Mexico’s Oil and Gas Sector: Background,
Reform Efforts, and Implications for the
United States
Clare Ribando Seelke
Specialist in Latin American Affairs
Michael Ratner
Specialist in Energy Policy
M. Angeles Villarreal
Specialist in International Trade and Finance
Phillip Brown
Specialist in Energy Policy
July 30, 2015
Congressional Research Service
7-5700
www.crs.gov
R43313
Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States
Summary
The future of oil and natural gas production in Mexico is of importance for both Mexico’s
economic growth, as well as for U.S. energy security, a key congressional interest. Mexico is a
top trade partner and the 3rd largest crude oil supplier to the United States. Mexico’s state oil
company, Petroleos Mexicanos (Pemex) remains an important source of government revenue
even as it is struggling to counter declining oil production and reserves. Due to an inability to
meet rising demand, Mexico has also significantly increased natural gas imports from the United
States. Still, gas shortages have hindered the country’s economic performance.
On December 20, 2013, Mexican President Enrique Peña Nieto signed historic constitutional
reforms related to Mexico’s energy sector aimed at reversing oil and gas production declines. On
August 11, 2014, secondary laws to implement those reforms officially opened Mexico’s oil,
natural gas, and power sectors to private investment. As a result, Pemex can now partner with
international companies that have the experience and capital required for exploring Mexico’s vast
deep water and shale resources. Leftist parties and others remain opposed to the reforms.
The energy reforms transform Pemex into a “productive state enterprise” with more autonomy
and a lower tax burden than before, but make it subject to competition with private investors.
They create different types of contracts for private companies interested in investing in Mexico,
including production-sharing and licensing; allow companies to post reserves for accounting
purposes; establish a sovereign wealth fund; and create new regulators. In December 2014, the
Mexican government announced the terms of part one of Round 1, under which shallow-water
offshore exploratory blocks available for public bidding would be auctioned. On July 15, 2015,
Mexico’s Energy Ministry announced that only 2 of the 14 blocks available were awarded to
successful bidders. The government is likely to alter the terms offered, including the amount of
investment required by companies, in order to attract more interest in subsequent bidding rounds.
The U.S. Congress has legislative and oversight interests in examining the implications of
Mexico’s oil and natural gas reforms on U.S. hydrocarbons imports and exports, bilateral trade
and investment, and economic conditions in Mexico. In December 2013, Congress approved the
U.S.-Mexico Transboundary Hydrocarbons Agreement (P.L. 113-67), which aims to facilitate
joint development of oil and natural gas in part of the Gulf of Mexico. The 114th Congress is
likely to consider legislative proposals to speed up energy infrastructure development, including
cross-border natural gas pipelines, as was approved by the House on January 21, 2015 (H.R. 161).
Congress may also consider proposals to revise U.S. crude oil export policy.
The opening of Mexico’s oil and natural gas sector could expand U.S.-Mexico energy trade and
provide opportunities for U.S. companies involved in the hydrocarbons sector, as well as
infrastructure and other oil field services. If these reforms accelerate growth and investment in
Mexico (as the government has stated), they could also benefit North American competitiveness.
Industry analysts maintain that the reforms are generally well-designed, but that the way they are
implemented will likely determine their impact. The success of the reforms may also depend on
trends in global oil prices. Should oil prices remain at current levels, shale resources and other
unconventional fields may not be feasible to develop at this time. See also CRS Report R43442,
U.S. Crude Oil Export Policy: Background and Considerations, by Phillip Brown et al.
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Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States
Contents
Introduction ...................................................................................................................................... 1
Pemex: A Brief History and Pre-Reform Status Report ................................................................... 2
The Path to Pemex Reform .............................................................................................................. 3
Proposals for Energy Reform .................................................................................................... 3
Key Provisions of the December 2013 Constitutional Reforms ................................................ 4
Secondary Laws Approved in August 2014 .............................................................................. 5
Round Zero ................................................................................................................................ 7
Ongoing Developments and Round One ................................................................................... 7
Mexico’s Energy Resources ............................................................................................................. 8
Oil: Attracting a Lot of Interest ................................................................................................. 8
Natural Gas: More Needed ...................................................................................................... 11
Unconventional Oil and Natural Gas Opportunities ................................................................ 12
Refining: Limited Capacity and in Need of Modernization .................................................... 12
Energy: A Central Component of U.S.-Mexico Trade ................................................................... 13
Mexico Still a Top U.S. Oil Supplier ....................................................................................... 13
Trade in Natural Gas ................................................................................................................ 16
Areas of U.S.-Mexico Energy Cooperation ................................................................................... 16
Bilateral Framework on Clean Energy and Climate Change ................................................... 16
United States-Mexico Trans-Boundary Hydrocarbons Agreement ......................................... 17
Issues for Congress ........................................................................................................................ 18
Mexico’s Economic Development ........................................................................................... 18
Impact on the U.S. Oil and Natural Gas Sectors and the Bilateral Energy Trade ................... 18
U.S. Crude Oil Export Policy: The Case of Mexico ................................................................ 19
Mexico-U.S. Oil Exchanges .................................................................................................... 19
Pipeline Issues ......................................................................................................................... 20
Other Opportunities for Bilateral Energy Cooperation ........................................................... 21
TPP Negotiations ..................................................................................................................... 21
Outlook .......................................................................................................................................... 22
Figures
Figure 1. Mexico’s Hydrocarbons Sector ........................................................................................ 6
Figure 2. Mexican Oil Production, Consumption, and Exports ....................................................... 8
Figure 3. Mexico Energy Infrastructure ........................................................................................... 9
Figure 4. U.S./Mexico Oil and Natural Gas Activity Around the Gulf of Mexico ........................ 10
Figure 5. Mexican Natural Gas Production, Consumption, and Imports ....................................... 11
Figure 6. Top 5 Imports from Mexico............................................................................................ 15
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Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States
Tables
Table 1. U.S. Crude Petroleum Oil Imports in 2014 ...................................................................... 14
Contacts
Author Contact Information........................................................................................................... 22
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Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States
Introduction
The United States has a strong economic interest in ensuring energy security, bolstering exports,
and reducing barriers to U.S. trade and investment. The United States also has a national security
and an economic interest in ensuring that Mexico, a key ally and top trade partner with which the
United States shares a nearly 2,000 mile border, is economically vibrant and politically stable.1
U.S.-Mexico energy trade and cooperation plays an important role in achieving those goals.
Energy cooperation has become a priority of bilateral economic cooperation under the U.S.-
Mexico High Level Economic Dialogue as well as a focus of trilateral research, planning, and
coordination among the energy secretaries of the United States, Canada, and Mexico.2
U.S. policymakers are closely monitoring the implementation of the December 2013
constitutional reforms and August 2014 implementing laws that, among other things, allow
Mexico’s Petroleos Mexicanos (Pemex) to partner with international companies and other
industry entrants to boost Mexican production. Hailed by many analysts as the most significant
economic reform undertaken by Mexico since its entrance into the North American Free Trade
Agreement (NAFTA) in 1994, the energy reforms are expected to boost investment, growth, and
eventually oil and gas production in the country. The reforms also opened Mexico’s electricity
sector to private generators, although not addressed in this report.3 If power sector reforms can
help reduce Mexico’s high electricity costs, then Mexico’s manufacturing sector—a dynamic
sector that is highly integrated with U.S. industry—should become more competitive.4
There is a danger, however, that the Mexican government may have oversold the benefits of the
reforms. Investors initially appeared to have maintained interest in Mexico’s energy sector despite
declines in oil prices, but the results of Mexico’s first round of public bidding announced in July
2015 proved disappointing.5 At a House hearing held on July 23, 2015, witnesses cited the limited
size and production potential of the blocks offered, the high minimum bid required, and investors’
concerns about corruption and insecurity as possible reasons for the lack of interest in the tender.6
This report provides an overview of Pemex and the content and prospects for Mexico’s energy
reforms, before discussing specific issues facing Mexico’s oil and gas industry. It then examines
the U.S.-Mexico energy relationship through the lenses of trade and energy cooperation. It
concludes by suggesting several oversight issues for Congress related to what the enactment of
1 For background, see CRS Report R42917, Mexico: Background and U.S. Relations, by Clare Ribando Seelke, and
CRS Report RL32934, U.S.-Mexico Economic Relations: Trends, Issues, and Implications, by M. Angeles Villarreal.
