Impressive energy reserves, increasing investment, and foreign cooperation are about to end Mexico's declining output.

Violence across the MENA region, a tense standoff with Russia over Ukraine, Islamic militancy in Nigeria, and sporadic violence between Sudan and South Sudan, as well as internal uprisings are all raising the risks associated with investment and production in oil intensive regions. In contrast to this instability, North America and Latin America are emerging as stable and productive alternatives to traditional oil exporting regions. Nowhere is this truer than in Mexico, where an estimated $1.3 trillion in crude reserves sets the country on a path to mimic the energy revolution that drove US oil output to a 26-year high, and pushed Canadian output to record levels.


Mexico is one of the top 10 oil producers in the world, and one of the foremost suppliers of energy to the US. According to BP estimates, Mexico's proven reserves were 11.1 billion barrels in 2013. However, production declines from Cantrell and other large offshore fields have caused a steady decrease in oil production since 2005, although this trend has slowed recently. In December 2013, in an effort to address declining output, the Mexican government enacted constitutional reforms that ended the 75-year monopoly of Petróleos Mexicanos (PEMEX), the state-owned oil company. In addition to driving 13% of Mexico's export earnings in 2013, PEMEX also accounted for 32% of government revenues, and declining revenues directly impeded state-level activity. Mexican energy consumption in 2012 was overwhelmingly in the form of petroleum (53%), followed by natural gas (36%), and the remainder was predominantly coal (only 5%), and hydroelectric at 4%. The generation, distribution, and marketing of electrical power are also undertaken by a state-owned monopoly, the Federal Electricity Commission (CFE). The CFE infrastructure comprises 209 generating plants, with an installed capacity of 52,515 MW. And while PEMEX and the CFE dominate the Mexican energy landscape, this is set to change in the coming years as reforms enacted in 2013 begin opening up the market to private competition. By replacing government intervention in the industry with regulation, establishing independent system operators to manage transmission, transportation, and distribution grids, and mandating new governance structures for state-owned monopolies, Mexican energy customers will soon have access to more competitively priced power and services. While domestic power is on par with US prices, industrial power is significantly more expensive.

Meanwhile, enhanced efficiency will allow energy companies in Mexico to turn outwards. Despite having ample reserves of oil and natural gas, proficiency in energy production, encouraging economic fundamentals, and industrial capability, Mexico still imported 1.8 billion cubic feet per day (bcf/d) of natural gas. Mexico's Natural Energy Ministry (SENER) predicted that imports of natural gas from the US would hit 3.8 bcf/d in 2018, highlighting the need for Mexico to develop its own capacity. According to SENER, almost three-quarters of the projected growth in Mexico's natural gas consumption between 2012 and 2027 will be in the electric power sector. This growth will be primarily in private and independently operated power plants, whose natural gas consumption is predicted to rise by 7.9% annually, from 1.6 bcf/d in 2012 to 4.9 bcf/d in 2027. While the private sector steams ahead, plants operated by the CFE are only expected to grow by 0.4% per year, from 1.1 bcf/d in 2012 to 1.2 bcf/d in 2027.


In 2013, Mexico produced an average of 2.88 million barrels of oil per day (bbl/d), however this statistic represents a 1.1% decrease from the 2.91 million bbl/d seen in 2012, and 3.83 million bbl/d a decade ago in 2004. Oil consumption in Mexico has also fallen, at 2.02 million bbl/d in 2013, compared to 2.06 bbl/d in 2012, representing a 2.6% decline over one year. Crude oil accounted for 2.5 million bbl/d, or 87% of total output, with the other 13% in leases condensate, natural gas liquids, and refinery processing gain. Mexico's total oil production has fallen sharply in recent years, down 22% from its height between 2004 and 2009. However, the last five years have seen declines level off to 1% per year. Notably, crude oil production in 2013 was the lowest since 1995, and 2014 indicates a continuation of this trend.

