Interconnected and Interdependent: Texas and Mexico at the Forefront of Energy Production

As a senior vice president of Hunt Power, Enrique Marroquin has been responsible for developing and growing the group’s greenfield electric transmission projects with a particular focus on electric interconnections between the southwest region of the US and Mexico.

As an active member and knowledgeable resource for the SMU Mission Foods Texas-Mexico Center, we asked Mr. Marroquin for an update on Texas and Mexico’s Energy sector, why the region is a leader in energy production, and what he predicts for the industry going forward.

1. Why is it important to have Energy as an area of study for a research center focused on Texas and Mexico?

No other region in the world has the type of relationship that Texas has with Mexico. It is unique in many more ways than just being neighbors separated by an international border. We share historical, cultural, family and economic bonds that have been in the works for many, many decades. Since the passing of NAFTA in 1994, we have been each other’s top trading partner and have built a robust cross-border trade interdependence in all sectors of the economy. Energy trade may not be the highest revenue generator in this relationship, but it is probably the one that draws the most attention.

Let me cite some numbers to illustrate how important energy trade is to this relationship. If Texas, were a country, it would rank 4th only behind Russia and Saudi Arabia in oil production. Mexico is also up there, but ranked 12th globally. The value of energy trade between both regions is in the tens of billions per year and the infrastructure that enables all that trade is comprised of 11 natural gas pipelines with a capacity to export 4.5 billion cubic feet per day (BCFD); four refined product cross-border pipelines; half a dozen deep sea ports and almost 30 international bridges and crossings that represented around $9 billion dollars of exports to Mexico in 2018[i]. Furthermore, Texas is home to 29 refineries (30% of the total U.S. capacity) that can process up to 5.4 million barrels of crude oil per day. Not all the fuel that is exported to Mexico is produced at these refineries, but those in Texas have a competitive advantage given its proximity and geographical location. We are, as they say, tied by the hip.

Another relevant fact is that Texas sends around 4.5 BCFD of natural gas to Mexico, Mexico imports around 70% of its 8.0 BCFD of natural gas needs, 90% of which is exported by the U.S. Of that amount, 4.5 BCFD is produced in the Permian and Eagle Ford basins of Texas and is exported south via the cross-border pipelines mentioned above. Furthermore, with an estimated 86 trillion cubic feet of gas of reserves and its vast network of gathering and processing facilities, Texas will remain as Mexico’s largest strategic supplier of natural gas in the foreseeable future. Mexico will not find a cheaper, more stable and reliable source of molecule anywhere else in the world.

We have to constantly remind folks of how the competitive advantages of having an irreplaceable geographic proximity with ultra-cheap prices and stable long-term supply and demand outlook can result in more jobs and more regional stability. The Mission Foods Texas-Mexico Center has chosen wisely in focusing one of their core research areas in the energy sector. There is no question that there is an opportunity to develop and strengthen the understanding of benefits of having an integrated energy network and to me it is obvious that the Center should continue to be a key partner in developing such an understanding and communicating it to all the relevant shareholders.

2. What are the areas of opportunity in energy collaboration between Texas and Mexico? Challenges?

In addition to being the largest producer and exporter of natural gas, Texas also holds the largest crude oil reserves in the country with 18 billion barrels, almost twice that of Mexico, and at 4.6 million barrels per day, it is the largest crude oil producer in the U.S. and almost three times larger than Mexico. Besides these impressive numbers, Texas is also the state that has the largest wind generation installed capacity with almost 29 Gigawatts (GW). Again, if it were a country, Texas would be ranked 4th in the world, nudged between India and Spain. Furthermore, there are almost 15 thousand wind turbines installed throughout the state. The American Wind Energy Association, AWEA, estimates that close to 25 thousand jobs are supported by and around 50 different manufacturing companies depend directly on the wind farms of Texas[ii].

The rapid adoption of all this wind energy was carefully studied by the Electric Reliability Council of Texas (ERCOT), who is perhaps the leading Independent System Operator in the U.S. ERCOT manages the dispatch and integration of all this wind over one of the most modern electric grids in the U.S. The knowledge base that ERCOT and other relevant stakeholder groups have developed in matters pertaining variable energy resource integration, for instance, make Texas the perfect partner for Mexico’s nascent wind industry, which stands at around 5GW today, but is looking to expand in a rapid manner over the years to come.