2 The U.S.-Mexico High-Level Economic Dialogue (HLED) is a cabinet-led initiative launched in 2013 to advance
economic cooperation. The White House, Office of the Press Secretary, “Joint Statement: United States-Mexico High
Level Economic Dialogue,” January 6, 2015. The North American energy ministers met for the first time on December
15, 2014. They pledged to share data, develop best practices for unconventional hydrocarbons development, and
modernize regional energy infrastructure.
3 Lisa Viscidi and Paul Shortell, A Brighter Future for Mexico: The Promise and Challenge of Electricity Reform,
Inter-American Dialogue, June 2014, http://www.thedialogue.org/uploads/IAD9603_MexicanEnergyFINAL.pdf.
4 David H. Petraeus, Robert B. Zoellick, and Shannon K. O’Neil, North America: Time for a New Focus, Council on
Foreign Relations, Independent Task Force Report No. 71, October 2014, available at http://www.cfr.org/north-
america/north-america/p33536. Hereinafter CFR, October 2014.
5 Laurence Iliff, “Oil Majors Show Early Interest in Mexico Bidding Round,” Wall Street Journal, January 20, 2015;
6 U.S. Congress, House Committee on Foreign Affairs, Subcommittee on the Western Hemisphere, Pursuing North
American Energy Independence: Mexico’s Energy Reforms, 114th Cong., 1st sess., July 23, 2015.
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energy reform might portend for Mexico’s economic development, the U.S. energy matrix, and
bilateral or North American energy cooperation.
Pemex: A Brief History and Pre-Reform
Status Report
Foreign investment in Mexico’s oil industry has had a tumultuous history. 7 After oil was
discovered in Mexico at the turn of the 20th century, foreign investors—primarily from Britain
and the United States—played a significant role in helping the country become the world’s
second largest oil producer by the early 1920s. However, political unrest during and after
Mexico’s bloody revolution (1910-1920) and the country’s 1917 constitution, which established
national ownership of all hydrocarbons resources, caused investment in Mexico’s oil and natural
gas sectors to gradually decline. By the 1930s, reduced foreign investment had resulted in
dramatic declines in production levels, and fraught relations between U.S. oil companies and
successive post-revolutionary presidents had damaged U.S.-Mexican relations. Tensions
culminated in President Lázaro Cárdenas’ historic 1938 decision to abandon efforts to mediate a
bitter labor dispute between Mexican oil workers and foreign companies and instead follow
through on his threat to expropriate all U.S. and other foreign oil assets in Mexico.
Upon its creation in 1938, Pemex became a symbol of national pride and a rallying point around
which Cárdenas and what became the Institutional Revolutionary Party (PRI)—the party of
President Enrique Peña Nieto—united a disparate Mexican society against foreign intervention.
Oil remains deeply tied to Mexican nationalism. Nevertheless, Pemex continued to pursue service
contracts with some U.S. oil companies until the practice was definitively outlawed by a 1958
regulatory law implementing Article 27 of the constitution.8 From then on, Pemex retained a
monopoly over Mexico’s oil and natural gas sector and the Mexican Finance Ministry kept tight
control over the companies’ finances and management.
In 2013, seventy-five years after its founding, Pemex found itself facing significant challenges.
Pemex had its heyday in the late 1970s following the discovery of the huge shallow water
Cantarell oil field, but the company’s long-term performance had been hindered by a number of
factors. For years, Pemex sustained itself on the revenue produced from its relatively easy-to-
exploit shallow water fields without investing the capital necessary to replace those reserves with
new fields or even maintain its infrastructure. Pemex had a high percentage of losses, low worker
productivity, and facilities that are in significant need of repair; 37 people were killed in January
2013 after an explosion occurred at one of the company’s offices in Mexico City.9 In part because
of the Mexican government’s heavy tax demands, Pemex had operated at a loss since 1998 and
significantly increased its debt burden. Until recently, the government had also prevented the
7 For an overview of Mexico’s oil industry from 1901 through the 1970s, see George Grayson, The Politics of Mexican
Oil (Pittsburgh, PA: University of Pittsburgh Press, 1980).
8 Article 27 of Mexico’s 1917 constitution gives the Mexican government exclusive legal authority to exploit,
distribute, and process hydrocarbons in the country and states that the government may not, per the regulatory law,
grant private concessions for their exploitation. Article 28 establishes petroleum and other hydrocarbons as strategic
sectors over which the government (public sector) exerts total control.
9 Adam Thompson, “Rusty Wheels of Pemex Require Much Oiling,” Financial Times, April 3, 2013.
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company from reinvesting its profits into maintenance and new exploration.10 Pemex’s pension
liabilities, negotiated by the company’s powerful and, for some observers, corrupt workers union,
had become an unsustainable drain on its finances.11 Each year, Pemex had been losing hundreds
of millions of dollars due to criminal groups illegally tapping into its pipelines.12 Pemex’s
inability to partner with other companies arguably inhibited it from benefitting from new
expertise and techniques, particularly in deep water drilling and hydraulic fracturing (fracking).
The Path to Pemex Reform
Proposals for Energy Reform
President Enrique Peña Nieto of the nationalistic PRI assumed the Mexican presidency on
December 1, 2012 after 12 years of rule by the conservative National Action Party (PAN). Even
though Peña Nieto hailed from the PRI, the party that had nationalized the oil industry and
watered down previous PAN-led reform efforts, he campaigned on an economic platform that
prioritized allowing Pemex to form joint ventures with private companies. At his inauguration,
President Peña Nieto announced a reformist agenda aimed at bolstering Mexico’s competitiveness
that included energy sector reform.
In order to implement his agenda, President Peña Nieto and leaders of the PRI concluded a “Pact
for Mexico” agreement with the PAN and the leftist Party of the Democratic Revolution (PRD)
that facilitated the passage of financial, education, telecommunications, and fiscal reforms.13
Many of those reforms required constitutional changes. As with the other constitutional reforms
enacted in 2013, the energy reforms that Peña Nieto proposed in August of that year required a
two-thirds vote in the Mexican Congress and approval by a majority of the country’s 32 state
legislatures. As discussed below, a PRI-PAN alliance enabled the December 2013 approval of
constitutional reforms on energy, but led the PRD to leave the Pact for Mexico.