Mexico's oil production is concentrated off the eastern coast, in the Bay of Campeche of the Gulf of Mexico, near the states of Veracruz, Tabasco, and Campeche. Approximately 1.9 million bbl/d are produced in the Cantarell and Ku-Maloob-Zaap (KMZ) offshore sites. However, in 2013, Cantarell produced only 440,000 bbl/d of crude oil, which was almost 80% below its peak production level of 2.1 million bbl/d in 2004. Meanwhile, production from KMZ has tripled since 2004, to 864,000 bbl/d, due to the introduction of a nitrogen reinjection program by PEMEX. Onshore production accounted for 25% of crude oil production in Mexico in 2013, but that could change. PEMEX has increased investment in the Chicontepec oil field, to the northeast of Mexico City, as a potentially significant source of future production. With 637 million barrels of proven crude oil reserves, and 15 billion barrels of probable and possible reserves, the prospects have attracted foreign interest from the Spanish oil company Repsol and China's Sinopec.


While Mexico has 12.3 trillion cubic feet (tcf) of natural gas reserves, the country is a net importer. In 2012, Mexico imported a total of 779 bcf of natural gas; 620 bcf of which came from the US. Booming shale gas production in North America has driven down natural gas prices, and Mexico's consumption further exceeded its productive capacity. US exports of natural gas to Mexico accounted for over 38% of total US natural gas exports, and almost 80% of Mexico's natural gas imports. This deficit is the result of market changes and resource misallocation, meaning that Mexico is well positioned to capitalize on its own natural gas reserves. According to the Oil and Gas Journal, Mexico had 17 tcf of proven natural gas reserves at the end of 2013. And according to the US Energy Information Administration (EIA), Mexico has an estimated 545 tcf of technically recoverable shale gas resources. Mexico's lack of development in exploration and production of shale gas are emblematic of PEMEX's low investment, poor financial situation, and lack of technical ability, which the 2013 reforms address. In early 2014, PEMEX announced plans for 10 more shale wells on top of recently discovered reserves in northern Mexico, bringing the number of shale wells in the country up to 175. Across the border in Texas, there are over 13,000 established wells.


In 2013, Mexico had 53.5 GW of effective generation capacity. According to SENER, the country generated an estimated 258 billion kWh of electrical power in 2013, signifying an increase of almost 25% from a decade ago. Most of this power was generated through fossil fuel generation, with 58% of sales going to industry consumption, and just over 25% to residential customers. Beginning in 1992, the Mexican government implemented legal reforms that liberalized the Mexican electricity market. By the end of 2011, privately owned production was contributing over 30% of total capacity. New legislation in 2013 included language that opened the distribution side of the electricity market to further competition by establishing an independent grid operator and trading market for electricity. Mexico is currently a modest exporter of electricity to the US, and as more private power generators come online, sales may pick up. In 2012, Mexico exported a net 683,000 kWh, representing a 16% increase from the previous year.


While petroleum and natural gas dominate energy consumption in Mexico, coal makes up another 5%, according to the US EIA. In 2013, 8.3 million tons were mined. Coal consumption in 2013 stood at 12.4 million tons of oil equivalent, making Mexico a net importer. According to BP, the country had 1.2 billion tons of proven reserves. Of these, 860 million tons were anthracite and bituminous, and the other 351 billion tons were sub-bituminous and lignite. Growing access to cheap natural gas will lead to a decline in coal use for power generation. Industry experts expect the role of coal in Mexico's power generation to gradually fall over this decade and into the next, from 11.8% of total generation in 2012 to 8.4% in 2022. And with alleged involvement of Mexican drug cartels in the coal mining business, and mines being shuttered due to child labor law violations, this transition is good news for Mexico.

Hydroelectric power supplied about 11% of Mexico's generation of electricity in 2013. The largest such project is located in Chiapas, at 2,400 MW. Another hydroelectric project, the 750-MW La Yesca facility, was completed in late 2012. Non-hydro renewables make up 3% of Mexico's electricity generation. Geothermal generation is the largest contributor to this group, such as the 645-MW Cerro Pietro plant in Baja California, followed by biomass, and waste combustion power plants. Currently, wind and solar projects are not significant contributors to Mexico's electrical grids; however, several wind projects are being developed in Baja California and southern Mexico. Overall, Mexico is on track to set a record high in renewable energy investment with an estimated $1.3 billion in the first half of 2014. Germany's Siemens is considering investing in renewable energy in Mexico. Spain's Iberdrola owns 5.2 GW of generation facilities in Mexico, and plans to invest $5 billion over the next four years. Meanwhile, Spain's Acciona SA and Gamesa Corporación Tecnológica have also acquired wind development projects in Mexico, demonstrating that Mexico's energy sector is still ripe for innovation.