Opportunities for North American energy security—and increased economic competitiveness.
Energy has an outsized impact on North America’s economic competitiveness. Energy fuels everything we do. From public and private enterprise to individual health and well-being, we rely on energy to keep the foundations of our society running. Every supply disruption and market imbalance compromises our ability to maintain steady economic growth. Access to affordable, reliable, and sustainable energy supplies is crucial. Fortunately, Canada, Mexico, and the United States can all boast of having major reserves and supplies of both traditional and clean energy. How each country manages its domestic policies is important for the broader good, and for the long-term outlook of North America. In this sense, natural gas offers a logical segment of the energy economy for enhancing regional—if not international—competitiveness.
Inside their borders, Canada, Mexico, and the United States have convulsed with the politicization of energy.
At the global level, Russia’s invasion into Ukraine threw a wrench into postpandemic recovery efforts. With new energy security challenges emerging, supply chains are being reconfigured and near-term climate objectives put on hold. Despite high tensions, there is a great opportunity for North America’s partnership to show resilience and deepen cooperation. The three nations have had closely knit economies since the establishment of the novel North American Free Trade Agreement, or NAFTA, in the early 1990s. The United States–Mexico–Canada Agreement, or USMCA, is the current institutional framework through which key sectors are being propelled, including energy. Indeed, the ongoing dispute over energy—the US argues that Mexico is favoring its state-owned energy firms and is impeding private investment in Mexico’s energy market, in violation of USMCA—will be resolved not despite of, but thanks to, the negotiations and efforts to modernize NAFTA and develop a more robust institutional governance structure for energy.
Inside their borders, Canada, Mexico, and the United States have convulsed with the politicization of energy. This underscores the role of natural gas in our energy matrix as a way to ensure social inclusion and balance near-term crisis solutions with the long-term climate imperative. At the end of the day, energy is political, and policy is politics.
There are clear-cut areas of mutual interest for enhancing economic competitiveness and strengthening North America in the face of global energy insecurity. Natural gas is at the forefront among the areas that, if harnessed correctly, could lead to the development of a robust market for regional and international consumption. Importantly, natural gas has not been subsumed as deeply into the Mexican energy sovereignty debate, allowing ample room for increased collaboration and expansion into the future.
Natural Gas Infrastructure
Mexican President Andres Manuel Lopez Obrador’s (AMLO) initial rollback of the 2013 energy reform seemed to have stalled hopes of building a North American energy sector and market. His administration placed focus on strengthening state enterprises PEMEX and CFE, a nationalist perspective that clashes with the priorities of a neoliberal regional integration project. However, and fortunately so, cooperation between the United States and Mexico has not slowed down. During AMLO’s term, state power company CFE has increased the use of natural gas for power generation, and has played a major role in inking agreements and commercial memorandums of understanding with a wide range of US companies for new pipeline capacity and liquefied natural gas, or LNG, projects (figure 1).
Leveraging the major infrastructure developments that integrate natural gas supplies from the US to Mexico is logical. It also appears to fit with both the governments’ and regional companies’ goals and aspirations of exporting gas surplus production to Asian and European markets. With the world looking to diversify away from Russian gas, demand for US shale gas will only continue to grow. This has encouraged construction of LNG plants in Mexico that will be served by US assets. An offshore pipeline extension—such as the one connecting South Texas and Tuxpan, Veracruz—exemplifies the alignment of interests between Mexican state-owned CFE and US companies, and it proves that both sides can and should leverage each other’s strengths.
North America—as a key natural gas supplier—can be a guarantor of competitive and secure energy supplies.
Natural Gas and Electricity Generation
Mexico’s power market reached 55 percent of natural-gas-fired generation in 2021, according to data compiled by Statista. Meanwhile, according to the US Energy Information Administration, US exports of natural gas to Mexico surged to more than 7 billion cubic feet per day (Bcf/d) in June 2021, a new record (figure 2). According to Natural Gas Intelligence, “imports accounted for 69 percent of Mexico’s gas consumption as of June 2022, and imports supplied 86 percent of national demand.” Amid declining production of natural gas, Mexico has thus turned into the world’s second-biggest market in net imports of natural gas via pipeline.
A study published by the Economic Commission for Latin America and the Caribbean (available in Spanish), demonstrates that for the last two decades, natural gas has been the energy source with the greatest dynamism in Mexico, and one that will continue to grow in coming years. Mexico’s developing industrial sector has mostly been the driving force behind this surge in demand. Given its proximity, the price competitiveness that it offers, and the pipeline network connecting Texas with Mexico’s northern states, the US has positioned itself as Mexico’s sole provider of natural gas. With current international gas prices rising, Mexico is at a comparative advantage because it has easy access to US gas and can supply all its energy-intensive industries without major interruptions. This explains the growth in demand for natural gas but also hints at why Mexico has had limited development of its own gas-extracting projects.
Exporting North American Natural Gas Molecules
Projects that combine upstream natural gas reserves in the US with cross-border and domestic Mexican pipeline capacity, topped by new LNG projects and infrastructure, are gaining attention. These increasingly integrated projects could offer a unique form of bilateral energy cooperation for North American natural gas molecules to compete globally. In addition to shoring up regional energy security, North America—as a key natural gas supplier—can be a guarantor of competitive and secure energy supplies.
Due to a lower carbon footprint, demand for natural gas on the global stage was on the rise even before Russia’s invasion of Ukraine, which propelled demand to new heights. In light of these new geopolitical market dynamics and Mexico’s proximity to US shale gas reserves—and the aforementioned infrastructure—Mexico is now looking to become a gas export hub for imported gas.