The Peña Nieto Administration’s August 2013 energy reform proposal would have removed
hydrocarbons from the list of strategic sectors that can only be developed by the government and
allowed Pemex to form “profit-sharing”14 partnerships with international companies in
exploration and production. The reform would also have allowed Pemex to sign agreements with
private companies for transporting oil and gas, refining, and producing petrochemicals. In
secondary legislation, the President pledged to introduce reforms to give the company budget
autonomy, improve its transparency, and change its fiscal structure, among other measures.
10 Reforms passed in 2006 allowed Pemex to fund a portion of its capital investments with earnings rather than through
the issuance of new debt. Ognen Stojanovski, “Handcuffed: an Assessment of Pemex’s Performance and Strategy,” in
Oil and Governance: State-owned Enterprises and the World Energy Supply, ed. David G. Victor, David R. Hults, and
Mark C. Thurber (Cambridge University Press, Cambridge: UK, 2012).
11 Thompson, op. cit.
12 Patrick Corcoran, “Oil Theft Is Big Business for Mexican Gangs,” InSight Organized Crime in the Americas, March
20, 2012.
13 For information on the reforms in English, see http://reformas.gob.mx/en/reforms.
14 Under this scenario, private companies receive a percentage of the remaining revenue earned once exploration and
production costs have been recovered, but would not own a share of production.
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The PAN put forward deeper reforms than the PRI that would permit private concessions in
upstream and downstream15 operations and production-sharing agreements between Pemex and
private companies. Former PAN President Felipe Calderón tried to enact far-reaching energy
reforms in 2008, but his proposal was watered down by the PRI-led Congress.16 The PAN also
sought to establish a strong regulatory body and a sovereign wealth fund to support social needs.
Some PAN legislators reportedly conditioned their support for energy reforms on the PRI backing
political reforms, which were also approved in December 2013.
The PRD vigorously opposed allowing private involvement in Pemex. Instead the PRD proposal
focused on reforming the company while simultaneously granting it greater budget autonomy and
a less onerous tax burden. Past and present PRD party leaders joined forces to oppose the PRI and
PAN versions of energy reform.
Key Provisions of the December 2013 Constitutional Reforms17
In the end, the reforms approved by the Mexican Congress18 and a majority of state legislatures
and then signed into law by President Peña Nieto on December 20, 2013, bore most in common
with the PAN proposal, but contain elements of all three parties’ energy reform propositions.
Key elements of the reforms include:
• Maintaining state ownership of subsoil hydrocarbons resources, but allowing
companies to take ownership of those resources once they are extracted and to
book reserves for accounting purposes;
• Creating four types of contracts for exploration and production: service contracts
(companies are paid for activities done on behalf of the state), profit-sharing
contracts, production sharing contracts, and licenses (enabling a company to
obtain ownership of the oil or gas at the wellhead after it has paid taxes);
• Opening refining, transport, storage, natural gas processing, and petrochemicals
sectors to private investment;
• Transforming Pemex into a productive state enterprise with an autonomous
budget and a board of directors that does not include union representatives;
15 Upstream refers to the exploration, development, and production phases of oil and natural gas production. Midstream
refers to the transportation of the resource, and downstream refers to the refining and marketing of the resource. Natural
gas does not need to be refined, so downstream in that sector relates to the marketing of natural gas.
16 President Calderón originally proposed measures that would have allowed Pemex to enter into joint ventures with
foreign companies in exploration and production, and permitted private companies to build and operate refineries,
pipelines, and storage facilities in Mexico. Calderón’s proposal prompted strong resistance from the PRD and was
significantly watered down by the PRI in the Mexican Congress. Nevertheless, the final legislation brought private
sector experts into Pemex’s management structure, created an independent National Hydrocarbons Commission (CNH)
to advise the company, and added greater flexibility to its procurement and investment processes. Most significantly,
the 2008 reforms permit Pemex to create incentive-based service contracts with private companies.
17 David L. Goldwyn, Mexico Rising: Comprehensive Energy Reform at Last? Atlantic Council, December 2013,
http://www.atlanticcouncil.org/images/publications/Mexico_Rising.pdf.
18 The reforms were approved by the Mexican Senate on December 11, 2013 (95-28) and the Chamber of Deputies on
December 12, 2013 (354-134).
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• Strengthening four federal entities with regulatory roles in the hydrocarbons
industry (the Ministries of Energy and Finance, the National Hydrocarbons
Commission or CNH, and the Energy Regulatory Commission) and creating a
National Agency for Industrial Safety and Environmental Protection; and
• Establishing a sovereign wealth fund, the Mexican Petroleum Fund for
Stabilization and Development, to be managed by the Central Bank. (See Figure
1 below.)
Secondary Laws Approved in August 201419
While the constitutional reforms outlined the broad contours of Mexico’s oil and gas reform,
many details were left to be defined in secondary laws needed to implement those reforms. Those
laws had to pass Congress by a simple majority and technically had to be enacted within 120 days
of the signing of the energy reforms (December 20, 2013). However, due to a variety of factors,
including the PAN’s internal elections held in May 2014, the Mexican Congress did not consider
the energy laws until a special section convened in July. The Senate and Chamber of Deputies
debated and made minor modifications to the Peña Nieto Administration’s original proposals that
were then approved with broad support from the PRI, PAN, and smaller parties. Key provisions
dealing with the hydrocarbons sector not mentioned above include:
• Pemex: is more independent of the state, but must adopt internal reforms; is to
pay a tax rate of roughly 65% (rather than 79% now); and is permitted to keep
some of its existing fields through a “Round Zero” process as deemed
appropriate by the Secretariat of Energy;
• Pemex’s monopoly on retail gasoline and diesel sales ends in 2016;
• Companies will pay royalties and taxes varying with the price of oil;
• Companies must respect national content requirements of 25% in 2015, rising to
35% in 2025 (excluding deep water activities);
• Companies may not expropriate land from communities for exploration and
development, but rather temporarily occupy land and compensate its owners;
and,
• The National Hydrocarbons Commission (CNH) is strengthened and established
as a constitutionally coordinated entity to gather and manage information on the
energy sector; issue regulations and monitor compliance; and manage the bidding
rounds, award contracts, and supervise those contracts.
19 This section draws from David L. Goldwyn et al., Mexico’s Energy Reform: Ready to Launch, Atlantic Council,
August 2014, available at http://www.atlanticcouncil.org/publications/reports/mexico-s-energy-reform-ready-to-launch.
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Figure 1. Mexico’s Hydrocarbons Sector
Source: Government of Mexico.
The institutions now in charge of Mexico’s hydrocarbon industry20 now include:
• Ministry of Energy (SENER): develops Mexico’s upstream policy; determines
areas to be made available and the schedule for public bidding; chooses which of
the contract models to apply to which contract; and approves the non-fiscal terms
of the contract.
• Ministry of Finance (SHCP): determines the fiscal terms to apply to each
contract and participates in audits.
• National Hydrocarbons Commission (CNH): interfaces with Pemex and
private companies, conducts and manages contracts, and oversees the industry.
• Energy Regulatory Commission (CRE): grant permits for transportation,
storage, distribution, compression, liquefaction, decompression, regasification,
marketing, and sale of crude oil, oil products, and natural gas.
• National Agency for Industrial Safety and Environmental Protection (new):
regulates environmental and safety concerns.
20 Atlantic Council Fact Sheet, available at http://www.atlanticcouncil.org/images/files/
Energy_Reform_Fact_Sheet.pdf.
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• National Natural Gas Control Center (CENAGAS): manages system for gas
distribution and storage.
