The Mexican Energy Opportunity for the Reluctant Amigo

The Mexican leader launched a series of major reforms after winning the 2012 election, including a major reform of the energy sector.

The Mexican leader launched a series of major reforms after winning the 2012 election, including a major reform of the energy sector.

Mexican President Enrique Peña Nieto waited until the fourth year of his six year term in office to visit Canada. The delay was partly a response to Canada’s imposition of a visa requirement on Mexican travelers in 2010 that offended Mexican pride. It also didn’t help that the Harper government was never enthusiastic about trilateral arrangements in North America, preferring to deal with the United States one-on-one. Fortunately for Peña Nieto, this approach has not persisted and Prime Minister Justin Trudeau decided in June to overrule his officials to partially lift the visa requirement, hoping to thaw a chilly diplomatic relationship in time for the June 29 North American Leaders Summit in Ottawa.

The other reason Peña Nieto had not visited Canada might have been that he was busy. The Mexican leader launched a series of major reforms after winning the 2012 election, including a major reform of the energy sector that required amending the constitution.

Peña Nieto’s energy reform, which he trumpeted as “the most important economic change in Mexico in the last 50 years” has begun to gradually liberalize the country’s sluggish energy sector by insulating state-owned petroleum giant Pemex from politically motivated tinkering, creating the Mexican Petroleum Fund to better manage oil revenues, and removing barriers to private investment—such as an aforementioned constitutional prohibition barring certain kinds of production contracts.

While the reform has helped to lift the fortunes of both Pemex and the Mexican economy—including a highly coveted upgrade of the country’s credit by Moody’s in 2014 from Baa1 to A31—it has also created new opportunities for foreign firms. For Canadian firms, the opportunity to own a part of the country’s substantial deepwater, conventional, and unconventional plays or to ply their services to those that do has proved understandably attractive, with one 2014 projection from Barclays estimating that foreign investment in Mexico’s energy sector could reach USD 40 billion by 20202.

Mexico is expected to see stronger GDP growth than both Canada and the United States through 2018.

Mexico is expected to see stronger GDP growth than both Canada and the United States through 2018.

The sector’s attractiveness is also driven by underlying economic trends: not only has Mexico grown substantially in real terms from USD 527 billion in GDP in 1994 to USD 1.114 trillion in 20153, but Mexico is also expected to see stronger GDP growth than both Canada and the United States through 2018. And while economic inequality remains a pressing concern within the country, this growth has moved millions of Mexicans into the middle class and nearly doubled the purchasing power of Mexican citizens from USD 8,854 in 1994 to USD 17,276 in 20154—making Mexico’s middle class by some measures larger than Canada’s.

To satisfy rising demand both at home and abroad, Mexico is seeking to expand—or at least arrest the decline of—its energy supply capacity and, to the extent possible, promote clean energy development—including the expanded use of natural gas to generate electricity. As one of Mexico’s NAFTA partners, Canada enjoys several advantages that its firms will be able to leverage as they enter the Mexican market, including: Canada’s clearer rules for investment than other emerging markets; the right to bring Canadian-made equipment, materials and services into the country tariff-free; and access to dispute resolution mechanisms if things go awry.

Mexico’s other NAFTA partner, the United States, has also been exploring opportunities in the Mexican market, and already has a leg up on Canada due to its proximity and shared history. But for many Canadian firms, who are used to working with U.S. energy companies as partners, suppliers and co-investors, the fact that U.S. firms are already present in Mexico is good news: it means that Canadian companies can build on these U.S. relationships to overcome unfamiliarity with the Mexican market.

The shift to a greener and more efficient North American energy sector is also being at least nominally supported by government policy.

The shift to a greener and more efficient North American energy sector is also being at least nominally supported by government policy.

The shift to a greener and more efficient North American energy sector is also being at least nominally supported by government policy. At their Ottawa summit, Trudeau, Peña Nieto and U.S. President Barack Obama proclaimed their shared goal to see 50 per cent of electricity in North America generated by clean sources by 2025. To bring it about, the three leaders revealed the North American Climate, Clean Energy, and Environment Partnership Action Plan, which includes initiatives to improve energy efficiency, accelerate the development and deployment of renewables, and reduce emissions.

But the overall goal of reaching 50 per cent clean electrical generation, while certainly laudable, could be less ambitious than it seems. One problem is how to measure the region’s—as opposed to the individual countries’—progress. While the 50 per cent goal could be measured as the share of total clean North American generation, it could also be reasonably interpreted as the average of the three countries’ shares. Another more significant problem with the goal is the exact meaning of “clean”, which the Plan fails to specify5. If a charitable definition of clean energy including natural gas, nuclear, renewables, and hydro is assumed, then the goal probably would have been reached even in the absence of the Plan. Under such a definition, 90 per cent of Canadian, 48 per cent of U.S., and 61 per cent of Mexican electrical capacity is already generated from clean sources, and using Canadian, U.S., and Mexican government projections published before the Plan’s announcement, these shares would reach 93 per cent, 62 per cent, and 81 per cent in their respective countries anyways by 2025.6 If, however, natural gas is excluded—as at least one senior adviser to President Obama has indicated—then the plan represents a significantly more aggressive commitment, as only Canada will meet the target in 2025, with the U.S. and Mexico coming up short at 74 per cent, 40 per cent, and 35 per cent respectively—albeit from a lower baseline of 75 per cent, 28 per cent, and 26 per cent today.7

“Mexico is seeking to expand its energy supply capacity and, to the extent possible, promote clean energy development—including the expanded use of natural gas to generate electricity.”

Given this sizable gap, the commitment by the three leaders could be interpreted as either ambitious or implausible, but it is undeniable that all three countries will be investing to change their energy supply mix over the next decade. For Mexico to do its part to meet the North American clean energy target, fulfill its climate change commitments to the United Nations, and slake the thirst of its growing middle class for energy, it will need to continue investments in clean energy projects and deploy technologies developed by U.S. and Canadian firms.

In Ottawa, Trudeau and Peña Nieto finally made strides in improving bilateral relations, eliminated some obstacles to energy collaboration between Canada and Mexico, and set a goal for cleaner energy by 2025.
Canada’s days as the “Reluctant Amigo” in North America may be over.

Christopher Sands is Senior Research Professor and Director of the Center for Canadian Studies at the Johns Hopkins University School of Advanced International Studies, the G. Robert Ross Distinguished Visiting Professor in the College of Business and Economics at Western Washington University, and a nonresident Senior Associate of the Center for Strategic and International Studies.

Jesse N. Barnett is studying international economics in the Energy, Resources and Environment Program at the Johns Hopkins University School of Advanced International Studies.

  1. “Moody’s Upgrades Mexico’s Sovereign Rating to A3 from Baa1; Stable Outlook.” Moody’s Investor Service, 05 Feb. 2015.
  2. Mason, Richard “Mexico’s Energy Reform” Oil & Gas Investor, April 2014.
  3. World Bank. GDP (current US$).
  4. World Bank. GDP per capita, PPP (current international $).
  5. The White House. Office of the Press Secretary. North American Climate, Clean Energy, and Environment Partnership Action Plan. 29 June 2016.
  6. National Energy Board. Canada’s Energy Future 2016: Province and Territory Outlooks. Page 37. May 2016
  7. U.S. Energy Information Agency. Annual Energy Outlook 2016: Electric Power Sector: Electricity Generating Capacity: Power Only. May 2016.