELs), associated with energy produced from renewable sources. CELs can be sold via bilateral contracts or on the spot market, and can be purchased to offset emissions that would otherwise be taxed, to fulfill clean portfolio requirements or for other voluntary reasons. To jumpstart the CELs market, the law requires certain energy-intensive industries fulfill at least 5% of their electricity demand from clean sources by 2018 – the first compliance period.

 

The law also created the National Electricity and Clean Energy Institute (INEEL), in charge of coordinating and executing R&D projects related to clean energy technologies and to transmission and distribution systems.

 

  1. The Paris Agreement

Mexico ratified the Paris Agreements in September of 2016, through which it committed to reduce GHG emissions 25% by 2030 relative to their baseline year , with net emissions peaking in 2026. This commitment is consistent with its pathway to reduce 50% of emissions by 2050 with respect to the base year, as mandated by the General Law on Climate Change Besides having emission abatement priorities engrained in the country’s policy framework, Mexico is now legally bound to those targets through this treaty, one of the most important milestones of the international community on climate change issues.

 

  1. Fiscal Incentives

The government put in place a set of fiscal policies to incentivize the deployment of renewable energies (or disincentivize the use of fossil fuels), such as an accelerated depreciation program that allows companies and individuals to immediately depreciate 100% of their expenses on renewable energy equipment.  This is reinforced by secondary policies that include feed-in tariffs, net-metering laws, and power purchase agreements. Lastly, the government introduced a carbon tax in 2014, settled at around $39 MXN/tonCO2e. It is levied on fossil fuel sales and imports, but firms can use carbon-offset credits to fulfill their resulting tax obligations.

 

New energy markets: Opportunities for stronger U.S. – Mexico cooperation

Mexico’s energy transition and the recent boom in renewable markets could be harnessed as an opportunity to solidify U.S. – Mexico bilateral energy cooperation and political ties as a whole. For starters, Mexican officials have pointed out that there is a potential for integrating Mexico’s carbon offset market (to be launched in 2017) to that of the Western Climate Initiative—comprised by California, Quebec, and Ontario. This is a great opportunity, as the WCI encompasses 76% of Canada’s GDP and 20% of the U.S. economy.  Having a 3-nation carbon-offset market would be a solid first step towards the regional integration of NAFTA’s energy system.

 

Furthermore, the energy ministers of Mexico, the United States and Canada, Pedro Joaquin Coldwell,  Ernest J. Moniz, and Rick Carr respectively, signed the Clean Energy Working Group memorandum of understanding in February 2016. Experts noted that this is the first high-level official recognition that the region’s energy relationship goes beyond oil and gas. The working group will focus on the creation of reliable and low-carbon electricity grids, energy efficiency for equipment, appliances, and buildings, and the deployment of clean energy technologies. The agreement also discusses the possibility of a continent-wide infrastructure for electric cars. Carr noted that, “As of today, all of our North American energy data and energy maps are gathered on one platform for the first time. This is significant because it allows us to think about continental energy integration in a new light.”

 

Clean energy is also now part of the three governments’ agenda at the highest level. Canadian Prime Minister, Justin Trudeau, and Presidents Barack Obama and Enrique Peña Nieto announced the creation of a North American Climate, Energy, and Environment Partnership during the North American Leaders Summit celebrated in June 2016. The partnership will be a high-level action plan designed to support the development of cross-border transmission projects, including renewables. The three leaders pledged to achieve a regional target of 50% of clean energy production (including hydropower, solar, wind, and nuclear) along with efficiency measures, and carbon capture and storage, by 2025.

 

4

(Isthmus  of Tehuantepec, Oaxaca, Mexico

http://cronicadeoaxaca.com/anuncia-banco-de-exportacion-de-dinamarca-inversion-por-mil-mdp-en-energia-eolica-en-oaxaca/)

 

A Renewable Industry: Challenges and Obstacles

Although the policy framework, fiscal incentives, and financing mechanisms are in place to support the growth of this new industry, there are several challenges that could hinder its full potential. Social opposition and indigenous communities’ resistance to wind megaprojects particularly in the southern state of Oaxaca are an ongoing source of friction that tends to delay the completion of projects. This proves costly for the developers and creates a negative image for the governmental institutions involved. As experience from Europe and the United States shows, one possible answer is to foster greater community involvement  through engagement with local authorities and by protecting their right to consultation.

