Mexico City, We Have a Problem

Pemex is the national oil and gas company of Mexico.  And fortunately for Pemex, Mexico has considerable state-owned natural gas resources.  But because of legal, economic, and political barriers, the country is drastically underutilizing its gas reserves.

Mexico currently holds approximately 11.8 trillion cubic feet (Tcf) of proved gas reserves, but is seeing significant declines in reserves each year [1].   While production in Mexico is declining, consumption is rising at nearly 7 percent annually [3].  A major contributor to the rise in gas consumption is the increased use of natural gas as a fuel for electricity generation.  Consumption in the electricity sector alone has grown from 16 percent in 1997 to 33 percent in 2007.   Pemex itself is Mexico’s single largest consumer of natural gas, accounting for approximately 40 percent of the country’s annual consumption [2]. The figure below shows the recent decline in Mexican natural gas reserves.



Already a net importer of natural gas, these trends raise questions of how Mexico can sustain its current energy policy as it relates to natural gas, or for that matter, why it would choose to.

Mexico has significant potential for new discoveries of natural gas, predominantly in the deep and ultra-deep waters of the Gulf of Mexico.   However Pemex does not have the necessary technology or financing to develop these resources, and the current legal framework and political regime has proved that changing the status quo will be difficult.   Additionally, legal restrictions in Mexico all but ban outside investment.

Mexico needs to create joint ventures and partnerships with foreign companies to significantly bolster exploration and production efforts in order to combat current declines in production as well as steady increases in consumption. By and large, Mexico has waited too long to act.  Their energy policies have been extremely shortsighted and have failed to realize a growing need to open their natural gas market to outside investment.  Policymakers should be aware of several certainties in the Mexican gas market, which should be the driving force behind many of their energy policy decisions.

1)   There is a limited domestic gas supply and production is rapidly decreasing;

2)   Mexico has shown a strong demand growth for natural gas in recent years;

3)   Pemex has limited technology and financing;

4)   Pemex has shown limited execution capability; and

5)   There is significant potential for new natural gas discoveries [3].

If Mexico is to reverse this trend it must act ASAP, and dramatically change its policies to attract more foreign investors.

[1] U.S. Energy Information Administration. Mexico Energy Data, Statistics and Analysis, 2009. http://www.eia.doe.gov/emeu/cabs/Mexico/NaturalGas.html

[2] Leon, Alejandra and Falcon, Ricardo. Mexico’s Quest for Energy Reform:  Making the Bid for the Quantum Leap? Cambridge Energy Research Associates, Inc. April 3, 2008

[3] Salazar Diez de Sollano, Francisco X., “Natural Gas in Mexico: Current Trends and Alternate Scenarios.”  The James A. Baker Institute for Public Policy, Rice University.  May 27, 2004.

Energy, Technology, and Policy across the Pond

As a British native I would like to write briefly on what is happening on the other side of the pond in terms of Energy, Technology and Policy, and in particular the reduction of Carbon Dioxide emissions. This is obviously of great interest to me but I also believe it is very useful as a comparison to the US.

The United Kingdom has a population of around 60million, around 20% that of the US.  In 2006 the UK was Consuming 9802 Quadrillion Btu of Energy a year, this represents 10% of US consumption of 99856 Quadrillion Btu of Energy in 2006. This was broken down by 1738 thousand barrels of Petroleum per day (US: 20,680), 74.21 short tons of Coal per year (US 1,112.39) and 3,202 billion cubic year (US: 21,653).  While per person use in the UK is less this post is not designed to be a tip of the hat to the UK, nor wag a finger at the US. There a lots of reasons for the lower energy usage, milder climate in both winter and summer, higher gas prices,a  more dense population on a national and city level, an economy with very little heavy industry and factory production, and a smaller GDP per person help to  contribute to a lower consumption level. However even despite this the UK is still 9^th largest consumer of fossil fuel energy in the world, and as such is a significant part in reducing global carbon usage.

In attempting to reduce Carbon emissions the UK has many physical limitations when compared to the US. Utility scale Solar is a non-starter with regular cloud coverage across the UK rendering Solar thermal impossible and Solar PV of limited use. This leaves wind, wave, and tidal as the main opportunities in the UK, which as an Island nation there are plenty of resources. However there are further constraints on Wind as there is very little undeveloped land in the UK and many of the windiest locations in the UK are in protected national parks. This leaves offshore wind as the biggest opportunity, along with wave and tidal energy. Offshore wind, wave, and tidal have their own problems as they are inherently difficult to engineer and as such is proving expensive to get to scale, however the UK does have expertise in drilling for Oil and Gas in the North Atlantic and hope to transfer these skills in installing these projects.