In summary, besides the obvious natural gas, refined products and exploration and production, the areas of collaboration that I see today should also include renewable energy; environmentally conscious hydrocarbon production; workforce development in the wake of new technological adoptions; electrification of transportation (more below on this); and design and implementation of modern regulatory frameworks to support all the above.

3. Texas is the leader in energy production in the U.S. What do you think the future holds in this sector for Texas and the U.S.?

No one can deny that technology is quickly becoming a disruptive force in the energy industry. Transportation electrification, for instance, is touted globally as a harbinger of multiple environmental and societal benefits, but the impacts that electric vehicles (EVs) will have on fossil-fuel consumption and, by extension, to the upstream-midstream-downstream hydrocarbon industry can only be but predicted today. Consider for a moment a hypothetical scenario, called Pluggening in a Wired magazine article published in 2018[iii], where suddenly all internal combustion vehicles were to be replaced by EVs. In that scenario, the electric grid would not be ready to supply reliably the charging requirements of these millions of EVs. The new load patterns would strain the distribution grids to a point where lights would flicker or wreak havoc to the grid. In a Pluggening scenario, the costs to prepare the electric distribution systems would be massive and someone must pay for them, which always ends up being the consumer.

Texas has always distinguished itself for being at the forefront of technology adoption, and is not afraid of taking the “bull by the horns” (no pun intended). The state prides itself on tackling the most difficult of challenges with a mix of creativity, pragmatism, and respect to the communities and the environment. Therefore, as Texas holds both the leadership position in hydrocarbon and clean energy production, it ought to also become a leading voice in responsible stewardship to that future.

Thought leaders like the Texas-Mexico Center can and should consider taking a prominent role in shaping the future of the state for when Pluggening comes. If the sole purpose of technology is to improve the quality of life, broaden humanity’s horizons and expand opportunities for growth, then it is our duty to make that happen. 

4. With the recent passage of USMCA and Mexico’s recent energy reform, how do you see these pieces of legislation changing the dynamics between Canada, the U.S. and Mexico going forward? Do you think there will be more opportunities for integration?

Since NAFTA passed, in 1994, Texas exports have grown much faster than exports of the rest of the U.S.[iv] However, the revamping of the old trade agreement, now called USMCA was much needed. Because the North American energy markets are highly integrated and interdependent especially between the US and Canada, Mexico will see the opportunity to catch up and support the growing North American energy integration via USMCA. The agreement is by no means perfect, but it sets the foundation for an independent energy region by eliminating trade tariffs for crude oil, gasoline, and other refined products, most of them, used to manufacture goods in Mexico. Furthermore, it improves some of the key elements that were critical to the energy sector such as investment protections and other provisions that serve as the foundation for new North American investments in Mexico´s energy sector. I am bullish in the integration of Texas and Mexico even further while each one keeping its sovereignty, identity and culture, and I truly believe that USMCA will make North America the most competitive and robust region in the planet. 

5. What would you think would be important for our readers to know about the industry going forward?

As I mentioned before, Texas and Mexico are interconnected and interdependent on each other for stability and growth. Supply chains ought to get stronger and therefore cross-border trade and infrastructure will continue to be the drivers of growth on both sides of the border. As Mexico retakes its path to growth, energy demand will also increase. The need for all types of infrastructure in the energy and transportation sector is jaw dropping, and opportunities to invest and participate in that growth should not be lost to any Texas-based company.

Furthermore, Mexico will continue to import natural gas and refined products for the foreseeable future, and the exchange of electricity between both countries should continue the pace of previous years. However, the new government in Mexico has been very vocal about the need to transform Mexico’s energy sector and to strengthen its independence. As the government of president Lopez Obrador continues to evolve its thinking on how to balance growth with a desire to strengthen its national oil and electricity companies, it would be interesting to read about the impacts that decisions made in Mexico City will have on the short and mid-term investment outlooks of Texas-based companies and other interested individuals that see Mexico as a desirable business destination.

[i] International Trade Corridor Plan, Texas DOT

[ii] Wind Energy in Texas

[iii] Electric Cars Could Destroy the Electric Grid—or Fix It Forever

[iv] Why Texas has so much riding on Mexico

0 comments on “Interconnected and Interdependent: Texas and Mexico at the Forefront of Energy ProductionAdd yours →

Leave a Reply

Your email address will not be published. Required fields are marked *