 This is Think Tech Hawaii. Community Matters here. Welcome. This is the Energy in America show, and I am not J. Fidel. J. is off today. I'm Maria Tome, and with me soon is Lou Puyirisi. And he's actually not even in Hawaii. I believe he's in Mexico City, and he's going to tell us about how important Mexico's election is to our energy situation. Hey Lou, welcome to the show. Nice to be here. So our topic today is about the Mexican election and its importance. So maybe I should start things off here. I've been in Mexico City since Sunday night, and I've been meeting with most of the senior people in the political parties, including one of the presidential candidates. And the reason I'm here is to participate in a series of roundtable discussions on the Mexican energy reform, which I don't know how many of your audience are familiar with it, but Mexico has had an enormous success with privatizing and opening up their energy sector to private investment, not just for oil and gas, but for renewable solar wind. There's an enormous privatization effort in the power sector, in the midstream sector of moving both electricity and natural gas and petroleum products. And in the upstream sector, where literally tens of billions of dollars have been committed toward development of Mexico's onshore and offshore oil reserves. So having said that, why don't we start and we're going to tell a story today on why how this election turned out is likely to have a very big effect on Mexico, but not just Mexico, because what happened to Mexico is very important to the United States these days because of the integrated nature of our energy markets. So let's go to the first slide. So this first slide, I have to pull it up myself, shows what are the three leading candidates, right? And if you start with the one on the upper side, the upper, I guess the upper right, upper left to you, is the frontrunner, Dom Derez Obrador. Okay. And Obrador is put in run for office before, and he has made a lot of statements that the reform program has gone too far, that perhaps it should be reviewed, and although the reforms were actually implemented through a constitutional change, so it's not going to be that easy to change, but Obrador provides a lot of uncertainties on the future of the reform movement in Mexico. And to his right, you will see Ricardo Anaya, and Ricardo Anaya, basically, he's a pre-market guy with some notable exceptions. He's a state-owned company. He wants to strengthen him a bit. But the main feature Anaya has is that he is not a member of the so-called pre-government, and the pre-government is the government that's in power, as we know in most democracies. If you get in power for a while, the voters tend to resent you. So the runner Jose Antonio Mead is running for as a member of the pre-party. He's a very bright guy. He's very committed to the energy reforms. But right now, and probably even quite difficult in Mexico, but right now Obrador seems to be in the lead, but we still don't know how the election is going to turn out. So if we go to the next slide, I think we're going to see why Mexico remains very important to the United States. And this next slide shows the forecast for U.S. natural gas exports going forward to 2040. The other thing I want you to take away from this slide is pictures that, as you can see, the U.S. was a major importer of natural gas until the onset of the North American petroleum renaissance. And we are now becoming a net exporter of natural gas. In fact, probably sometime this year, the U.S. will be the largest producer of natural gas in the world and the largest producer of crude oil in the world. But if you look at this chart, you can see that U.S. is going to be exporting a lot of liquefied natural gas largely to the Pacific Rim. But pipeline exports to Mexico are very important. But those pipeline exports to Mexico are largely because of the reform movement in Mexico. The energy reforms have allowed the development of much more natural gas pipeline and new power plants to replace crude oil and aging coal plants throughout Mexico. And you can see, go to the next slide, which looks at U.S. natural gas exports to Mexico. You can see here, not only is the U.S. selling pipeline gas to Mexico, but many people may be quite surprised that Mexico last year was the most important destination for U.S. liquefied exports of new liquefied natural gas. So these slides are showing you how important the Mexican market is for U.S. producers to have easy access. And I'm going to show you in a bit why that is important even for oil production. Do you have any questions? Okay, no, this is interesting. So the Mexican market is very important to the U.S. natural gas producers, both the liquefied natural gas piece and increasingly the pipeline gas. And you're going to mention how this may be affected by the upcoming election? Yes, so I want also, let's go to the next slide for a second. It shows Mexican consumption of gasoline, distilled jet fuel, and the visual fuel oil. So for most of your audience, I think when they think about crude oil, they really think about what it's made, the use of gasoline and diesel fuel. Of course, in the Hawaiian Islands, you have to use fuel oil, every fuel oil, for producing power. Now, you can see that Mexican demand for consumption, for products, has not risen nothing. But one of the interesting points of the reform movement is that the politicians said, if we proceed with reform, gasoline prices will come down. But in fact, gasoline prices were heavily subsidized in Mexico. And Mexico has a sort of historic connection to the state oil company Mx. It's part of the national patrimony. It's a kind of iconic historical event in Mexico from the 1930s, when the government kicked all the oil companies out of Mexico and created a state oil company. So you can imagine these reform programs are very difficult to put in place. The other interesting aspect of Mexico, and go to the next slide, is you can see the imports of Mexico. And virtually, you can see that the imports have risen off of 2008 to 400, 