 

The second and more important obstacle is a technical one. As higher percentages of the electricity supply come from intermittent sources like wind and solar, Mexico will need more base-load and reserve power to resolve demand-supply balancing challenges that may arise. Likewise, as the energy system migrates towards more distributed generation whose renewable sources tend to be located far from large demand centers, transmission infrastructure investment requirements will be large. While the efforts to date have been laudable both from the government and from the private sector keeping Mexico’s energy transition on the right track, it is also far from reaching its aggressive renewable targets set for 2018. “The Mexican government is aiming to triple the total amount of clean energy generation and to achieve a 9.5GW target by 2018 is a huge logistical and operational challenge by any standards.”

 

To deal with this challenge, Mexico will need to make use of every tool in its toolbox; from coupling two or more sources like wind and hydro, to more stringent efficiency measures, and to the development and deployment of innovative technologies like battery storage and fuel cells. This, however, underscores the need for stronger binational cooperation with the United States since the US faces similar technical challenges. Cooperation might include  universities and research centers of both countries working together on technology innovation and R&D.  Another area where more bilateral collaboration could and should be fostered is in data sharing, best practices, and performance standards.. Lastly, Mexico could learn from California’s vast experience with renewable energy programs and policies, particularly demand response. Nowhere is this more important than with regards to distributed generation.

 

Distributed generation refers to power generated at the point of consumption (such as home solar),  at customer/consumer premises or close to the power load being served. The term encompasses utility-scale plants connected to a transmission grid as well as generation that is developed and implemented on a smaller scale. . Until now solar photovoltaic has led the distributed generation sector, but  small-scale hydro and wind generation are also within the portfolio of regional opportunities.

 

There are well-documented benefits for generating power on-site rather than centrally. These include lower costs, less complexity, and reduced inefficiencies associated with transmission and distribution losses. These factors in turn lower the environmental impact of power generation by harnessing local clean energy sources. There are also important local economic development, economic stimulus, and competitivity impacts from distributed generation. Finally, distributed generation has been part of a paradigm shift transferring greater control to the consumer. This has been evidenced in several U.S. states , most notably California, which can provide ample lessons for a broader binational energy cooperation effort, both in terms of the customer’s role of the and vis-à-vis grid operators and utilities.

 

California has set ambitious Renewable Portfolio Standards of 33% by 2020 and 50% by 2030, pushing it to adopt every possible policy in the textbook. Particularly innovative is their Self Generation Incentive Program that provides rebates for distributed energy systems installed on customers’ meters (known as behind-the-meter energy storage), providing faster payback periods for solar systems, especially in commercial industrial buildings. As many of the tech developers and manufacturers of energy storage systems are Californian companies, the potential introduction of these in large industrial centers in Mexico as a pilot program could further the binational energy discourse between the two countries.

 

III. Cross Border Electric Interconnection – Fostering Renewable Energy and Electricity Trade

The potential for cross border electric interconnection has long been understood, even if poorly exploited. To date, nine interconnections exist between the United States and Mexico but only four operate regularly as the other five interconnections are kept in reserve only for use in emergency situations.

 

According to a report from the United States Agency for International Development (USAID), the most important active connections are between the Mexican state of Baja California (with a combined capacity of 800 MW) and the regional transmission system for the western United States and Canada:  The Western Electric Coordinating Council (WECC). The connection between Ciudad Juárez and El Paso, Texas (200 MW capacity) is used exclusively for emergency situations and the connection with the Electric Reliability Council of Texas (ERCOT) regional transmission system are primarily used for emergency situations. The only interconnection enabled for regular operations in Texas is located in Eagle Pass-Piedras Negras zone and has a capacity of just 36 MW.

