Trump will change U.S-Mexican Energy Relationship
President-elect Donald Trump has called for the building of a wall along the U.S.-Mexico border, the deportation of illegal migrants, and a tax on the remittances to Mexico.
Even more worryingly for Mexican officials, Trump has called for a U.S. exit or renegotiation of the North American Free-Trade Agreement (NAFTA) which Trump has called “the worst free-trade agreement in history.”
Trump’s election has seen the Mexican Peso depreciate 15% against the dollar. The Mexican economy is experiencing a downturn. The International Monetary Fund (IMF) has pushed downwards its projects of Mexican GDP growth from 2.5% to 2.18%. Continued violence related to ongoing narcotic trafficking is a major concern.
Oil has long been the one bright spot in the economy but, that could change under Trump. Already Mexico is seeing rising fuel prices which prompted protests this week.
— Veronica Flores (@vxflores) January 4, 2017
The successful bidding round for ten offshore exploration areas or blocks in Mexico took place on December 5th was seen as a minor victory. Some twenty international oil companies, including American oil giants like Exxon Mobil and Chevron took part. Other large oil companies involved in the bidding included Statoil, Shell, BP, Total, and Repsol according to Prensa Latina.
China’s Offshore Oil Corporation took two of the eight blocks on offer. France’s Total took three blocks. One of Total’s bid was included support from Exxon Mobil. American companies like Chevron and independent producer Murphy also were involved in winning bids.
The Mexican government estimates that the combined value of the oil in those blocks could be worth as much as $10 billion dollars. Given that Chevron and Exxon Mobil are already involved in oil production, the companies hope to draw on that experience and existing infrastructure in the Gulf. That could be complicated if NAFTA were to repealed which could complicate such moves. Oil production pays for 20% of the state budget and Mexico worries that a repeal of NAFTA could impact its most vital industry.
Mexico to pay for the wall
In order to get Mexico to pay for the wall, Trump could also tax Mexican import of petroleum products from America. Mexico’s refineries are no longer producing at full capacity and the country has relied increasingly on U.S. imports of gasoline, diesel and LPG. Mexico is in fact the top destination for U.S. exports of these products. Last year, an article written by the influential energy newswire S&P Global Platts noted Trump could tax U.S. energy exports to Mexico to pay for his wall. The article noted that a modest tax could pay for the wall over the course of two-presidential terms.
Many winning bids from December’s round of bidding on exploration blocks involve partnerships with PEMEX, the national oil company. PEMEX was formed in 1938 when Mexico nationalized its oil sector. The inspired similar nationalizations of the oil sector by, countries after the Second World War notably in the Middle East. In 2013, Mexico liberalized its oil sector which allowed foreign investment for the first time since 1938. Prior to the liberalization, PEMEX’s own exploration and production has slowed to a crawl. Next year PEMEX’s production of oil will fall to its lowest level since 1980.
Earlier this year to increase interest in his country Mexico’s chief oil regulator Juan Carlos Zepeda made clear that Mexican government data would be made available to foreign oil companies.
For Mexico, one Trump’s choice for Secretary of State — Rex Tillerson – is a welcome one. As the outgoing head of Exxon Mobil, Tillerson understands energy issues well. Exxon Mobil has been heavily involved in oil drilling in the American portion of the Gulf of Mexico. The American oil giant also has substantive operations in Mexico. Still faced with both a possible wall tax and a possible repeal of NAFTA, Tillerson’s Mexican experience maybe of small comfort to the government in Mexico City.