Round Zero
On August 13, 2014, the Mexican government announced the results of Round Zero a month
earlier than had been required by the legislation. The Secretariat of Energy awarded Pemex 83%
of Mexico’s probable reserves and 21% of its prospective reserves. Pemex had requested to retain
31% of the country’s prospective reserves, but its limited capacity to explore and produce in deep
water and unconventional areas may be why it was not awarded that large a share.
Even though Round Zero did not open up new fields for private companies to bid on, it did
increase the opportunities for private involvement in exploration and production in Mexico.,
Pemex is in the process of changing some existing service contracts it has with oil companies (as
allowed under the 2008 reforms) into profit-sharing contracts, as well as seeking new partners to
help it develop some of the other probable and prospective fields. New companies interested in
investing in Mexico may first seek to partner with Pemex before submitting independent bids.
Ongoing Developments and Round One
In the past year, Pemex has been undergoing restructuring; all of the regulatory agencies
empowered or created by the energy reforms have begun hiring and training their staffs;
regulations have been released; and the priorities for the Mexican Petroleum Fund have been
defined.21 U.S. companies are closely watching the degree to which Mexico establishes sound
environmental and safety standards, recruits qualified individuals to staff regulatory agencies,
fosters transparency, and conducts fair and transparent bidding processes. These efforts have
arguably been made more difficult in recent months due to the fact that Mexico’s 2015 budget—
including funding for those energy-related entities—has been cut by some $8 billion due to
declining oil prices (and therefore declining government revenue).22
On December 14, 2014, the Mexican government announced the terms under which companies
already incorporated in the country could bid on production-sharing contracts to explore 14
shallow-water fields of prospective light crude in the Gulf of Mexico. The Mexican government
has maintained that the fields would be profitable even if oil prices were to fall below $50 per
barrel; average production costs for Pemex hover around $22/barrel.23 On July 15, 2015,
Mexico’s Energy Ministry announced the bidding results. The results have been deemed
disappointing by energy analysts, as only 2 of the 14 blocks available were awarded to successful
bidders.24
While analysts concur that there is still interest in Mexico’s remaining “round one” offerings even
though oil prices are low, they predict that the government will have to offer more competitive
21 Ibid. Pedro Valenzuela and Duncan Wood, Mexico’s Energy Reform: Entering the Final Phase - The Expert Take,
Woodrow Wilson Center’s Mexico Institute, August 13, 2014.
22 Eric Martin and Brendan Case, “Mexico Cuts Spending Saying Oil Price May Stay Low for Years,” Bloomberg,
January 30, 2015.
23 Robert Perkins, “Pemex Sees No Price Constraints to Reforms,” Platts Oilgram News, October 31, 2014.
24 “First Phase of Mexico’s ‘Round 1’ Oil Concessions Disappoints,” Latin News Daily, July 16, 2015.
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terms in order to garner greater interest. Aggressive drilling requirements in the proposed
contracts may also deter companies in the current low price environment. The next rounds
expected to be launched in the coming months include bidding for shallow water production and
mature fields.
Mexico’s Energy Resources
Oil: Attracting a Lot of Interest
Mexico is the world’s 10th largest producer of oil and holds approximately11.1 billion barrels of
oil reserves—the 18th largest in the world.25 Mexico may also have the 8th largest tight oil26
resources globally, about another 13 billion barrels.27 With these reserves, Mexico has the
potential to halt its decade-long decline in oil production.
Figure 2. Mexican Oil Production, Consumption, and Exports
2000 - 2014
kb/d
4,500
4,000
3,500
Production
3,000
2,500
Consumption
2,000
1,500
Exports
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BP Statistical Review of World Energy 2001 - 2015.
Notes: Units = thousand barrel per day (kb/d).
25 BP Statistical Review of World Energy, June 2014, http://www.bp.com/en/global/corporate/about-bp/energy-
economics/statistical-review-of-world-energy.html.
26 Tight oil refers to oil that is trapped in impermeable formations, such as shale or sedimentary rocks, and requires
artificial fractures to allow the hydrocarbons to flow.
27 U.S. Energy Information Administration (EIA), Technically Recoverable Shale Oil and Shale Gas Resources: An
Assessment of 137 Shale Formations in 41 Countries Outside the United States, Washington, DC, June 10, 2013, p. 10,
http://www.eia.gov/analysis/studies/worldshalegas/. Hereinafter: EIA, June 2013.
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Mexico’s oil production declined by some 20% from 2005 through 2009; production has fallen by
roughly 1% per year since that time (see Figure 2) due, in part, to aging and inefficient
infrastructure (see Figure 3).28
Figure 3. Mexico Energy Infrastructure
Source: Compiled by CRS using data from IHS, Platts, and Esri. Date: September 2013.
Nevertheless, Mexico lags only behind Russia, the United States, China, and Canada as an
important non-OPEC oil producer. Most of Mexico’s production (75%) is found offshore in the
shallow waters of the Bay of Campeche, which is part of the Gulf of Mexico, and concentrated in
two fields—Ku-Maloob-Zaap (KMZ) and Cantarell. KMZ production has been on the rise since
2006, reaching almost 864,000 barrels per day (b/d) at the end of 2013, and has replaced part of
Cantarell’s decline. Cantarell was once one of the largest producing fields in the world, but
started having pressure problems in the mid-1990s. Efforts to reverse the decreasing production
were successful for a while and the field reached its peak in 2004 at 2.1 million b/d (63% of
Mexico’s production). By 2013, Cantarell produced only about 440,000 b/d (17% of Mexico’s
production).
28 This paragraph draws from: EIA, Country Analysis: Mexico, April 24, 2014, available at http://www.eia.gov/
countries/cab.cfm?fips=MX.
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The U.S. Energy Information Administration (EIA) has estimated that the recently-enacted energy
reforms could boost Mexico’s long-term oil production potential to 3.7 million b/d by 2040 from
the 2.9 million b/d produced in 2013. That estimate is 75% higher than the EIA’s 2013 forecast
for Mexico’s long-term oil production that was issued prior to the enactment of energy reforms.29
There may also be significant deep water resources in the Gulf of Mexico yet to be discovered. As
can be seen below in Figure 4, Mexico has undertaken very little activity in its portion of the
Gulf of Mexico, particularly compared to the United States, in part because Mexico does not yet
have the technical capacity to effectively explore or produce its deep water areas. This is one of
the reasons that international companies, particularly those with deep water expertise, are excited
about the reforms in Mexico. Additionally, the U.S.-Mexico Transboundary Agreement (see
below) may play an important role in raising Mexico’s standards of operation in deep water.
Figure 4. U.S./Mexico Oil and Natural Gas Activity Around the Gulf of Mexico
Active Wells and Platforms
Source: Compiled by CRS using data from HSIP Gold 2012 (Platts), IHS 2012 Wells, and Esri.
Note: This map may or may not offer information related to the submerged land tenure systems of the United
States or Mexico.
29 EIA, “Energy Reform Could Increase Mexico’s Long-Term Oil Production by 75%,” press release, August 25, 2014.
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Natural Gas: More Needed
Mexico’s natural gas production capacity is higher than in 2000, but has not been able to keep up
with demand (see Figure 5), which increased about 123% between 2000 and 2014. Most of
Mexico’s natural gas consumption supports its oil operations and national electricity generation.
Mexico’s proven gas reserves are on the decline due to underinvestment in exploration.