 

These statistics underscore the existence of important electricity interconnections between the United States and Mexico, and they offer a small sense of the profound underutilization of the cross border potential. Indeed, there is a strong case in favor of expanding this infrastructure to allow both countries to take advantage of supply-demand scenarios like the one created by California’s RPS. Along the border, and largely due to the monumental overhaul of Mexico’s electric sector and market opening, there has been progress reflected in plans to enhance the cross border power exchange and to develop as many as seven new electric interconnection projects in the short and medium term.

 

Matching Energy Surpluses with Renewable Portfolio Standards – Baja California and California’s Example

The California and Baja California connection illustrates very effectively the potential for building a mutually beneficial binational approach to energy security in the area of electricity provision in the border region, and the role that renewable energy can play in a shared energy future.  Mother Nature has blessed the Baja California-California region with an enormous potential for alternative energy generation, especially solar and wind energy.  Indeed, Baja California is estimated to possess Mexico’s second largest potential source of wind energy.  But perhaps just as important, Baja California possesses far more renewable potential than its small population can consume.  Even after factoring in the state’s growing consumption of energy, Baja California’s current energy prospectus points to the possibility for a long-term energy surplus. The trick will be finding a way to match Baja’s clean energy-produced power surplus with California’s rapidly growing demand for electricity generated from renewables. California’s Renewables Portfolio Standard increased the percentage of energy consumption that must be obtained from renewable sources to 33 percent by 2020, providing a powerful incentive to access new sources of renewables.  Baja California lies in wait.

 

The challenge is to create the electricity interconnections that can match Baja California’s large and likely growing surplus of renewable energy production with the market demand for this source of energy in California.  As such, this potential binational energy market is just one example of the possibilities for and logic of increased cross-border cooperation in the distribution of clean energy resources.  Unfortunately, the disconnect between policy makers, developers and government on both sides of the border has made this difficult, a fact that reinforces the need to strengthen and deepen bilateral cooperation.

 

To deal with this challenge, Mexico and the United States created a Cross Border Electricity Task Force in 2010 with the mandate to promote regional renewable energy markets between the two countries.  Specifically, the task force was charged with reviewing opportunities and obstacles to cross border trade in renewable energy, advancing options on standards, electricity transmission, grid connections, and creating market incentives for investment and trade in renewable energy technologies.  Also at the forefront of this effort is a commitment to increase electricity grid reliability and resiliency, in part by collaborating on smart grid standards and technology, and to make energy use more efficient and reliable in both countries.  This bilateral framework should be embraced much more energetically as a means to enhance political and technical cooperation and information exchange, and to facilitate joint efforts to develop green economies and implement clean energy technologies.

 

Policy Proposals

There have been some advances toward interconnecting the Mexican and U.S. electric systems, as the Baja California-California example demonstrates. But this and other existing bilateral electric interconnection efforts should be reinforced and expanded. To develop a viable and efficient renewable energy sector that can advance binational energy security in the area of renewables, it is essential to eliminate the constraint imposed by the border.

 

Experience in the field suggests that to achieve this objective, there are a host of issues policymakers must address in the near and medium terms.  So a successful strategy must prioritize policy solutions.

 

At the top of policymakers’ agenda must be measures to streamline the permitting process on both sides of the border to deal with time requirements and eliminate duplication of efforts. In a perfect world, both governments would also strive to calculate a market price for carbon emissions which feeds directly into the need to set national renewable standards.  Together these would go a long way toward addressing environmental and financing questions.  Experts also point to the importance of allowing market-driven imports without restrictions, workforce development to address labor needs and worker migration, and the most technically savvy underscore the need for creating certainty in cost-allocation rules and integrating Smart Grid technology.

 

In addition, establishing a robust cross-border renewable electric energy market would benefit from the creation of an institutional structure to facilitates and promotes the binational exchange of information. Electricity energy generation and transmission, especially when they require large-scale infrastructure projects, directly impact local communities and often generate public concern.  Dealing with this requires open lines of communication between communities and governments, and doing this in a binational context would be assisted by local and regional bilateral groups tasked with addressing these issues directly and efficiently.

