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Mexico says it will cut carbon, and is buying US nat gas

Mexico made headlines and earned praise from environmentalists this year when it pledged to cap and cut carbon emissions. Less discussed has been how Mexico may use U.S. natural gas to help it get there.

A network of insulated pipes carry liquefied natural gas from ships to giant storage tanks at Sempra Energy's Costa Azul terminal north of Ensenada, Mexico.
Don Bartletti | Los Angeles Times | Getty Images
A network of insulated pipes carry liquefied natural gas from ships to giant storage tanks at Sempra Energy's Costa Azul terminal north of Ensenada, Mexico.

Mexico has been slowly developing noncarbon emitting energy sources such as solar and wind power, but it's also been aggressively investing in natural gas infrastructure. It has converted many of its oil-burning power plants to natural gas, which emits less carbon dioxide than fuel oil—Mexico's biggest fossil fuel for power generation.

The Mexican government pledged earlier this year that its greenhouse gas emissions will peak in 2026 and then begin declining. The Carbon Dioxide Information Analysis Center puts Mexico's per-capita carbon dioxide emissions at slightly below the global average.

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To be sure, many nations and groups of nations have set targets for greenhouse gas emissions that later had to be revised when they proved too ambitious. And some scientists have pointed out that the way much of that U.S. natural gas is pulled from the earth—hydraulic fracturing, or so-called "fracking"—is rife with its own environmental problems. That said, natural gas does burn more cleanly than the oil that Mexico uses to generate electricity today. (Tweet This)

Renewable energy sources will play a growing role in Mexico's energy mix, but "the move from fuel oil generation to natural gas is really the way you are going to see these dramatic drops in carbon emission," said Duncan Wood, director of the Mexico Center at the Wilson Center, a policy research institute based in Washington, when he talked to CNBC earlier this year.

Unlike the United States, Mexico has traditionally relied heavily on fuel oil to generate electricity for its own citizens. But Mexico's state-owned electricity company, CFE, has retooled many of its fuel oil plants to run on natural gas.

And American firms such as Kinder Morgan and Energy Transfer Partners have been building pipelines to send natural gas from the United States to Mexico.

Recent regulatory reforms that opened Mexico's oil and gas sector to private investment have accelerated the trend, according to James Brick, an analyst with Wood MacKenzie.

An abundance of natural gas from the U.S. shale boom is making natural gas a cheaper source of energy than oil is, and it makes more sense for Mexico to generate electricity with American gas, while exporting its own petroleum abroad, Brick told CNBC. It's even more cost effective than taking advantage of Mexico's own plentiful natural gas.

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"Because U.S. prices are so low, it makes sense for them to input more U.S. gas as opposed to explore domestically," Brick said. "Finding Mexican gas that could compete with U.S. gas would be difficult."

The Mexican market consumes roughly three percent of the United States' natural gas production, according to Donald Santa, president and chief executive of the Interstate Natural Gas Association of America, a trade association representing the natural gas pipeline industry. That may not sound like much, but it is a small slice of a very large pie, he said.

"A number of folks have noted that while there has been a lot of attention on exporting liquefied natural gas, Mexico has been a bit of a sleeping giant," said Santa.

Big potential for solar

Brick says renewable energy sources such as wind and solar, plus noncarbon emitting sources such as nuclear and hydroelectric, will likely account for roughly 20 percent of Mexico's power generation mix by the mid-2020s, while natural gas will grow to about 65 percent of the mix.

"In 2000, natural gas was just over 20 percent" of total electricity generation, Brick said. "Today it is just over 50 percent and we expect that to increase to 65 percent by 2030."

Mexico has potential to develop wind energy, and its proximity to the equator makes is an excellent location for solar energy. Mexico has been signing deals with solar power companies, including a deal made earlier this year with the U.S.-based Pattern Energy to build one gigawatt of solar energy capacity in Mexico over the next five years.

"If you look at the solar resource in places like Baja, California, Sonora and a few other places, it's world class," Wood said. "There is not a better solar resource in the world. Although the solar industry has not really taken off, we are getting to the point where the price of solar in Mexico is not just competitive with most traditional fossil fuel" sources like coal and oil, "but is actually getting down to being competitive with natural gas."