What are the infrastructure and supply challenges facing Mexico as lawmakers debate oil sector reforms and the introduction of more natural gas into the country's energy mix? During today's OnPoint, Marc Spitzer, a former commissioner at the Federal Energy Regulatory Commission and now a partner at Steptoe & Johnson, explains how Mexico's proposed energy reforms could economically benefit both Mexico and the United States. He discusses the impact a major reform could have on global energy markets and reacts to the withdrawal of Ron Binz as the nominee for FERC chairman.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Marc Spitzer, former FERC commissioner and now a partner at Steptoe & Johnson. Marc, thanks for coming on the show.
Marc Spitzer: My pleasure, Monica.
Monica Trauzzi: Marc, Mexico is on the verge of a significant energy reform. Politically it looks like there is support to move forward with what would be the biggest reform that they've seen there in 60 years. In the broader context of global energy markets, how significant are the steps that are being taken?
Marc Spitzer: Well, they're a growing economy. They've been hampered in the past by a lack of productivity from the energy sector, both for oil exports and now in their electricity sector, in the power, and they're trying to reform both at the same time. It's a real challenge, but there are fabulous potential benefits to Mexico if they achieve these forms, change their energy production sector and convert the electricity from burning oil to burning natural gas.
Monica Trauzzi: And you actually spoke in Mexico at the request of the Department of Interior, giving your perspective as a former FERC commissioner on the future of pipelines and shale gas development.
Marc Spitzer: Right.
Monica Trauzzi: How do you view the steps that they're taking, and what are the potential challenges?
Marc Spitzer: Sure. What's really good from the point of view of an American citizen who worked at FERC and had a small role in the shale revolution is that Mexico has seen in the U.S. the amazing benefits to the ratepayers of the shale revolution. And they're looking to monetize those benefits in Mexico, either to produce shale gas in Mexico, which will require a greater degree of governmental reforms, or at a minimum get some benefits by importing shale gas from the Eagle Ford play, which is very close, right across the border, through pipelines. Right now there's almost 2 Bcf a day of pipeline exports into Mexico. There are some commentators who think that'll go up to 6 Bcf very soon. And we've had a lot of debate over LNG export. Well, 6 Bcf without much political dispute going across the border, that's creating a lot of jobs in the United States in the production sector, employed in the gas production, employed in the steel fabrication, employed in the pipeline sector. And then all those revenues from Mexico is helping our balance of trade substantially. And what it enables Mexico to do, their electric utility's called CFE. Right now most of CFE's electricity production comes from oil-fired plants. Oil is very expensive. It's very polluting. There are many parts of Mexico that are mountainous, that have inversions and have serious air quality problems attributable to the burning of oil to produce electricity. If they could convert to natural gas for electricity generation, it is potentially billions of dollars in benefits to Mexican ratepayers and the Mexican economy, and many benefits to Mexico's environment. So it's a win-win. It's a win for the United States, it's a win for Mexico, and it shows that the revolution in shale production in terms of the science of the geology, in terms of the directional drilling, in terms of the hydraulic fracturing is producing benefits to our neighbors to the south.
Monica Trauzzi: So if it's a win-win, what stands in the way? I mean, the progress has been a bit slow.
Marc Spitzer: Well, Pemex, the Mexican oil producer, is technically permitted to drill for natural gas but it's not been encouraged by the government. And the current government, the Nieto government's proposing reforms with respect to Pemex. I think ultimately most folks at the conference I attended, both in government and the private sector in Mexico, but collectively the department of energy, felt that they needed some assistance of some form, whether financial or know-how for Mexico to fully exploit its resources. In the meantime, though, these pipeline exports are today, I mean almost 2 Bcf coming today. There will be new pipelines required, but the permitting process has had a lot less political risk than certainly the TransCanada pipeline from Canada. And it's something that's very feasible. These are short-distance pipelines. There are Mexican entities on their side of the border that are willing to invest in the infrastructure, and there are apparently those at CFE, the electric utility, willing to do conversions from oil power generation to natural gas for all those economic benefits that we talked about.
Monica Trauzzi: So why does the U.S. ratepayer story provide a good case study for Mexico? I mean, are the situations the same?
Marc Spitzer: Well, they're the same and different. There has not been much natural gas consumption in Mexico. So the benefits in the U.S. for power prices dropping as a consequence of $3 natural gas aren't as manifest right now, but they can be harvested. And the truth is the Mexican department of energy at this conference was very clear that they were insisting upon reforms of CFE in terms of the power mix. The environmental issues in Mexico City just for one are pretty striking. The power sector has been a drag on the Mexican economy, and that needs to be corrected. And then Pemex may be free of its natural gas obligations to reform how it produces and exports petroleum for Mexico's balance of trade. So there may be what I would describe as a virtuous cycle of benefits. All of this comes from that amazing shale revolution in the United States that has changed energy economics in this country and potentially the rest of the world.
Monica Trauzzi: All right, quick change of topics. I can't let you go without getting your thoughts on the Ron Binz nomination fallout. FERC is generally not an agency where we see much drama, so what exactly happened here? Was it just that he had a bad confirmation hearing?
Marc Spitzer: Well, it's a convergence of events, and the fact is Congress, unlike past Congresses where there was an awful lot of energy legislation being proposed and enacted every year, there's less being enacted because of just the nature of Washington. On the other hand, the Energy Committee in the Senate is a very collegial body, and the R's and the D's have always gotten along very well there. This was just one of those circumstances where the nomination got politicized right out the chute and sort of warring sides, most of whom aren't really very involved in FERC traditionally, got involved. And my hope is that cooler heads prevail, and particularly knowing the members of the Energy and Natural Resources Committee in the Senate as I do, maybe they would enforce a little bit of discipline on some of these outside groups, because at FERC we weren't real pleased all the time with political matters getting in our sandbox, so to speak.
Monica Trauzzi: Right.
Marc Spitzer: R's and D's at FERC work together and like to cooperate, and hopefully that'll be the rule.
Monica Trauzzi: So will it be Cheryl LaFleur?
Marc Spitzer: Well, presumably one of the two Democrats would be the chair if the new chair is not imposed by December, confirmed and seated by December. I know Cheryl LaFleur and John Norris are great people and they, either one of them would be a very fine chairman. And I'm confident that the president will select someone who will be equally good at FERC and look forward to their confirmation.
Monica Trauzzi: All right. We will end it right there. Thank you for coming on the show.
Marc Spitzer: Thanks.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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