Mexican Energy Transition

Mexico is a huge economic engine with a huger thirst for energy. With a population of 130 million and a USD190 billion manufacturing sector,

Mexico needs a whopping 283 billion kWh of energy each year. This is secured from a variety of sources, ranging from old-fashion hydrocarbons to the country’s only nuclear reactor on the Gulf Coast and trendier solar installations in the deserts of Coahuila.

There is no denying that there is much room for improvement in Mexico’s energy portfolio. The Laguna Verde nuclear power station was commissioned in the early 1990s, and its nameplate capacity is no more than 1,620MW. Although the country is a pioneer in the LATAM region in adopting solar energy, the current infrastructure may not be enough to meet the demand.

“In 2020, the installed capacity of Mexico’s clean energy plants, such as hydroelectric, geothermal, wind, photovoltaic, and bioenergy, was 29,512MW and by December 2021 there was an installed capacity of 30,812MW, which represented an increase of 4.4%,” according to the US Department of Commerce. It is believed that the growth is mainly coming from “hydroelectric, wind, and photovoltaic solar power plants.”

The 4.4% growth in the space of only one year indicates that Mexico is indeed making an effort to reduce its dependence of fossil fuels; however, a country the size of Mexico cannot have an overnight transition to green energy. Indeed, a sudden restructuring of the energy portfolio is not only impossible, but also deeply unsustainable: insisting on a sudden transition can throw the energy sector off-balance, causing huge costs for the system which will, in turn, be a burden on the country’s resources.

Natural gas is an excellent steppingstone in the context of Mexico: it is reasonably clean-burning, cost-effective and accessible—of which more later.

And Mexico has a robust natural gas infrastructure, including gas-powered electricity plants. Natural gas accounts for over 60% of electricity generation in the country, which makes it “by far the most prominent source for electrical power generation in Mexico,” according to Statista. But where does Mexico’s natural gas come from? With proven gas reserves of no more than 16tcf (roughly 1% of the global reserves), Mexico is admittedly not a major producer of natural gas.

New discoveries, however, are being made, especially off the eastern coasts of Mexico. Around 20 major on-land and offshore oil and gas pockets were discovered in 2022 by the national oil firm, Pemex. And the LATAM nation’s natural gas output has been modestly growing throughout 2022; however, Mexico’s main source of natural gas is still pipelines which cross the border from the US. Some 80-90% of the country’s demand for natural gas is met through imports from its northern neighbor. Exports have increased in 2022 at West Texas border, with the pipeline carrying over 1.6bcf per day in the spring and summer of 2022. This is an all-time high in the pipeline’s history, showing a 12% increase, month-on-month.

While defending a pragmatic view toward Mexico’s gas imports from the US, Warren Levy, CEO of the Mexican oil and gas company, Jaguar, told TBY that “The continued evolution of the government policies here [is] to a more pragmatic understanding that Mexico has an opportunity which can be taken advantage of which is the connectivity with the US gas market.” There are more than one new pipelines between the two country in the planning stage or even under construction.

For example, “The Yuma II project developed by US-based EPGN and Mexico-based Grupo Clisa will add a second connection point at the border,” according to BNamericas. And why not? Although some have criticized Mexico’s reliance on natural gas imports from the US, claiming that it contradicts the country’s policy of self-reliance, the fact remains that the US and Mexico have strong bilateral ties.

A scenario in which the US would curb the flow of energy to its southern neighbors is extremely unlikely, especially as that the American industries also depend on nearshoring their operations to Mexican contractors. Reliance on natural gas imports from the US, therefore, is in fact increasing the nation’s energy security, rather than putting it at risk.

In keeping with Mexico’s current policy, the country is encouraging investment from countries other than the US, as well. It is not only American companies which are coming to the sector these days. The Qatari oil and gas company, GDI, for instance, cites Mexico as an attractive market. The company focuses, among other things, on “pipelines and mainstream facilities, including storage terminals for gasoline, pipelines for oil and gas, and infrastructure needed to build underground infrastructure,” which are all of utility to Mexico’s energy security.

By diversifying the presence of foreign investors in its natural gas sector, Mexico—a country with little reserves—will be able to rely on the more-or-less clean natural gas during its transition to green energy.