500,000 bales a day to well over 800,000 bales a day. You mostly gasoline, but some diesel fuel oil, what we call diesel fuel, that would include jet fuel. Now, both rising imports are the result of a couple of the developments. First, the refining industry in Mexico is very inefficient, it's old, and the Mexican government has put more effort into pipelines and upstream development, including bringing in foreign investors into upstream development. But the key point here is that within the electorate in Mexico, a lot of the nuances of how the reform program works do not necessarily translate into a full understanding of the public. I mean, given your position, you have a lot of experience with trying to explain relatively complex developments in the energy sector to the broader public. And this is a big political issue in Mexico now. A big political issue that many of the candidates are running on that look. The U.S. cannot throw up the United States in the right adequate supplies that the U.S., that Mexico faces an energy security problem, maybe an energy security crisis. And after the election, the government should step in and put money into refineries, money into developing effective supplies and natural gas. They do have an extensive program to bring in foreign investment for these. But what is turning out is that the integration of the U.S. and the Mexican market is actually good for both countries. For Mexico, they have access to cheap natural gas. The U.S. natural gas at the border is the lowest cost in the world today. That's $2.00 a thousand cubic feet. In addition, the U.S. is exporting between two and three million barrels a day petroleum products, much of it to Latin America. And probably a reason for its year of 800,000 barrels a day, two thirds of that come from the United States. Now, why is all of this so important? I think it comes to the last slide. I think we have two more slides. First, the next slide shows you the dollar value of energy trade between the U.S. and between Mexico and the United States. And you can see that this is a very big deal. In 2016, probably imports from Mexico to the U.S. was $10 billion. But Mexico is actually buying the petroleum products and natural gas nearly $20 billion from the U.S. So any energy sector, even though we hear all this criticism about trade with Mexico, in the energy sector, the balance of trade favors the United States by a large margin. Now, the final slide on this little discussion here is shows us the relationship between oil production and associated natural gas. And this is the key point for U.S. energy security. And the reason it is is because in the United States, in the unconventional, even though the United States, it's probably gone in five to 10 million barrels a day of oil production in a remarkably short period of time. In fact, in the history of the world oil market, the expansion of U.S. oil production over this short period of time, from about 2009 to 2014, is the largest expansion of oil production in that period of time in any one country in the history of the world. A lot of reason for that, private mineral rights, that development of unconventional resources can take place very quickly. But an interesting thing about unconventional oil development in the United States is that it doesn't happen without a very important byproduct, which brings that crude oil to the surface of the earth, and that is natural gas. So if you produce crude oil in the United States, and let's take a look at two of these major sort of productions across the unconventional space, you can see that the black line on the left side which shows gas, it shows horizontal versus vertical valves. The steep curve is from what we call vertical valves. And you can see that natural gas production is climbing right along oil production. Also we produce a lot of oil. That's another issue we need to talk about at some point. But the important point is that if you produce oil in the unconventional space in the United States, you produce a lot of gas. And you need to find a home for that gas. You actually really don't care how much money you get for that gas. You need to find a home for it because if you don't produce that gas, you have to flare it. And it's even infected. You cannot flare gas for more than 60 days. And if you can't find a home for that gas, you have to curtail production of the crude oil. You cannot separate the production of those two products in the unconventional oil and gas space in the United States. Yes, we have dry gas production and gas production without oil in the Marcello contemplation. But in the vast part of the unconventional oil space, it comes with this natural gas. The integration of the technology side of the thing and the political and the economic is very interesting. And I look forward to hearing you talk more about how the balance of trade and the balance of products are both very important. I think we need to take a quick break. So don't go away. We'll be right back. All right. Thank you. This is Stink Tech, Hawaii, raising public awareness. For an insightful discussion of contemporary Asian affairs, there's so much to discuss. And the guests that we have are very, very well informed. Just think we have the upcoming negotiation between President Trump and Kim Jong-un. The possibility of Xi Jinping, the leader of China, remaining in power forever. We'll see you then. Hey, welcome back to Energy in America with Lou from Mexico City talking about the importance of the upcoming Mexican election to America's energy situation. So Lou, please continue. So if we go back to our last chart, I think the point I would like to make here is that because if it's about a joint product, what is a joint product? Well, you think about cattle. It's very difficult to produce beef without also producing leather. They sort of come together. And this is the case with oil and gas in the unconventional sort of resources in the United States. And we cannot use all the gas we produce in this unconventional space. And so, finding an export market, LNG in