Crude Awakening

How the opening of Mexico's state oil monopoly could spell the end of Keystone XL.

If President Barack Obama wants a way to appease both sides of the controversy over the Keystone XL pipeline from Canada, he might want to look in the other direction -- south to Mexico.

The pipeline, furiously opposed by environmentalists yet coveted by oil companies, could simply be substituted by a new gusher of oil supply -- perhaps just as controversial, but for completely separate reasons -- from Mexico.

Mexico's recent decision to open its oilfields to foreign companies promises to pull the country's petroleum production out of what had been a terminal decline, thus allowing it to slake the ever-growing thirst of the petro-industrial complex along the U.S. Gulf Coast.

Last week's decision by Mexico's Congress to extend major concessions to foreign companies became unstoppable Monday, when the plan gained approval from a majority of the country's 31 state legislatures. The opening is being touted by analysts as a historic step that could stop the collapse of Mexico's oil industry and turn it into a global energy superstar. In Mexico, however, it has sparked a bitter political fight that is likely to get worse in coming months. But for U.S. environmentalists and oil companies alike, it might offer a conveniently Solomonic solution, in which Obama could forsake the highly polluting Canadian crude for a Mexican alternative.

Mexico's role in North American energy markets is contradictory. It is a circular importer and exporter of petroleum products, exporting more than 1 million barrels per day of crude to the Gulf region and re-importing nearly half that amount in refined products. And to an extent much greater than generally understood, Mexico's declining production has forced the American energy industry to look to the Keystone XL as an alternate supplier.

Since the decline of Mexico's oil industry began in 2004, total crude output has fallen by one-third. Formerly gargantuan oil fields have dried up, and Pemex, the state-owned oil monopoly, has proved unable to deploy advanced technologies to develop new production. As a result, the country is widely predicted to become a net oil importer by the end of the decade. This trend is of critical importance to Mexico -- if not arrested, it would deprive the government of more than one-third of its revenue and deal a body blow to the economy. But it is of equal importance to the U.S. petro-industrial complex.

U.S. oil imports from Mexico, most of which are heavy crude similar to the diluted bitumen, or dilbit, produced by Canada's tar sands, have fallen from 1.7 million barrels per day in 2004 to only 900,000 today. Mexico then re-imports more than half that amount in a variety of refined fuels and petrochemicals. It's just one example of the Gulf Coast's role as the world's dominant supplier of refined petroleum products and petrochemicals, with Canada and Mexico as both suppliers and customers.

But the 800,000 barrels per day by which Mexican exports have declined is conveniently roughly the same as the 830,000 barrels per day that Keystone XL would carry southward from Canada. For the Gulf Coast refineries, most of which are configured to process heavy crude, the loss of Mexican crude cannot be easily substituted by the light, sweet crudes now pouring out of North Dakota and Texas oilfields. This lack of supply has been compounded by a somewhat smaller decline in heavy oil shipments from Venezuela, where the leftist government has gradually shifted its export focus from the United States to China. The result is what analysts have described as a "hunger for heavy," with Gulf refineries running at less than full capacity and straining to find replacement supplies on the world spot market.

All this formed the central logic behind the Keystone XL, at least from the U.S. perspective: So, it was adiós Mexico, hello Canada. The dilbit from the Keystone XL may be "game over" for the Earth's climate, as environmentalists like to say, but it would slake the thirst of the industrial beast.

Yet lo and behold -- if Mexico's oil production could be revived by foreign companies, the thirst for Canadian heavy crude could be substituted by new supplies from south of the border. Goodbye Canada, hola Mexico.

The key to this turnaround is the bugaboo of American environmentalists -- fracking.

Mexico has more than 10 billion barrels of proven oil reserves, Latin America's third largest after Venezuela and Brazil. Pemex engineers believe Mexico's portion of deepwater reserves in the Gulf of Mexico contains another 29 billion barrels. To extract that oil, Mexico needs advanced technologies that Pemex has been unable to master alone. But much of Mexico's potential also lies in Northeast Mexico's shale formations, including a cross-border portion of the Eagle Ford Shale, which as a result of the successful application of fracking has become Texas's most successful single oilfield ever.

For Mexico, the world's 10th largest oil producer, the opening to foreigners is a humiliating climb-down. The government nationalized the former U.S.-owned oilfields in 1938, and the slogan "the oil is ours" has been taught and dutifully repeated by generations of schoolchildren. Until now, Mexico's opposition to the oil opening has been based mainly on this deep-seated ideology. Leftist politicians now complain loudly that the national patrimony has been given away to foreigners by "traitors" and "sellouts." But the advent of fracking could add a litany of local conflicts to fuel the opposition.

Similar to U.S. shale plays, Mexico's shale formations will require thousands of densely spaced wells. But some of the most promising formations lie underneath areas of northern Veracruz, Hidalgo, and Puebla states that are environmentally sensitive and are inhabited by the indigenous Otomí people. Other shale formations are in the desert of Coahuila, where water supplies needed for fracking are already too little for fast-growing towns and farms.

Until now, there has been very little fracking in Mexico's oil industry, and the practice has received almost zero public attention. But that is likely to change fast. U.S. environmentalists are attempting to spread their concerns about the dangers of groundwater pollution and depletion from fracking, and have given assistance to a new Mexico City-based coalition, Mexican Alliance Against Fracking.

"The fine print of the energy reform is fracking," wrote columnist Ruben Martin in the Mexico City newspaper El Economista on Dec. 3, summing up a fast-growing point of view among Mexico's left.