Production has also begun to decline in recent years as price differentials have made it more
profitable for Pemex to produce oil than gas. And, although Mexico may have significant
unconventional natural gas resources, it is further behind in developing these resources than other
countries, such as Canada. Mexico’s energy reforms seek to attract private investment in
exploration and production of both conventional and unconventional natural gas resources, but
also to accelerate investment in much-needed infrastructure for storage, transportation, and
distribution.
As a consequence of demand rising faster than production, Mexico’s imports of natural gas have
also been increasing, accounting for about 35% of consumption today compared to less than 10%
in 2000. In 2000, Mexico imported 30% of U.S. natural gas exports which accounted for 100% of
Mexico’s natural gas imports. In 2006, Mexico started importing liquefied natural gas (LNG) at
very high costs from Qatar, Nigeria, and Peru to help meet its growing demand for gas. Mexico
has three LNG import terminals, two on the Pacific side and one on the Atlantic.
Figure 5. Mexican Natural Gas Production, Consumption, and Imports
2000-2014
bcf
3,500
Consumption
3,000
2,500
Production
2,000
1,500
Imports
1,000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BP Statistical Review of World Energy 2001 - 2014.
Notes: Units = billion cubic feet (bcf).
As a free trade partner, exports of U.S. natural gas to Mexico are assumed in the public interest by
U.S. statute and permitted without delay, which has spurred U.S. natural gas exports to Mexico.
In 2014, U.S. natural gas exports accounted for approximately 69% of Mexico natural gas
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imports, and 24% of its natural gas consumption. Between 2008 and 2013, U.S. pipelines to
Mexico doubled their capacity. Current U.S. export capacity to Mexico is 4.9 billion cubic feet
(bcf) per day. By the end of 2015, that capacity should reach 8 bcf/d.30 It would appear that for
the immediate future Mexico will likely remain dependent on U.S. supplies of natural gas to meet
its growing demand.
Unconventional Oil and Natural Gas Opportunities
One of the areas gathering interest with the opening of Mexico’s oil and natural gas industry has
been shale development. The EIA has assessed Mexico’s shale gas resources to be significant (the
6th highest globally).31 The proximity of some formations in northern Mexico to U.S.
developments makes them attractive to some U.S. companies. As an example, the Eagle Ford
basin in Texas, one of the fastest growing shale producing areas in the United States, may extend
down into Mexico.
Mexico, through Pemex, has already started exploring some of its unconventional formations. A
limited number of test wells have been drilled, but Pemex has ambitious plans for scaling up
development and production over the next 10 years. However, Mexico will need to implement
reforms to attract outside investment to strengthen regulatory and environmental protection
measures; expand pipelines, roads, and other infrastructure; address water management issues;
and deal with security concerns. Some of the states in northeastern Mexico where shale
formations are located have experienced significant violence in recent years, possibly deterring
additional business opportunities. The impact of government efforts to quell that violence and
criminality in those states has been limited.32 Potential disputes with individuals and communities
over access to land could for exploration and development, as well as opposition to fracking in
some areas, could also deter would-be investors. The United States has already been working
with Mexico in some of the more technical areas such as resource assessment, environmental
protection, and regulatory policies.
Refining: Limited Capacity and in Need of Modernization
Although Mexico is a large exporter of crude oil, it is a net importer of refined petroleum
products, such as gasoline and diesel fuel. Mexico does not have enough refining capacity of its
own to meet its domestic demand for refined products, nor has it made the investment to process
heavy crudes like its Maya crude. Mexico has six refineries with a total capacity of 1.54 million
barrels per day, but in recent years has operated below capacity because of operating
mishaps.33As in many other countries throughout Latin America, Mexico’s refineries are in need
30 Electronic correspondence with U.S. Federal Energy Regulatory Commission (FERC), October 3, 2014.
31 EIA, June 2013.
32 Kathryn Haahr, Addressing the Concerns of the Oil Industry: Security Challenges in Northeastern Mexico and
Government Responses, Wilson Center: Mexico Institute, January 2015, available at http://www.wilsoncenter.org/
publication/addressing-the-concerns-the-oil-industry-security-challenges-northeastern-mexico-and.
33 EIA, April 2014.
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of major repairs and upgrades and often operate at below their stated capacity.34 Mishaps and
other losses are expected to result in a $7.7 billion loss for the company in 2013.35
Mexico and the United States already have a close relationship in the refining sector. Much of the
U.S. Gulf Coast refining capacity is designed to process heavy crudes, which require more
sophisticated and expensive technologies than Mexican refineries currently possess. Mexico
exports its heavy crude to U.S. refineries on the Gulf Coast, which then sends some of the refined
products back to Mexico. Pemex, which operates all of the refineries in Mexico, also owns 50%
of a refinery in Texas. The refining relationship between Mexico and the United States could
potentially be expanded even further as the reforms fully open up Mexico’s downstream
(marketing and refining) hydrocarbons market to international companies.
Energy: A Central Component of U.S.-Mexico Trade
The bilateral economic relationship with Mexico is of key interest to the United States because of
Mexico’s proximity, the high volume of trade with Mexico, and the strong economic ties between
the two countries. The United States is, by far, Mexico’s leading partner in merchandise trade,
while Mexico is the United States’ third largest trade partner in total trade after China and
Canada. Mexico is the United States’ second largest export market after Canada and ranks third as
a supplier of U.S. imports.
Since NAFTA took effect in 1994, the United States and Mexico have become more economically
integrated with strong trade and supply chain linkages. U.S. exports to Mexico increased rapidly
since NAFTA, increasing from $41.6 billion in 1993 to $240.3 billion in 2014, an increase of
478%. U.S. imports from Mexico increased from $39.9 billion in 1993 to $294.2 billion in 2014,
an increase of 637%.36 In most sectors, NAFTA removed significant trade and investment
barriers, ensured basic protections for NAFTA investors, and provided a mechanism for the
settlement of disputes between investors and a NAFTA country. The agreement, however,
included explicit country-specific exceptions and reservations. Under Chapter 6 of NAFTA, the
Mexican government reserved to itself strategic activities, including investment and provisions in
such activities, related to the exploration and exploitation of crude oil and natural gas.37 Despite
these exclusions from NAFTA, energy remains a central component of U.S.-Mexico trade, as
discussed below.
Mexico Still a Top U.S. Oil Supplier
Mexico has been trading oil and natural gas with the United States since the turn of the last
century. It is typically among the top three exporters of oil to the United States. Mexico’s crude
oil exports to the United States increased steadily in the 1980s and the 1990s, reaching a peak in
34 Justin Jacobs, “Refining Woes in Latin America,” Petroleum Economist, October 2013.
35 “Mexico’s Pemex to Incur $7.7 Billion Refining Loss in 2013,” Fox News Latino, October 23, 2013.
36 Based on data from the U.S. International Trade Commission (USITC) Interactive Tariff and Trade DataWeb using
Harmonized Tariff Schedule (HTS) at the 4-digit level. For more information on NAFTA and its effects on trade, see
CRS Report R42965, The North American Free Trade Agreement (NAFTA), by M. Angeles Villarreal and Ian F.
Fergusson.
37 Chapter 6 of NAFTA applies to energy and basic petrochemicals. It reserves most activities in Mexico’s energy
sector to the Mexican state.