Mexico, which is now taking nearly 10% of all the natural gas produced in the United States. It's a huge benefit for Mexico and it's a huge benefit for the national economy. And what the data shows in the last chart is that if we start to have difficulties in marketing our natural gas to domestic sources, foreign pipeline shipments to Mexico, or even liquefied natural gas shipments to the real market, we are going to then have trouble with continuing the expansion of the oil production. In fact, we may begin to lose some oil production. So what happens in Mexico? In this election in our neighborhood to the south is actually much more important than many Americans, I think. And in the coming, this election is going to take place on July 1st. And I must say, just a fascinating time here, talking to energy analysts, producers, consumers, utility companies, and I'm talking about the transformation of the Mexican market. Mexico is an industrialized society. It thinks of itself, it used to think of itself historically as a producer, but it is now the major consumers of petroleum, petroleum products and oil and gas in the real market today. And how we integrate with this market, particularly over the struggle overnight, is very important. And I sort of feel it has not set enough effort from the U.S. side. Thank you, very interesting. So does Mexico, does the election have an effect on Mexico's production? I mean, does it have natural gas and petroleum resources of its own? Is that part of the dynamic, or is that further down? Mexico was a major producer. It produced well over three and a half million barrels a day. It was run by a state oil company. It did not have competition within the market. It was wholly owned by the state of Mexico, Mexico by the government. And in fact, unlike the United States, no part of Mexico has privately held mineral rights. One of the reasons the U.S. oil and gas production expanded so rapidly is that the mineral rights were owned privately. And came outside a lot of the political review that makes it so difficult to do energy projects, not just on gas energy projects, but renewable projects. Any project in which the government's land is involved, or government, the federal government's review is involved, as you well know, can be a great deal of difficulty to get these projects implemented. So Mexico underwent, which could only be described as one of the most remarkable reforms. They changed the Constitution. They have well over nearly $200 billion of investment, hard investment commitments for the development of offshore oil resources, onshore oil and gas resources, renewable resources. And they definitely need a lot of infrastructure to make this happen. As you know, the renewable fuels are both intermittent and bearable. They do not yet have a battery technology that can give us 24-hour on-demand delivery of power for minerals. So they're getting better at it. Mexico will need a lot of gas to produce domestic fuel from the U.S. But if the election, if one of the candidates, particularly, I guess, Oberdorf, he comes in and he claims he's going to review the contrast that recently he's made more contributory statements. But there's going to be a lot of uncertainty on what's going to happen to the development. And this can have, of course, an unimportant effect on the United States and could even harm the U.S. production platform. So if you were going to state your concerns if things, you know, as you mentioned, would harm the U.S. production, what would that look like? What would that situation be? So I think the particular harm would be that gas demand falls. And if gas demand falls, if gas demand finds a producing field in the permanent basin, probably our most prolific unconventional oil fields today, finds gas demand falling, producers then are forced to either flare the gas or shut in. But even in the Texas Railroad Commission, which regulates oil and gas in Texas, they will not permit flaring more than 50 days. It's combusting methane right into the atmosphere. It's not good for the environment. It's actually against the law. And so producers will then begin to have to curtail their oil production or find other markets for that natural gas. And that will not be easy to do. Do we have adequate? Sorry, do we have adequate? And we don't have adequate export capacity at the moment to just quickly move that out. We do not. It's a very long time to build LNG export capacity. We have it coming online, but these are, these export facilities cost $10 to $20 billion. They're extremely expensive. It is a long time to get permit, all the infrastructure to put in place. So this is a long-term deal, not a short-term deal. So one of the things that suggested to the Mexicans is that, you know, Mexicans talk a lot about energy security. They say, well, you know, we're too dependent on the United States. And you should, but, you know, it may not, it's not really cost effective for them to try to develop their own resources in a very short period of time. It's just not going to happen. So my concern then is they try to find a way to engage the U.S. in looking at joint strategies to build confidence. More storage in Mexico, cooperative efforts to build out more infrastructure, more resiliency with the grid. There are a lot of things that can be done if it's kind of turned out in the politics of it. Well, thank you. I know we only have a few seconds left and I think we're all looking forward to seeing the results of the Mexican election more so now than before we started this conversation. Great. Yeah, so do you have a final comment? Are you going to be talking about this more? Are you leaving Mexico City and then coming back after? I don't know. I think after the election it might be worthwhile to revisit this issue again. Yeah, yeah. Yes. And I'm happy to talk about that. Yeah, well thank you very, very much and I hope you have a good rest of your visit there and productive conversations with all the folks who have insights to offer as you have offered your insights to us. Okay, great. Aloha. Thank you. Aloha.