 

Finally, there is a need to better educate policy makers on the processes and entities involved in the development of cross-border electricity generation and transmission projects, as well as the associated obstacles and existing mechanisms designed to address key issues. Being better informed would help policymakers develop more consistent and credible policies aimed at fostering a renewable energy market at the border.  And central to this, and to binational energy coordination more broadly, is the reinvigoration of the Cross Border Electricity Task Force.

 

  1. Natural Gas and Lessons from the Shale Revolution – Toward a Binational Shale Gas Market

Mexico figures prominently in a discussion of the development of unconventional shale gas resources and its game changing quality for the regional energy outlook. As noted in the Economist July 2012 special report on natural gas, the use of natural gas in power generation expanded dramatically in recent years due to the development of the combined cycle gas turbine, which increased the efficiency of gas-fired electricity generation and reduced carbon emissions to half the level of coal emissions. Mexico has been a clear case study in this trend, with state power firm CFE embracing natural gas combined cycle technology for new generation capacity.

 

These developments are of particular importance for Mexico where electricity demand is expected to grow almost 4 percent per year for the next 15 years in a country sitting on a very significant supply of untapped natural gas reserves.  Mexico estimates its natural gas reserves to be around 16 trillion cubic feet (TCF) but a 2011 U.S. Energy Information Administration (EIA) report places Mexico’s shale gas potential at 680 TCF giving Mexico the second largest shale gas potential in Latin America, second only to Argentina, and the fourth largest in the world.

 

The potential associated with the EIA figures for shale gas in Mexico has not been lost on Mexican energy officials. Indeed, some have increasingly advocated for a “Shale Revolution” of their own and the possibility for shale gas to jumpstart a lagging petrochemical industry. Without shale, natural gas production in Mexico will never keep up with demand; but with shale gas development, Mexico could position itself to transition from its current status as a natural gas importer to a huge international player.

 

As a reminder, Mexico’s national oil company, Pemex, had until 2013 held a monopoly on gas production.  Until recently, the firm’s large and easily exploitable reserves of oil have led it to prioritize oil exploration and production at the price of leaving important gas opportunities undeveloped.  According to SENER, this meant that while domestic natural gas sales in Mexico rose 70 percent over the last decade, production grew only 46 percent. This imbalance between supply and demand was tangibly underscored in the summer of 2012 when Pemex cut natural gas supplies to some of Mexico’s largest and most important industrial consumers due to supply shortages. These cuts have been since overcome and according to Mexico’s new Energy Regulatory Commission (CRE) there have not been any interruptions or so-called critical alerts for over three years. It has also meant that Mexico has relied on gas imported from the United States to meet its growing needs rather than producing gas at home. In large measure the commitment by CFE to develop combined cycle projects and convert older plants from fuel oil to natural gas has been a major natural gas demand driver, only furthering the import totals from the US.

 

5-2

 

Indeed, the shale revolution in the United States and spiking demand in Mexico has created a boom in imports of natural gas into Mexico. Tendering thousands of miles of Infrastructure and a massive bet by the Pena Nieto government on pipeline projects to seize the economic upside of cheaper natural gas from the United States has been a palliative while Mexico sorts out its upstream challenges and decades of intransigence on private investment. Indeed, 2015 saw the largest spike in US natural gas exports to Mexico fueled in part by the aforementioned price differential and increased transmission and industrial infrastructure.

 

According to Mexican government’s Five Year Gas Pipeline Plan, there will be considerable expansion by 2019 including 10 new strategic pipelines, 2 social coverage pipelines, 7 interconnections with the United States, and one interconnection with Central America. The plan estimates these projects will total new investment on the order of $16 Billion.

 

7
When it comes to Mexico’s shale gas potential, Pemex is focusing its exploration efforts on five areas: Chihuahua, Salinas-Burgos-Picachos, Burgos, Tampico-Misantla, and Veracruz.  The first three of these are considered to be extensions of the Texas–based Eagle Ford formation. This geographical fact is extremely important for energy policy makers on both sides of the border.  Recent experience in the management of cross-border energy resources in the Gulf of Mexico has demonstrated both the need for meaningful binational cooperation to confront the issues associated with development of the massive energy potential that does not end at the border, land or maritime, and the capacity to do so.