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2004 and 1.6 million b/d. Since 2006, U.S. crude oil imports from Mexico have generally
declined, reflecting Mexico’s drop in production and rising internal demand. In 2014, the United
States imported 842,000 b/d of crude oil from Mexico, behind Canada and Saudi Arabia.38
As shown in Table 1, Canada accounted for 34% of the dollar value of U.S. crude oil imports in
2014, followed by Saudi Arabia (18% of the total), and Mexico (11% of the total).
Table 1. U.S. Crude Petroleum Oil Imports in 2014
Total in Billions of U.S. Dollars
Country
Value
% of Total
Canada 83.2
34%
Saudi Arabia
44.9
18%
Mexico 27.7
11%
Venezuela 25.9
10%
Iraq 13.6
5%
Other Countries
51.8
21%
Total 247.0
—
Source: Compiled by CRS using USITC Interactive Tariff and Trade DataWeb: HTS number 2709
for crude petroleum oil.
The United States is the destination for approximately 71% of Mexico’s oil exports, which arrive
via tanker. Although Mexico has an extensive pipeline network that connects major production
centers with domestic refineries and export terminals, it does not have any international oil
pipeline connections. Exports leave the country via tanker from three Gulf Coast export
terminals.39 The majority of Mexico’s crude oil exports are of the heavy Maya blend
(approximately 82% of exports), while the lighter crude oil produced offshore is mostly retained
for domestic consumption. Most of Mexico’s crude oil exports will likely continue to be exported
to the United States because of its close proximity and also because the U.S. Gulf Coast possesses
the sophisticated refineries necessary to process the heavier Maya crude oil.
The leading U.S. import item from Mexico is crude petroleum oil.40 The value of crude oil
imports from Mexico in 2014 totaled $27.7 billion, nearly 30% higher than the value of
automobile imports, the second leading import item. As shown in Figure 6, crude petroleum oil
imports from Mexico have been considerably higher than other top imports from Mexico over the
past 10 years. The drop in oil prices, however, caused the value of Mexican oil imports in 2014 to
reach its lowest level since 2006, declining from a high of $39.6 billion in 2011 to $31.9 billion in
2013 and $27.7 billion in 2014.
38 EIA, Mexico Country Report, April 24, 2014.
39 EIA, April 24, 2014.
40 USITC Trade DataWeb, using HTS code 2709 for crude petroleum oil.
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Figure 6. Top 5 Imports from Mexico
2003 - 2014
Source: Compiled by CRS using USITC Interactive Tariff and Trade DataWeb at http://dataweb.usitc.gov; HTS4-digit level.
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Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States
Although Mexico is one of the world’s largest crude oil exporters, it is a net importer of refined
petroleum products. In 2012, Mexico’s imports of refined petroleum products from all countries
totaled $29.6 billion. Mexico was the destination for 44% of U.S. exports of motor gasoline in
2013, although imports from the United States have declined since 2011.
Trade in Natural Gas
The United States has been Mexico’s largest supplier of natural gas and Mexico continues to be a
growing market for additional U.S. natural gas exports. As previously mentioned, Mexico’s
natural gas production has failed to keep pace with rising domestic demand making U.S. gas
exports an important source of energy. The value of Mexico’s natural gas imports increased from
$995.7 million in 2007 to $2.5 billion in 2013.41
Mexico imported a total of 779 billion cubic feet (Bcf) of natural gas in 2012, out of which 620
Bcf came from the United States. The United States imports a very small amount of natural gas
from Mexico. The surplus in natural gas trade with Mexico is expected to widen as recent supply
and demand trends in both countries are expected to continue.42 U.S.-Mexico trade in natural gas
is done exclusively via pipeline.
Areas of U.S.-Mexico Energy Cooperation
In addition to the burgeoning energy trade between the United States and Mexico, energy
cooperation has gradually risen to the top of the U.S.-Mexican political agenda as well. The
United States and Mexico have been working on geothermal energy projects since the 1970s, but
the possibility of expanding joint efforts to produce renewable energy sources, as well as
conventional and unconventional hydrocarbons resources, has also entered the bilateral agenda.
Bilateral Framework on Clean Energy and Climate Change
On April 16, 2009, President Obama and then-Mexican President Calderón announced the
Bilateral Framework on Clean Energy and Climate Change to jointly develop clean energy
sources and encourage investment in climate-friendly technologies. Among others, its goals
include enhancing renewable energy, combating climate change, and strengthening the reliability
of cross-border electricity grids. Four bilateral meetings have thus far been held to advance the
Framework. Since Mexico remains a top U.S. crude oil supplier and many of its untapped
resources lie in deep waters in the Gulf of Mexico and in shale formations abutting the U.S.
border, the countries want to ensure that Pemex (or other companies) develop those resources in
an environmentally responsible way.
The U.S. and Mexican governments share a mutual interest in developing renewable energy
sources, particularly those capable of serving rapidly growing population centers along the U.S.-
Mexico border. As part of that effort, since 2011 the North American Development Bank has
provided loans worth at least $677 million for projects related to wind and solar energy. The U.S.
41 Secretaría de Energía de México, http://www.sener.gob.mx.
42 EIA, April 2014.
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Agency for International Development (USAID) and Mexico have also expanded cooperation on
environmental issues with the Mexico Global Climate Change (GCC) Program, a five-year,
approximately $70 million program. The program seeks to help Mexico reduce emissions from
deforestation, implement a low emissions development plan, and create a system for monitoring
greenhouse gas emissions.
Although Mexico is trying to diversify its energy sources, it, like the United States, is likely to
continue relying on oil and natural gas from traditional and unconventional (i.e., shale) sources.
In the wake of the 2010 Deepwater Horizon spill in the Gulf of Mexico and amid concerns about
the impact of hydraulic fracturing of shale oil in the United States, both governments have an
interest in ensuring that hydrocarbons resources are developed in an environmentally responsible
way. For example, as Pemex begins to partner with U.S. companies in the Gulf, it could benefit
from participation in the Marine Well Containment Company that was created by U.S. companies
to deal with spills. Should Pemex pursue contracts with U.S. companies who have years of
expertise in hydraulic fracturing, they could complement the environmental and regulatory advice
that Mexico is already receiving from the U.S. Departments of State and the Interior.
United States-Mexico Trans-Boundary Hydrocarbons Agreement
In 2012, the United States and Mexico signed an agreement known as the U.S.-Mexico
Transboundary Hydrocarbons Agreement (the Agreement). The Agreement could mark the start
of an energy partnership in an area of the Gulf of Mexico that the U.S. Department of the Interior
estimates to contain as much as 172 million barrels of oil and 304 billion cubic feet of natural gas.
Although it concerns relatively little oil and natural gas, a main purpose of the partnership is to
lift a moratorium on development in that region that had been in effect since 2000. In addition,
the Agreement gives Pemex and U.S. companies options for jointly developing oil and gas
reservoirs, referred to as “transboundary resources,” that exist in areas straddling the marine
border of both countries.
Prior to the expected expiration date for the moratorium, the Mexican and U.S. Congresses
reviewed and accepted the Agreement.43 Congress enacted legislation approving the Agreement
on December 18, 2013, (H.J.Res. 59).44 Now that the United States and Mexico have approved
the Agreement, the moratorium is considered moot. The Department of the Interior’s Bureau of
Ocean Energy Management awarded the first leases subject to the Agreement in May 2014.45
43 The Mexican Senate reviewed and accepted the agreement in April 2012. On June 27, 2013, the U.S. House of
Representatives passed H.R. 1613, the Outer Continental Shelf Transboundary Hydrocarbon Agreements Authorization
Act (H.Rept. 113-101). House activity featured signs of a persistent policy divide between “pro-drilling” arguments to
accelerate energy production and “anti-drilling” arguments to maintain the moratorium in order to provide time for
fiscal, safety, and environmental issues to be addressed. On October 12, 2013, the Senate passed S. 812, to allow the
Secretary of the Interior to implement the Agreement.
