Column: Mexico oil swap a response to Saudi price war

Daniel Fine
The Daily Times

So far, the discussion is over Mexican ocean-based refineries taking 100,000 barrels of our light oil in a swap for 100,000 barrels of their heavy for U.S. East Coast refineries.

The swap can be a physical exchange with tankers delivering to Mexico and picking up cargoes of Mexican heavy.

Any heavy Mexican oil purchased by U.S. refiners displaces foreign overseas imports from Saudi Arabia and Venezuela. This emerges as a North American counter to the OPEC oil price war. Now Mexico and the United States have a common market interest in a swap of oil between them. There are historic and strategic origins that surround the swap transactions. First, the change in Mexico towards oil and gas ownership and investment is itself a significant, if not radical, shift from exclusive, anti-foreign government control (enshrined in its 1938 Constitution) towards an opening to private foreign exploration and production companies. American companies are prominent among applicants to the first auction. PEMEX, Mexico’s state monopoly company is prepared to take partners who deliver capital and technology to increase production.

It is this historical change that must be conscious in the Swap strategy. The “Swap” transaction is part of a new southward emphasis on PEMEX and Mexico in a North American market. Earlier, Canada was the northern emphasis only in contrast to an anti-foreign PEMEX controlled by government policy. Canadian market acceptance of U.S. investment was reciprocal under American mining law since the 1920s, although sidetracked briefly by Canadian resource nationalism.

U.S concerns over national security more than 50 years ago led to efforts to control foreign oil imports. An exception for Mexico was created: over-land imports from Mexico were allowed. The concept was “over-land” which is central to a North American oil market configuration and strategy including the proposed Swap. If it is North American “over-land”, it is not water-borne over the world’s oceans.

The Mexican Swap adds to the market-based transactions and mitigates the difference in petroleum geology between the two counties. Precision horizontal drilling by American oil and gas companies has created an over-supply of oil and an OPEC retaliatory price war. None of this technology has been applied to Mexican shale so far. The Mexican heavy-light Swap is a step in that direction.

How much heavy oil is needed by U.S. refiners? New Mexico refineries have switched to light oil and others are investing in downgrading their complex operations away from heavy crude feedstock. Government energy policy could be recalibrated to support the Swap expansion by way of mandating that any new purchases of heavy crude for the Strategic Petroleum Reserve must originate from the Swap with Mexico.

The North American Swap — Mexico and the U.S. — reduces heavy oil imports, which impact the U.S. balance of trade. While small in volumes, the Swaps reinforce the North American continental “elements complex” of natural resources in minerals and energy. This vision permeated the Reagan Administration despite Canada’s short-lived foreign investment rules.

The Mexican Swap affirms a North American resource continentalism which provides trans-border energy security. It also introduces American light, tight crude oil producers to Mexican refiners outside the price war with OPEC. Unless OPEC producers want to compete as suppliers of ultra-light crude to Mexican refiners, the Swap opens downstream opportunities as PEMEX prepares to invite U.S. oil companies to upstream participation.

Swap qualifications might include new production, excluding existing crude oil storage owners unless shale oil producers have title as storage owners. Dates of oil produced and placed in storage could be used to determine new from storage oil, which is now at record volumes. The Swap is a North American continental exchange — a contemporary “over-land” supply and demand function consistent with national and energy security. It is oil price war resistant. It is highly unlikely that OPEC would retaliate against Mexico in principle and cause further price declines by producing more crude oil.

Daniel Fine is associate director of the New Mexico Center for Energy Policy at New Mexico Tech and project leader for the State Energy Policy.