Energy

Mexico is a net energy exporter. The primary export is oil. Mexico exported over 1.1 million barrels of oil per day in 1998.

Mexico has the second largest proven crude oil reserves in the Western Hemisphere after Venezuela, at 28.4 billion barrels. In 1999, Mexico produced about 3.4 million barrels per day (bbl/d) of oil, with net oil exports of 1.4 million bbl/d. Mexico ranked as the world's fifth-largest oil producer and tenth-largest oil exporter in 1999, with about 1.3 million bbl/d (93 percent of exports) bound for the United States. The value of Mexican oil exports has increased from $6.4 billion in 1998 to an estimated $10.4 billion in 2000, and oil exports account for about a third of government revenues. Mexico's position in world oil markets is underscored by its agreement to act in tandem with Saudi Arabia and Venezuela to increase or decrease production as needed, in accordance with world oil market conditions.

Mexico produces three grades of crude oil: heavy Maya-22, which accounts for more than half of total production; light, low-sulfur Isthmus-34 (less than one-third of total production); and extra-light Olmeca-39 (about one-fifth of total production). About three-quarters of Mexican production comes from the Campeche Bay in the Gulf of Mexico. Production at the largest field, Cantarell, is expected to increase in the next two years.

The Mexican oil industry was nationalized in 1938. Petroleos Mexicanos (Pemex), the state oil company, is one of the world's largest oil companies, the single most important entity in the Mexican economy, and a symbol of Mexican sovereignty and independence. Pemex is the only company in the Mexican oil market, upstream and downstream. While the company is criticized widely as being bloated and inefficient, privatization is not on the agenda. The state-run organization of the sector enjoys enthusiastic public support, and President-elect Fox has retracted early campaign promises to privatize Pemex and has vowed instead to modernize and streamline the oil giant.

A maritime boundary dispute between Mexico and the United States was settled in June 2000. The Western Gap area, halfway between the Yucatan and Texas coastlines, is more than 200 miles from either shore and therefore outside either country's "exclusive economic zone". Under international law, Mexico and the United States had to agree on a boundary. Technological advances now will allow drilling in the 10,000-foot-deep waters. The two countries have agreed that 62 percent of the region belongs to Mexico and 38 percent to the United States. Companies are expected to take active interest in the area.

Pemex is upgrading its oil transport infrastructure. Currently, there are 2,625 miles of crude oil pipelines and 5,322 miles of product pipelines. A 700-mile pipeline currently under construction will connect production from offshore Veracruz to refineries.

Mexico has proven natural gas reserves of 30.1 trillion cubic feet (Tcf), with 1998 production of about 1.26 Tcf and consumption of about 1.28 Tcf and net imports of 20 billion cubic feet (Bcf). Natural gas imports from the United States have been allowed since January 1996, and the import tariff was eliminated in mid-1999. There is significant U.S.-Mexican gas trade, with the U.S. exporting only slightly more gas to Mexico than it imports. Mexico has not emphasized natural gas development and exploration until recently, and most of its current gas production is "wet" gas, associated with oil production. "Dry", or non-associated, gas comes primarily from the Burgos basin, offshore northeastern Mexico.

Natural gas is slated to play a more important role in the future as demand rises quickly, especially in the power sector. In response to anticipated demand growth, Pemex plans to increase Mexican-U.S. border infrastructure and capacity, and to focus more on gas exploration activities, especially in the non-associated Burgos and Macuspana basins. Cantarell also holds significant wet gas reserves, most of which currently are flared. Pemex predicts that gas production will increase more than 50 percent from current levels by 2008.

The natural gas industry is the most liberalized of Mexico's energy sectors. While upstream exploration and production is the sole domain of Pemex, the downstream gas market has been open to private investors since the passage of the 1995 Natural Gas Law. This legislation modified the constitution to allow private companies to become involved in gas transportation, storage, and distribution in Mexico, although it prohibits a company from ownership in more than one function within the industry. The legislation also liberalized exports and imports and established the regulatory framework for building and expanding transmission and distribution pipelines.

The Mexican Energy Regulatory Commission (CRE) regulates the gas industry. CRE is mandated to achieve a competitive, efficient, safe, and sustainable natural gas industry as part of Mexico's efforts at increasing use of natural gas. CRE's powers include enforcement of regulations, inspections of facilities, issuance of permits, regulation of prices, overall supervision of the industry, ensuring an adequate supply, security, the promotion of competition, and the elimination of cross-subsidies. Private-sector participation in these areas currently is subject to permits granted by CRE for 30 years, based on competitive bidding.

Despite early indications that the United States would dominate private investment in Mexico's gas market, European companies, led by Spain's Gas Natural and increasingly by Belgium's Tractabel, currently have a larger presence than U.S. companies. Sempra Energy International is the only U.S.-based company with significant involvement in the sector at present.

A major constraint on gas development in Mexico has been the lack of investment in pipelines for transporting gas over long distances (most production is offshore or in southern onshore regions, while population is concentrated inland and in the north). New pipelines are planned, especially trans-border connections linking Mexico and the United States. The Texas Railroad Commission and CRE officials met in September 2000 to discuss how best to cooperate to promote construction of U.S.-Mexico gas infrastructure.