 

In Los Cabos, Mexico, in February 2012, Mexico and the United States signed a Transboundary Hydrocarbon agreement. This deal delineated legal guidelines for the joint development of oil reservoirs roughly 1.5 million acres in size straddling the two countries’ maritime border in the Gulf of Mexico.  It specifically allows U.S. firms to join with Mexico’s national oil company to develop these deep water oil resources, and as a result ended a long-standing moratorium on oil and gas exploration and production in this region.

 

In her remarks at the signing ceremony, former U.S. Secretary of State Hillary Clinton called the agreement part of the commitment to improve energy security for both countries and to ensure a safe, efficient, responsible exploration of the oil and gas reservoirs in the Gulf of Mexico.  It also offers a model for the future development of the shale gas reserves in those portions of the Eagle Ford Formation that cross the two countries’ land border.

 

Mexican Shale Gas Development: Obstacles and Challenges

Beyond transborder cooperation, Mexico’s ability to ride the shale gas wave depends on its ability to overcome important obstacles and challenges associated with its development and how these might create additional opportunities for bilateral energy cooperation.

 

As the development of shale gas in the United States demonstrates, technology is the key to the successful development of unconventional resources. Gaining access to technology and operational know how is therefore critical to Mexico’s capacity to extract natural gas in a cost effective manner.  But costs associated with shale gas development reflecting the large number of wells that need to be drilled, licensing the technology, hiring workers trained in its operation, and building the corresponding infrastructure – are high.

 

As a consequence, creating the policy framework and associated market incentives needed to acquire access to cutting edge technology and capital is a necessary prerequisite for successful shale gas development in Mexico. As with oil, dealing with the impediments to upstream investment are central to the reform efforts and overhaul underway. While bid rounds have been conducted, Pemex retains an effective monopoly over natural gas production in Mexico. Postponement of the proposed auction for shale plays originally planned for the Round One bidding will need to be addressed in 2017 as part of the broader upstream reform but also in terms of private participation to help Pemex and Mexico develop its heretofore underexploited natural gas reserves. As detailed in the Five Year Natural Gas Plan, the Mexican government has set forth their intentions to include shale blocks in future auctions; many expect a first round of shale blocks to be included in the latter phases of the Round Two auction process.

 

There are also critical financial elements for developing unconventional resources, and the examples in the United States of risk capital and financial models merit evaluation in Mexico. There have been interesting developments such as the Fibra E infrastructure finance model slowly being deployed in Mexico. According to a policy brief from PWC, FIBRA-E will offer significant tax and economic advantages similar to the Master Limited Partnership (MLP) structures used in other countries. This structure effectively permits a deferral of income tax of up to 5% of the taxable profits on the activity and eliminates the Mexican dividend tax on distributions pertaining to the designated activities.

 

Environmental concerns, much like those that are impacting the U.S. debate, are also apt to influence shale development in Mexico. Critics argue that the methods used to extract natural gas from shale, specifically hydraulic fracturing, or “fracking,” are harmful and pollute surrounding groundwater. In addition, shale development demands massive amounts of water while wastewater and its disposal remains challenging. An MIT report suggests that these concerns are overstated.  It notes that shale development has a good environmental track record with very limited instances of any groundwater contamination in the more than 20,000 wells drilled over the last decade analyzed in the report. When it comes to the water usage issue, the report concludes that in many instances shale development uses less water than mining or livestock farming.  Pro-fracking forces note further that a shale gas well’s usage of roughly five million gallons of water over its lifetime is the same amount consumed by a golf course in Florida in three weeks. Nevertheless, significant environmentally based opposition to fracking persists.

 

There are also economic questions looming over shale gas development.  The dramatic expansion of shale gas production in the United States has depressed natural gas prices placing a damper on new gas production in the hemisphere and, especially in the Mexican case, has made it cheaper to import natural gas than to develop native resources.  But this latter point assumes the existence of sufficient infrastructure to move supplies between the two markets, specifically pipeline infrastructure. Projects being developed by the government and Pemex, while important, still only provide limited capacity to meet the aforementioned projected demand for natural gas in Mexico.