44 Title III of the Bipartisan Budget Act of 2013 (H.J.Res. 59) gives congressional approval of the Agreement and
requires implementation planning by the Secretary of the Interior. For details about implementation plans to date, see
http://www.bsee.gov/uploadedFiles/BSEE/Newsroom/Publications_Library/BOEM-
BSEE%20MOU%20and%20Attachment%20A%20re%20Impementation%20of%20US-
Mexico%20TBA%20(FINAL%20signed%207-17-2014).pdf.
45 “BOEM awards leases in US-Mexico transboundary area to ExxonMobil,” Oil & Gas Journal, May 30, 2014.
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Issues for Congress
Mexico’s Economic Development
Mexico’s long-term economic outlook depends largely on the energy sector. Economic growth in
Mexico has been sluggish for several years, expanding just 2.4% in 2014 and 1.4% in 2013.
Growth is forecast to drop slightly in 2015 to 2.1%. Since the Mexican government’s reliance on
oil income is very high, any decline in oil revenue has fiscal and economic implications. The
decline in oil production combined with the drop in oil prices has resulted in lower export
earnings, prompting foreign-exchange market volatility and causing the peso to depreciate.46
Energy reform is the centerpiece of the President Peña Nieto administration’s attempts to
overhaul the economy, attract greater foreign investment, and generate more jobs. Numerous
observers and government officials have laid out high expectations for the potential of Mexico’s
energy reforms to improve economic conditions. One study suggests that the reform “offers the
prospect of enormous wealth generation over the next five years.”47
According to some industry experts, the importance of energy reform in Mexico cannot be
understated because of the additional opportunities for unconventional or shale oil and gas
production.48 While it is difficult to predict how increasing private participation in Mexico’s oil
and gas sectors may affect the country’s economic development, skeptics see reason to doubt the
government’s positive predictions. Some argue that multinational companies and large Mexican
conglomerates stand more to gain from the energy reform than the Mexican people.49 Other
critics question the government’s claim that the reforms will create thousands of jobs, and,
maintain that because Pemex is a bloated company with too many employees, it would likely
shed workers as a result of the reform. Others are concerned that the oil revenue will be
mishandled by corrupt Pemex or government officials rather than invested in strategic ways that
will benefit the country as a whole.50
Impact on the U.S. Oil and Natural Gas Sectors and the Bilateral
Energy Trade
The opening of Mexico’s oil and natural gas sector to foreign investors poses significant changes
in the U.S.-Mexico energy relationship that may have advantages and disadvantages for both
sides. Reversing Mexico’s production decline would add more oil to the global market and
enhance U.S. energy security. Having a neighbor who is a growing oil producer to the south, as
the United States has to the north with Canada, could provide a reliable supplier for the long term
and it would also contribute to North American energy independence. Some predict that the
46 IHS Connect, Country Outlook: Economic - Mexico, Country Reports, June 24, 2015.
47 Thomas Tunstall, Ph.D., Javier Oyakawa, M.S., M.Sc., and Alejandra Bueno, et al., Economic Impact and Legal
Analysis of the Shale Oil and Gas Activities in Mexico, UTSA, UANL, AEM, Wilson Center, Preliminary Report, May
2015.
48 Ibid.
49 “Richard Fausset, “Tons of Thousands Protest Mexican Oil Reforms,” Los Angeles Times, September 8, 2013.
50 Enrique Krauze, “Mexico’s Theology of Oil,” New York Times, November 1, 2013.
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region could produce surpluses of oil and gas in the coming decades, as well as expanded
renewable energy: wind, solar, biofuels, and hydro-power.51
U.S. companies that are able to enter the Mexican upstream sector are likely to benefit from the
opening of Mexican resources to foreign investment, depending upon the terms of the contracts
that are offered. Significant opportunities for infrastructure development, oil services companies,
and downstream industries are also likely to open up. This would be true for both the oil and
natural gas sectors, but U.S. natural gas producers who export to Mexico might, over the long
term, potentially lose some of their market.
U.S. Crude Oil Export Policy: The Case of Mexico52
U.S. crude oil exports generally are prohibited under U.S. law. The Energy Policy and
Conservation Act of 1975 (P.L. 94-163, EPCA) directs the President to restrict the export of crude
oil. There are certain cases where crude oil exports are permitted in statute: if it is shipped on the
Trans-Alaska Pipeline, is of foreign origin, or is from the Strategic Petroleum Reserve if such
export will directly result in import of refined products not otherwise available. EPCA and other
statutes permit crude oil exports in circumstances where the President determines that such
exports are in the national interest.
There have been some efforts to encourage the President to issue a national interest finding that
would allow for unlimited crude oil exports from the United States to Mexico, as has been
permitted for Canada since 1985. Under current laws and regulations, unlimited oil exports from
the United States to Canada are allowed, although an application must be approved for each
export transaction. As a result of this exemption, Canada is the primary destination for U.S. crude
oil exports, with exports exceeding 570,000 bbl/d in May 2015.53 The President could make a
similar national interest determination for export to Mexico, and, arguably, such a determination
would allow crude oil to be traded freely between the countries as economic conditions justified.
Congressional debate about potential changes to crude oil export restrictions is ongoing.
Numerous economic studies from various government and industry organizations have been
published. During the 114th Congress, there have been numerous hearings held by various House
and Senate committees that have explored aspects of U.S. crude oil export policy. Furthermore, at
least seven bills have been proposed during the 114th Congress, in addition to various Senate
amendments that have been filed.54 However, as of the date of this memo there has been neither
committee nor floor votes on any of the proposed legislation or filed amendments.
Mexico-U.S. Oil Exchanges
Under the Export Administration Act of 1979,55 the Bureau of Industry and Security (BIS)
provides export licenses for crude oil exports under so-called short supply controls. Its licensing
51 CFR, 2014.
52 This draws from CRS Report R43442, U.S. Crude Oil Export Policy: Background and Considerations, by Phillip
Brown et al.
53 Oilgram Price Report, “Canadian Imports of U.S. Crude Hit Fresh Highs in May,” July 9, 2015.
54 Proposed legislation in the 114th includes H.R. 156, H.R. 702, H.R. 1487, H.R. 2369, S. 791, S. 1312, and S. 1372.
55 The EAA is currently expired, however, its provisions and those of the regulations implementing it, the Export
(continued...)
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decisions are based on the statutory prohibitions and exemptions previously noted. However, it
will review other applications to export crude oil on a case-by-case basis to determine whether
they are in the national interest and consistent with the EPCA.
The BIS crude oil export regulations allow for exchanges with adjacent and non-adjacent foreign
states as long as certain criteria are met. It is important to recognize that exchanges with adjacent
and non-adjacent foreign states are distinct types of crude oil export transactions, and each has
different criteria. Generally, crude oil export licenses for non-adjacent foreign state exchanges are
much more difficult to obtain than those for adjacent foreign states. Adjacent foreign state
exchanges could be approved based on “convenience and increased efficiency of transportation,”
terms that are not defined in the regulations. Crude oil exported as part of an adjacent foreign
state transaction may not be reexported to another country.