Currently, there are eight proposed LNG export projects. According to Bloomberg, the total combined capacity of these projects is 50.2 million tons a year, which would place Mexico in fourth place among the largest LNG shippers in the world (figure 3).
The majority of these projects would be situated in states with access to the Pacific Coast, where cargo ships could easily sail to Asia. The other two proposed projects would be located in Tamaulipas and Veracruz, along Mexico’s Atlantic coast (figure 4).
As with any major capital-intensive infrastructure, there is no guarantee that all these LNG projects will ultimately be built. Indeed, only Sempra Energy’s Energia Costa Azul in Baja California is currently under construction. Nonetheless, Mexico’s gas-export policy, and the opportunities for the country to leverage its North American position vis-à-vis its Atlantic and Pacific coasts, have gained momentum. Indeed, the main gas pipeline capacity is already in place, with only a few last-mile connections needed for a full gas transport network.
An enhanced North American gas market would also entail new opportunities for Central America and the Caribbean. Mexico already has a two- decades-old agreement in place with Guatemala on natural gas supply—which both El Salvador and Honduras ultimately joined (figure 5).
In a more deeply integrated North American natural gas market, Mexico would occupy the role of reexporter of gas, which would initially be transported via ship from ports located along its Pacific and Atlantic coasts, but leveraged with a future interconnection with existing Central American policy frameworks.
The countries of North America have forged a competitive energy alliance over many years.
This is specifically an opportunity for the Mesoamerican component: The development of Gasoducto Prosperidad, visible as the red-dotted line in the map in figure 5, allows North American molecules for export market expansion closer to home. The pipeline is projected to run from Salina Cruz, Oaxaca, to Tapachula, Chiapas. If built, it should become an important part of a network to transport natural gas from the United States all the way to Guatemala’s doorstep. This would be a big boost to development in Central America and the Caribbean, to energy integration, and to energy security.
If liquefied natural gas is to play a key role in strengthening Mexico’s role in the energy market, there are a few important aspects to consider first. A recent study by Mexican think tank IMCO (Centro de Investigación en Política Pública or in English the Public Policy Research Center) highlighted Mexico’s lack of natural gas storage capacity. Projects to expand this capacity have not advanced since 2018 and would cast a shadow of energy insecurity over the country if they were to remain on hold.
As the IMCO study underscored, for several years Mexico has wanted to increase its natural gas storage capacity to at least five days of demand, up from the current two-and-a-half-days. Comparatively speaking, countries like Austria, France, and Italy, which have a lower daily consumption rate than Mexico, boast a storage capacity that is at least 35 times larger.
A deepened interconnection of natural gas and LNG are of mutual interest for enhancing economic competitiveness, and strengthening North America in the face of global energy insecurity.
Mexico currently has only three LNG storage facilities, and while it’s not the most efficient storage solution, increasing the number of facilities and gas containers/tanks can nevertheless play a complementary role. Other viable storage solutions include depleted oil/gas fields, salt caverns, and aquifer storage fields. Increasing storage capacity should be one of Mexico’s top energy priorities. The amount of investment needed would depend on the storage model and technology, with LNG storage facilities being most costly by a wide margin. Mexico has the capacity to gradually improve its storage systems, resulting in reduced market vulnerability if it wishes to become an exporter of gas.
Energy Security and Competitive Exports
Unlike many other regions of the world that export natural gas, the countries of North America have forged a competitive energy alliance over many years. This is particularly true of Mexico and the US. Thanks to the decades-long development and maturation of NAFTA and now USMCA, the US-Mexico energy alliance was tested by divisive and polarized rounds of negotiations in 2019 and 2020, and is now being strengthened by a potential settlement of the two nations’ ongoing energy complaint, allowing the region to continue to assert its role as an energy-exporting powerhouse.
As evidenced by the boom in pipeline and infrastructure development, gas-fired electricity generation, and global market demands, natural gas and LNG are integral parts of North America’s energy security plans and economic competitiveness—both at home and for export. One industry expert noted in a recent interview that the pull of Asian and European markets for LNG has what he sees as at least a 20–30 year horizon.
Given its abundance at relatively low prices, and that it is being relied upon as a cleaner electricity-producing fossil fuel to support pathways to net-zero emissions, there is a global market for LNG that has a near-term supply/demand crunch. Natural gas molecules from North America, by way of the two nations’ integrated pipeline and LNG infrastructure, could lead to competitive exports that help to alleviate, at least in the medium term, much of the global market’s volatility and imbalance.
For years, the US and Mexican natural gas markets have leveraged one another to enhance cross-border trade in natural gas molecules. There have been hiccups and issues, but working through them has only further strengthened the region’s competitiveness when it comes to global gas markets.
It is important to underscore the recent constructive posture of both governments, not to mention key companies, in the face of the energy insecurity dilemma induced by the Russia-Ukraine war. This situation makes the pivot to leverage developing and established natural gas markets to export to gas-starved European and Asian markets a crucial medium-term strategy.
A deepened interconnection of natural gas and LNG are of mutual interest for enhancing economic competitiveness, and strengthening North America in the face of global energy insecurity. The Mexican gas industry lawyer and noted expert, Rogelio Calderon, agrees, stating that “in the years to come there will be a deficit for natural gas in the world, and if Mexico has available LNG export plants to supply foreign markets, the country, and the US, should benefit from these projects over the next 20 to 30 years.”
The United States and Mexico can seize this opportunity in the near term to capture global natural gas demand and help to help solve the global energy imbalance. Their combined strategy will allow chasing the highest prices and attaining the best margins and economic benefits.
Jeremy M. Martin is vice president of energy and sustainability at the Institute of the Americas. William Lozano Arciniega is a second-year graduate student in the School of Global Policy and Strategy at the University of California, San Diego.