 

Policy Proposals: A Mexico-U.S. Shale Gas Council

By creating a new context for binational energy discourse, the shale gas boom and the challenges associated with it have shifted the playing field for U.S.-Mexico energy cooperation.  By sharing technological lessons, entrepreneurial models for finance and investment, and the management of environmental issues, both nations’ energy security will be advanced.

 

9-2

Beyond domestic efforts, the next logical bilateral step would be the formation of a public-private forum – a Mexico-U.S. Shale Gas Council. The council could partly be modeled on the advisory concept of the U.S. National Petroleum Council, but with a more narrow focus specific to unconventional natural gas.  The Council’s mission would be to disseminate lessons learned both from global experiences and to provide advice and recommendations unique to the bilateral context. For example, the Council could assess the viability for a bilateral agreement on cross border shale gas development, possibly modeled on the Transboundary Hydrocarbon agreement. The Council could also examine the adequacy of the natural gas infrastructure between Mexico and the United States and recommend ways to improve its capacity for binational market development, and specifically it ability to support both nations’ growing demand for gas-generated power. But perhaps most useful and relevant would be consideration of the development of a bi-national road map for managing shale gas’ environmental challenges, particularly those related to water usage.

 

In terms of structure, the proposed Council would be comprised of energy and environment officials from both governments alongside representatives of the natural gas industry, finance, think tanks and environmental NGOs. This plural structure would ensure the representation of a wide range of views, experiences, and outlooks so that the Council’s recommendations will produce policy outcomes that are apt to be stable over time and reflect the broad public interest of both societies. In keeping with its bi-national nature, the Chair and Vice Chair would be rotated each year between Mexico and the United States. The council would be tasked with producing an annual report, approved by its members, and transmitted to executive branch officials and energy and environment policy-making authorities in both countries.  Key policy objectives would be laid out at the beginning of each year with the annual report, submitted at the end, reflecting the Council’s analysis and policy priorities.

 

IV. Conclusion

Energy issues in the US-Mexico bilateral relationship are of critical importance for both nations. And as with many areas of the bilateral relationship, there have been huge strides in recent years toward deepening the two nations’ energy bonds.  The ever-changing energy context, however, creates dynamism in the energy realm that has recently produced opportunities for a more robust relationship.

 

This essay has focused on the impact of the global energy transition, as well as the role of natural gas and development of unconventional energy resources and cross border electric interconnection. These three elements are among the most important energy challenges facing both nations, and they are areas ripe for active cross-border cooperation. By focusing on these aspects of national and bilateral energy development, the U.S. and Mexican governments would promote economic growth, enhance energy security, and encourage electric market development based on more diversified and environmentally friendly fuel sources.  In addition to representing a realm where win-win scenarios predominate, this energy policy also presents an opportunity to purge polemic issues from bilateral energy discussions and allow officials to speak the same language. This is clearly happening as the foregoing discussion of natural gas exchange, as well as the North American clean energy commitment of 50% by 2025, highlights. Fortunately, key players on both sides of the border are increasingly grasping the upside – both economic and political – for jointly developing unconventional energy resources and intelligent interconnections.

 

 

Jeremy M. Martin currently serves as the director of the University of California, San Diego’s Energy Program at the Institute of the Americas.

Tania Miranda is a graduate student at Johns Hopkins University, specializing in renewable energy systems and Mexico’s energy policy. 

ABOUT THIS PROJECT

The U.S.-Mexico Network’s Imagining 2024 project is designed to provide readers a quick overview of key issues in US-Mexico relations – the background of the issue, its current state, where we ought to be by 2024, and how to get there.

 

Each short essay is coupled with suggested background readings for those interested in a more detailed understanding of the issue at hand.  And as an electronic publication, both the essays and their associated resource pages are updated as needed to keep the information and analysis fresh.
 

Return to the table of contents here.

 

To increase the size of the text, type: Ctrl +

LATEST NEWS

George Baker, editor of Mexico Energy Intelligence

Latest News and Video: Energy Reform

by Editors
With recent developments in reforming Mexico's energy sector and the transformation of state-owned Pemex, opportunities have emerged for increased U.S.-Mexico cooperation on energy projects.  The fol...more.