In a move that could potentially enhance the efficiency of refinery utilization in both the United
States and Mexico, the Mexican government proposed an exchange transaction whereby heavy,
sour crude oil from Mexico would be exchanged for light, sweet crude oil from the United States.
On January 8, 2015, the chief executive officer of Pemex announced that the company wants to
increase Mexico’s production of gasoline for domestic use by importing and refining light crude
from the United States. 56 U.S. Commerce Secretary Penny Pritzker has confirmed that the United
States is engaged in ongoing discussions with Mexican officials over whether to export light
crude oil to Mexico.57 Correspondence with the BIS at the Department of Commerce indicated
that as of early July there are no new developments associated with the Mexico oil exchange
application.58 Timing for the license application decision is uncertain.
Pipeline Issues
Cross-border natural gas pipelines are authorized by the Federal Energy Regulatory Commission
(FERC) in the United States. More than 20 natural gas pipelines linking the United States and
Mexico are operating. Their approval by FERC has generally proceeded with little opposition,
although concerns about environmental impacts from “induced” gas production in the United
States may become a factor in the future. Between 2008 and 2013, U.S. pipelines to Mexico
doubled their capacity. Current U.S. export capacity to Mexico is 4.7 billion cubic feet per day
(bcf/d). By the end of 2015, that capacity should reach 7 bcf/d.59 Private companies have, for the
most part, not complained about the speed of the current pipeline approval process, although they
have voiced concern about delays for specific projects.60
(...continued)
Administration Regulations (EAR), are maintained through a declaration of national emergency and invocation of the
International Economic Emergency Powers Act (IEEPA, P.L. 95-223).
56 Voice of America, Mexico Proposes Historic Crude Oil Swap with US, January 8, 2015.
57 David Alire Garcia and Christine Murray, “U.S. Discussing Possible Light Crude Exports to Mexico: Pritzker,”
Reuters, January 6, 2015.
58 Email correspondence with the Bureau of Industry and Security, July 8, 2015.
59 Electronic correspondence with U.S. Federal Energy Regulatory Commission (FERC), October 3, 2014.
60 On June 24, 2014, the House approved legislation (H.R. 3301) that seeks to ensure the continued development of
natural gas infrastructure and exports to Mexico. Those provisions were integrated into H.R. 2, which the House passed
on September 18, 2014.
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Unlike natural gas pipelines, cross-border oil pipelines require authorization from the U.S.
Department of State in the form of a Presidential Permit. Although there are no crude oil pipelines
between the United States and Mexico, there are two cross-border pipelines for refined petroleum
products. The review and issuance of Presidential Permits by the State Department has become
contentious in recent years, as illustrated by the protracted review of the proposed Keystone XL
pipeline between the United States and Canada. A number of legislative proposals in the 113th
Congress sought to modify the State Department’s oil pipeline permitting authority to encourage
pipeline development, but none have been enacted. The House approved a related bill on January
21, 2015 (H.R. 161).
Other Opportunities for Bilateral Energy Cooperation
As energy moves to the forefront of U.S.-Mexican relations, opportunities may exist for greater
bilateral or trilateral (with Canada) energy cooperation. Those advocating a trilateral approach
generally highlight the need for regulatory harmonization, regional planning, reduced investment
and export restrictions, and strategic investments in new infrastructure.61 Within the U.S.-Mexico
context, analysts have urged the United States to offer more technical assistance to Mexico if it is
requested.62 Another area that could be expanded involves efforts to ensure that hydrocarbons
resources are developed without unduly damaging the environment, possibly through
collaboration between Mexican entities and U.S. federal or state regulatory entities. In terms of
capacity-building, the University of Texas system has recently expanded educational exchanges
and training opportunities for Mexicans working in the petroleum sector. Other U.S. universities
could also follow suit, potentially with support from the Obama Administration’s “100,000 Strong
in the Americas” effort to boost educational exchanges.63 Many others have also urged the United
States and Mexico to work together to provide oil and natural gas resources to help reduce
expensive energy costs in Central America as well.
TPP Negotiations
While the North American Free Trade Agreement (NAFTA) removed significant investment
barriers and ensured basic protections for U.S., Canadian, and Mexican investors in other NAFTA
countries, it did not open the Mexican energy sector to foreign investment.64 The recent opening
of Mexico’s energy sector to foreign investors may have implications for the ongoing trade
negotiations for a Trans-Pacific Partnership agreement (TPP).65 The United States, Mexico and
Canada are all participating in the talks and, while, a TPP is not likely to change NAFTA, an
agreement may change the rules governing North American investment and trade. During an
October 2014 visit to Washington, DC, Mexico’s Economic Secretary Ildefonso Guajardo
suggested that the TPP talks should reflect the opening of Mexico’s energy sector to private
61 CFR, 2014.
62 Goldwyn, August 2014.
63 For information, see http://www.100kstrongamericas.org/about.
64 For more information on NAFTA, see CRS Report R42965, The North American Free Trade Agreement (NAFTA),
by M. Angeles Villarreal and Ian F. Fergusson.
65 For more information on the TPP, see CRS Report R42694, The Trans-Pacific Partnership (TPP) Negotiations and
Issues for Congress, coordinated by Ian F. Fergusson. The 12 countries involved in the Trans-Pacific Partnership (TPP)
negotiations are the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru,
Singapore, and Vietnam.
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investors and include updates in the investment provisions of NAFTA to deter trade and
investment disputes among North American investors.66
Outlook
Since taking office, President Peña Nieto has shepherded a number of significant constitutional
reforms through the fractious Mexican Congress that had eluded the past two PAN
Administrations. The most important of those reforms may be the energy reforms promulgated on
December 20, 2013 and implemented by secondary laws signed on August 11, 2014 that allow for
private participation in Mexico’s oil and gas sector in ways not possible since the sector was
nationalized in 1938. The recently-enacted energy reforms have the potential to boost energy
production and improve economic competitiveness in Mexico, but implementing them in a
meaningful way may prove difficult.
The next six months could prove critical for the success or failure of Mexico’s energy reforms.
Amidst strong opposition from the political left, the Mexican government will have to manage
popular expectations about the benefits of the reforms, many of which may not be felt
immediately. Pemex will need to restructure its workforce and investment priorities as it seeks to
become a productive state enterprise that can compete with other companies. The National
Hydrocarbons Commission (CNH) will need to complete the first round of public bidding in an
efficient and transparent fashion and to offer contracts with terms that are attractive to
international companies. At the same time, the executive will need to create strong regulators to
oversee the hydrocarbons sector.
This report will be updated periodically to inform the U.S. Congress on the implementation of oil
and gas reforms in Mexico and to analyze how the reforms may impact Mexico’s economic
performance, the U.S. oil and natural gas sector, and bilateral energy relations.
Author Contact Information
Clare Ribando Seelke
M. Angeles Villarreal
Specialist in Latin American Affairs
Specialist in International Trade and
cseelke@crs.loc.gov, 7-5229
Finance
avillarreal@crs.loc.gov, 7-0321
Michael Ratner
Phillip Brown
Specialist in Energy Policy
Specialist in Energy Policy
mratner@crs.loc.gov, 7-9529
pbrown@crs.loc.gov, 7-7386
66 “Trade Talks Must Reflect Mexico’s Energy Reforms, Guajardo Says,” Bloomberg Bureau of National Affairs,
October 23, 2014.
Congressional Research Service
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