A consortium of Sempra, PG&E, and Mexico's Proxima Gas plans to build a $230-million, 30-inch, 400-million-cubic-foot-per-day, 212-mile pipeline. It will connect the U.S. and Mexican natural gas grids, beginning with an interconnection with El Paso Natural Gas Company in Arizona, running through southeastern California and northern Baja California to connect with the Rosarito Pipeline, south of Tijuana. This "North Baja" pipeline will fuel a power plant that currently is powered by oil as well as expected new gas-fired electric capacity in the region. Baja California currently is experiencing rapid energy demand growth, much of which stands to be satisfied with U.S. gas. The pipeline could come onstream in 2003.

Mexico has recoverable coal reserves of about 1.3 billion short tons, just over 70 percent of which is anthracite and bituminous, and just less than 30 percent of which is lignite and subbituminous. The majority of the country's coal reserves are located in Coahuila, in the northeast of the country, bordering the United States. Coal production has increased slightly in the past few years and is used mostly for steel production and electricity generation. U.S.-based Mission Energy, which purchased the previously government-owned company Minera Carbonifera Rio Escondido (MICARE) when it was privatized, is now Mexico's largest coal producer. A small volume of imports from the United States, Canada, and Colombia augments domestic coal supplies.

Coal-fired plants supply roughly 10 percent of Mexico's electricity, but this percentage is slated to fall as natural gas-fired power plants are favored to meet rising demand. Mexican coal has very high ash content and is therefore mixed with imported coal. The Federal Electricity Commission (CFE) recently agreed that Mexican coal will be used for another three years to fuel two power plants near the Coahuila mines, despite the uncompetitiveness of Mexican coal as compared to imports. Last year, coal from local mines cost the CFE 38 percent more than imported coal.

Mexico has installed electric capacity of 38.1 million kilowatts and in 1998 generated 176.1 billion kilowatthours (bkwh) and consumed 164.8 bkwh. Oil-fired plants make up the largest share of electricity generation, and thermal (oil, gas, and coal) electricity generation in 1998 accounted for 78 percent of total generation. Hydropower accounted for 14 percent, nuclear power 5 percent, and other renewable sources (wind, solar, biomass) 3 percent. Mexico's industrial energy policy calls for conversion of many oil-fired power plants to natural gas by 2005. Most new power plants will be run on natural gas.

Mexico's electricity sector is at a crossroads. Although generation has increased rapidly over the past decade, supply is not expected to meet demand growth over the next two decades. Given current grid capacity constraints, shortages could result; regular shortfalls resulting in nationwide blackouts are predicted within the next two years. Failure to make substantial investments in generation capacity and infrastructure could adversely affect the international competitiveness of key northern industrial regions. Although about 95 percent of Mexican households are electrified, there are still many thousands of rural towns without electricity.

To combat impending shortages, current President Zedillo has pledged to have 30 major power generation projects underway when he leaves office in December. These 30 projects, which will begin operation between now and 2004, are anticipated to add 11,500 megawatts (MW) of capacity and require investment of almost $7 billion. According to some analysts, Mexico will need to add about 3,000 MW of additional capacity per year between 2005 and 2007.

Privatization of the electricity sector, one means of promoting investment in the sector, is a contentious issue in Mexico, and legislation to change the constitution to allow private investment in the sector most likely will be voted on before the end of 2000. The current and incoming presidents both support such legislation, which is expected to meet strong opposition in the Congress.

CFE and Light & Power (LFC) are Mexico's two state-owned electricity companies. CFE has enjoyed a monopoly in the electric power sector for decades, although reforms instituted in 1992 allow independent power producers - IPPs - and cogenerators limited involvement. CFE generates about 92 percent of Mexican electricity. LFC contributes about 2 percent, with most of its customers in Mexico City. Pemex generates 4 percent, while the remainder is generated by the private sector.

IPPs are allowed to build and own power generation facilities, and the power can be used at related industrial companies or sold under long term contracts to the public utilities. In recent news, Canada's TransAlta will build and operate a 250-megawatt (MW) power plant for sale to CFE in Campeche in the Yucatan peninsula. ABB Alstom Power and Sithe Energies plans to build a 230-MW plant to supply a cement company. Intergen and AEP will build the 600-MW Bajio plant in Guanajuato, mostly for sale to CFE but also with some industrial customers. Union Fenosa is the only remaining bidder for the 900-MW gas-fired Tuxpan plant, the group's third successful bid in the Mexican electricity sector.

Mexico has a national interconnected power grid divided into four regional divisions: Northern, North Baja, South Baja, and Southern (the largest). Northern Mexico is connected to the U.S. grid, and additional interconnections are planned. In July 2000, a cable from Eagle Pass, Texas to Piedras, Mexico connected U.S. utility AEP and CFE's transmission systems. This is a new kind of electric connection, using asynchronous (high-voltage direct-current) technology to combat the problem of differing power currents between countries. A New Mexico utility is working on a project to connect a power station outside of Phoenix, Arizona to CFE's system in Sonora, Mexico. A proposed project aims to link Tucson, Arizona to points south of the U.S.-Mexican border. Along the Mexican-California border in Baja California, new plants are under construction to meet growing demand in Baja and to allow Mexico to increase electricity exports to U.S. markets.