The UK has signed up to the European renewable energy directive in 2006, which requires them15% of their energy usage  to be from renewable by 2020. In response to this the recently re-branded UK ‘Department for Energy and Climate change’ published  its Renewable Energy strategy in 2009. This detailed how it expected the UK to achieve 15% of energy usage to be from renewable sources.  To achieve this over 240 TWh will have to be produced from renewables by 2015.

This will be achieved 49% in electricity production, 30 % from heat, and 21% from transport fuel. The biggest portions of this will be from offshore and onshore wind and renewable transportation (Hybrids).

The UK, will leverage its expertise in drilling for offshore oil and gas in the North atlantic to install off shore wind installations on both the West and East coasts of England. By 2015 it is hoped that over 5GW of electricity will be produced by offshore wind installations. With a further round of installations hoping to take that to 10GW by 2020.

There is however hope that we will be able to develop both wave and tidal power at significant scale with 2GW of installed capacity in the Ocean by 2020.

If they are successful the UK is hoping to make significant reductions in the use of fossil fuel usage over the next 20 years to the extent that there will be around a 30% reduction in Gas and Coal and 10% reduction in Oil.

With the failure of the Copenhagen summit to produce a binding agreement, it is going to be up to individual states to manage their own carbon reductions. The UK seems to have a plan to make significant reductions, however the plan also illustrates how carbon emission reduction can only achieved slowly over time. The sheer scale of the reductions being targeted by states such as California is put into perspective by this plan. It also illustrates how different parts of the world require different solutions and technology in order to be able to make these reductions.

Petroleum usage in current US military operations

Okay, so here’s a business guy in a course positioned at the intersection of engineering and law trying to blog for the first time ever, and to top it off it appears I’m the first one to post, so I have no frame of reference from my classmates.  Go easy on me….

While in Iraq last year, I was awestruck at the sheer scale of the supply trains that exist to provide logistical support to the American warfighter.  The purchasing, delivery, and usage of mobility fuels especially struck me as both a huge operational liability and a massive financial cost.  Non-stop breathing of exhaust fumes from F-16s, MRAPs, and a myriad of other tactical vehicles showed me very clearly the environmental cost we were paying as well.  I decided to do a little research into just how critical oil becomes in order to support our current foreign policy in places like Iraq, Afghanistan, Horn of Africa, etc.  I hope to shed some light on how significant a role petroleum plays in our foreign policy and to encourage thoughts on what else would be required of us, resource-wise, should we find ourselves moving towards military conflict with Iran or North Korea on top of our current commitments.  Unanticipated domestic response missions such as Hurricane Katrina in 2005 and foreign aid missions like the Haitian earthquake of 2010 only add to the burden on both oil supplies and the Defense budget alike.

For Fiscal Year 2010 (FY10), which runs 1 Oct 09 – 30 Sep 10, the Department of Defense requested $664B from Congress.  Included in this number was $130B solely to support the wars in Iraq and Afghanistan.  2.5-3.0% of the entire budget is allocated for fuels (product only), so big picture we’re looking at $3.25-$3.9B just for fuels that support our Southwest Asian operations, and $16.6-$19.9B overall.  That’s an awful lot of money at an absolute level, but bad news part one: it gets worse.  The Air Force has the lion’s share of this fuel demand (53%), and they spend an additional 144% of their fuel cost on delivery.  The Army only represents 7% of that fuel demand, but spends another $3.2B just on fuel delivery personnel costs.  $3.2B for gas jockeys!  Quick back-of-the-napkin calculations show that we could easily be spending over $48 billion dollars, all in, just to satisfy DoD fuel needs for FY10.

Bad news part two:  This budget, with respect to oil, was budgeted based upon a forecast for crude at $60.98/bbl.  Today’s (25 Jan) NYMEX close for WTI at Cushing was $74.96/bbl, a 23% increase over the forecast less than halfway through their fiscal year.  Morgan Stanley published their own forecast for crude prices recently, and they believe it will hit $95/bbl by calendar year end, so the DoD may have even more price shocks coming to them when the final gas bill is tallied up.  More accurately, though, the DoD doesn’t buy crude oil; it buys refined fuel products such as MoGas, Diesel, AvGas, JP5, JP8, and bunker fuel.  Using gasoline as a proxy for all refined products they buy (for simplicity) and Bloomberg data, as of today they could be paying as much as (spot) $1.99/gal or $83.58/bbl.  So maybe that $48B is even higher than has been forecasted.  Supplemental budget allocation, anyone?

Clearly energy use is a significant- game changing, in fact- issue for the American military.  Only 22% of their energy demand support basing and infrastructure, the rest is operational.  We must ask ourselves as a nation if we are willing to continue to spend this kind of money, consume massive quantities of a finite resource, and inflict an unknown amount of damage on our planet to sustain our current foreign policy courses of action.  If we collectively agree that it is justified for national security, then so be it.  If not, however, perhaps some calculated adjustments need to be made.

Sources: DoD, DLA, CIA