Mexico Purchases US Oil and Gas As Domestic Energy Demand Soars

LONG before ratification of the North American Free Trade Agreement (NAFTA), United States energy producers were finding a fertile market in Mexico.

Surging population growth, coupled with expanding industrialization, have increased Mexico's energy appetite by nearly 300 percent over the past 20 years. To meet the demand, Mexico has been importing increasing amounts of natural gas and liquid petroleum products from US oil and gas producers.

Formerly a major exporter of crude oil and other petroleum products to the US, Mexican oil production and refining capacity have not kept pace with demand. In the latter half of the 1980s, drilling activity by Pemex, the state-owned petroleum agency, began to slow down. Crude oil production leveled off, and demand for liquid petroleum gas (primarily propane and butane), gasoline, aviation fuel, and other products soared.

``They haven't made a capital commitment to refineries,'' says one US Department of Energy official. ``And even after they make a commitment, it will take years for that capacity to come on line. Until that time, we will be the supplier of choice for gasoline, aviation fuel, and other refined products.''

In northern Mexico, growth is being fueled by natural gas mainly from Texas fields. In 1988, Mexico bought 2.3 billion cubic feet (BCF) of natural gas from the US. By 1991, that figure jumped to 91 BCF. While government officials maintain that gas exports to Mexico will decline this year because of a slowdown in the Mexican economy, they expect sales of American gas to reach 300 BCF by the year 2000.

To meet the demand, San Antonio-based Valero Energy completed a pipeline last year that can carry 400 million cubic feet of gas a day from a terminal in McAllen, Texas, to the Pemex refinery just across the border in Reynosa.

MUCH of the demand for natural gas comes from the need for electrical power. Since 1972, electricity consumption in Mexico has more than tripled. Over the next decade, demand is expected to double. Mexico is now planning to add 6,000 megawatts of capacity -

half to be generated by natural gas.

Concerns about air quality and increasing industrial and domestic consumption of liquid petroleum gas (LPG) have forced Mexico to increase its imports.

In 1991, the Mexican government mandated that Mexico City and other large cities with air quality problems convert up to 300,000 commercial vehicles to LPG, a move that will increase LPG consumption dramatically. Since 1987, exports of American LPG to Mexico have grown more than 40 percent. Last year, the US exported 8.02 million barrels of LPG to Mexico.

Pemex has also begun buying gasoline on the spot market. US energy officials estimate that Mexico imported about 100,000 barrels of petroleum products a day last year, two-thirds of which was gasoline.

To feed the demand, Diamond Shamrock Inc., another San Antonio-based company, recently completed a pipeline from its South Texas refinery to a terminal in Laredo, Texas, from which it has been selling gasoline to Pemex.

NAFTA will stimulate other parts of the US energy industry. Oil-field equipment suppliers predict sales of nearly $350 million to Mexico next year.

Drilling contractors also expect to enter the market. NAFTA, however, does not remove Mexico's constitutional prohibition on foreign ownership of oil reserves. So US companies will have trouble joining Mexican oil exploration and production.

Over the short term, oil analysts expect the export surge to continue. But Mexico has nearly 30 billion barrels of proven oil reserves and 75 trillion cubic feet of natural gas.

As more of its oil fields are developed, the pipelines that were built by US companies to carry US products to Mexico may begin shipping products in the other direction.