Mexico’s US natural gas dependency tested in election year

Good morning and welcome back to Energy Source, coming to you this week from London and Mexico City.

In London, we have woken up to the news that Saudi Arabia has ditched a plan to increase its oil production in a major policy reversal for the kingdom. Stay with the Financial Times for the latest updates on that developing story.

I have spent the past few months investigating a little-known oil terminal in south-eastern Turkey. The site has become a staging post for disguised Russian fuels that have been shipped onwards to European buyers in contravention of the EU embargo, ship tracking data shows.

In the FT investigation, published this morning, I show how seaborne flows of Russian refined products into the Dörtyol terminal have soared since the first western restrictions on Russian trade began to take effect in the middle of 2022. The terminal has no capacity to further refine fuels on site and does not import oil into Turkey. Instead it functions as a trans-shipment hub, storing the oil before it is shipped to buyers in other countries, mostly in Europe.

Turkey has not banned its companies from dealing with Russian oil, so the terminal operator is not breaking any rules by receiving the cargoes. However, evidence of the facility’s role in the movement of Russian oil into Europe is another example of how Russia’s full-scale invasion of Ukraine has redrawn global energy flows, creating opportunities for countries and companies still able to trade with Moscow. It also comes at a time when Turkey’s western allies have grown increasingly frustrated over its continued economic ties with Moscow.

Do take the time to check out the full investigation, including some excellent graphics by the FT’s head of visual and data journalism, Alan Smith.

Now from Turkey to Mexico, where our Mexico and Central America correspondent Christine Murray has been investigating the country’s fragile energy dependence on imports of natural gas from the US.

Thanks for reading — Tom

Vulnerable US-Mexico gas flows face election year test

Mexico’s next government will face high-stakes decisions about the future of natural gas in the country after years of under-investment have left it dependent on the US and lacking essential infrastructure to broaden benefits from “nearshoring”, analysts say.

Almost half of Mexico’s energy mix comes from natural gas, with about 70 per cent of that demand met by the US. The Latin American country is one of the world’s largest importers of the fossil fuel, bringing in almost 60bn cubic metres a year from its northern neighbour, while its own domestic production has been declining for a decade.

That makes Mexico highly vulnerable to snowstorms and extreme weather in Texas, a problem exacerbated by critically low storage capacity. Gaps in its pipeline network also aggravate existing inequalities between the better-connected industrial north near the Texas border and less-developed southern states.

“It’s split into this very natural dependency because Texas is so competitive with its natural gas, and it makes so much more sense for Mexico to import . . . than it does for it to actually harness its own resources,” said Ryan Berg, director of the Americas programme at the Center for Strategic and International Studies think-tank. “What that means is you have distortions across the market.”

The US and Mexican economies have become increasingly intertwined since the North American Free Trade Agreement came into effect in 1994, with deep links spanning everything from agriculture to cars to labour. Washington’s trade war with China has only intensified the connections, with Mexico last year becoming the US’s biggest trading partner, benefiting from billions of new investments from companies shifting capacity closer to the American border in a process known as nearshoring.

The reliance creates vulnerabilities though, such as during Winter Storm Uri in 2021, when electricity outages in Texas cut gas flows and caused power cuts across big Mexican industrial cities such as Monterrey.

The US-Mexico relationship also contains myriad points of tension, from immigration to the northward flow of drugs, including fentanyl. This year, both countries hold presidential elections, and the rhetoric is escalating as Republican candidates promise to use military force to take out drug cartels.

“Countless scenarios could be created where either the US or Mexican government uses gas flows as a political weapon,” researchers at Columbia University’s Center on Global Energy Policy wrote last year. “In the US, both sides of the aisle in Congress could begin to question why the US is even sending gas to Mexico.”

Mexico’s energy policy has also swung like a pendulum, with populist President Andrés Manuel López Obrador moving to reverse the historic opening of the oil sector to foreign investment in 2013. His party passed electricity legislation to favour state energy companies over private renewables, and although it was held up in the courts, his administration in effect froze regulatory permits, leading to a collapse in private investment in the sector.

Presidential frontrunner Claudia Sheinbaum, a former climate scientist and protégé of the president, has said she will speed up the transition to clean energy and signalled some openness to private investment. But achieving that while balancing her party’s commitment to control by state-run companies CFE and Pemex won’t be easy.

“My sense is that Claudia is . . . more open to evidence-based policymaking. She’s not nearly as populist as [López Obrador],” Berg said. “That said, there’s this huge question hanging over the entire campaign, as well as a potential Sheinbaum administration, which is just how independent is she going to be?”

The political backdrop for the US natural gas sector, which has been criticised by environmental groups, is also in flux. Last week, President Joe Biden paused the permitting process for new liquefied natural gas terminals in a nod to climate-focused voters ahead of the November election.

In Mexico, the sector is less politically fraught, and even López Obrador has approved joint venture pipelines such as a $4.5bn one between state group CFE and Canada’s TC Energy. He has also approved multiple LNG export projects in the country, which will bring in US gas to be liquefied and exported to Europe, further increasing Mexican demand.

But building more pipelines, storage and possibly reviving the domestic natural gas industry would require quick work from the next government, said Oscar Ocampo, Coordinator for Energy at the Mexican Institute for Competitiveness.

“I think nearshoring is a structural change that isn’t short term,” Ocampo said. “[But] if you want to detonate growth, you have to do it in your first year . . . to be able to see the results as the term comes to an end.” (Christine Murray)

Power Points

• Activist investor Bluebell Capital Partners has called on BP to ditch its commitment to cut oil and gas output. Read this FT scoop for the full details.

• In an exclusive interview, Mongolia’s prime minister told the FT he was no longer certain construction will start this year on Russia’s long-planned mega-pipeline from its western gasfields to China.

• In the US, Myles McCormick probes the link between President Joe Biden’s decision to freeze approvals for new LNG export terminals and the cost of household energy.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu and Tom Wilson, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.