There's little doubt that fracking and other advanced technologies are the Mexican government's desired goals. Some key details of the energy reform -- such as how much favored treatment Pemex will still receive -- will only be determined by implementing legislation early next year. But the plan approved by Congress specifies that foreign companies will get largely what they want. Production-sharing contracts will provide them a share of profits and allow them to "book" reserves on their corporate balance sheet -- but only for the shale formations and deep-water Gulf reserves that require fracking or other advanced extraction technologies that Pemex currently lacks. In areas where Pemex now controls production, the current system will be maintained -- flat fees for contracted work and no share of production or profits.

Mexico's energy opening may face opposition sooner than expected. On Dec. 9, leftist legislators submitted 1.7 million signatures requesting a national referendum to overturn the reform. If the signatures are accepted by election authorities, a political battle royale will be set for next year. At that point, "fracking" will become a much-used word in Mexico's political lexicon, almost certainly as an insult.

But across the continent, the economic pressures for additional petroleum supplies are overwhelming. Mexico's energy reforms and the Keystone XL are interchangeable parts of a regional energy infrastructure feeding the maw of an oil-dependent society. While Mexico's opening does not guarantee the demise of the Keystone XL, it does underline their mix-and-match nature. Develop one project, block the other, or vice versa. Or, perhaps eventually, do both. The demand is the same. More oil!



The Red Wedding

A botched drone strike in Yemen shows how America's anti-al Qaeda strategy has gone off the rails.

SANAA, Yemen — On Dec. 12, near sunset, a convoy of vehicles carrying armed tribesmen that was part of a wedding procession was destroyed in an apparent U.S. drone strike. The attack, which occurred in Yemen's central al-Baydah province, was far from the first American strike in the area -- the United States is estimated to have carried out at least a dozen strikes against suspected al Qaeda targets in the province since the start of 2012. It was, however, the first time one of the strikes had made the grievous mistake of hitting a wedding.

The initial reports left me incredulous. As I started to make calls to sources in the area, it became clear the strike hit four cars in a convoy of about a dozen vehicles, killing at least a dozen people and wounding many more. The casualties were identified as members of local tribes. The information I received, as usual after such an event, was sometimes contradictory: While some sources stressed that those killed were all civilians, others seemed just as confident that some were indeed militants.

Whatever happened on Dec. 12, it was not a "targeted killing" -- the language President Barack Obama's administration often uses to describe drone strikes -- nor was it consistent with the White House's claim that the strikes are only carried out when civilians will not be caught in the crossfire. It's not just a matter of the morality of the drone program: The confirmed deaths of noncombatants in this strike will set back anti-al Qaeda efforts everywhere in Yemen, and its effects will only be exacerbated by the restive area where it occurred.

The strike was followed, as always, by silence from WashingtonThe drone strike was followed, as always, by silence from Washington., which has acknowledged carrying out drone strikes in Yemen but never publicly comments on individual attacks. The Yemeni government, however, released a statement the following day that said the strike targeted al Qaeda militants, but neglected to mention either the country that carried out the attack or the apparent civilian casualties. The actions taking place behind the scenes, though, painted a vastly different picture: Al-Baydah's governor was dispatched to mediate between the government and the families of the dead, while Yemeni officials that were previously supportive of the drone strikes cast the attack as a tragic error.

"Drones have saved lives, but they've also taken innocent lives," one official told me, speaking on the condition of anonymity due to the sensitivity of the issue. "And this strike personally shook me."

The exact nature of the error is still a matter of speculation. It was hard not to wonder if the wedding convoy was mistaken for something more sinister -- that someone in the bowels of the U.S. intelligence community concluded that vehicles carrying heavily armed wedding guests were actually an al Qaeda convoy. Some tribal contacts said that there were high-ranking militants near the site of the strike, and a Yemeni official briefed on security matters told me a vehicle hit in the attack had been linked to a prominent local al Qaeda leader. Either way, any "suspected militants" present were surrounded by civilian bystanders.

In many ways, the northwest corner of al-Baydah province is an unlikely place for al Qaeda militants to carve out a base. Tensions with the central government are far from new, but the locals' ideology has historically taken a far different form: The area was a hotbed for leftist insurgents in the late 1970s and its residents are still over-represented in the ranks of Yemen's Socialist Party.

Looking back, the chain of events that transformed the area into a notorious "al Qaeda hotbed" seems almost like a perfect storm. In January 2011, militants affiliated with al Qaeda in the Arabian Peninsula led by Sheikh Tareq al-Dahab, a local tribal leader, took advantage of the government's weakness and seized control of the town of Rada', near where last week's drone strike occurred. While the fighters pulled out little more than a week later and their sheikh was killed in a longstanding family feud the following month, al Qaeda's presence in the area remained. The fighters have maintained their presence in and around Sheikh Tareq's hometown of al-Manaseh, expanding to other parts of the province and capitalizing on the central government's virtual absence.

Most importantly, perhaps, the group has had far more success in infiltrating local tribes in the area than they've had in other parts of the country. Al Qaeda has capitalized on their ties with a faction of the Dahab family -- which locals tend to see as sheikhs first and militant leaders second -- appearing to take great pains to avoid tensions with other tribesmen while exploiting widespread unemployment and anti-government sentiment to gain recruits.

The group's supporters still appear to constitute a fraction of those in the area. But even if locals lament the current status quo, few want to see a devastating conflict similar to the 2012 offensive that pushed al Qaeda-affiliated fighters out of their former strongholds in Yemen's southern Abyan province. And even those who deeply resent the terror network's presence appear to lack the will to directly confront the group.

"The government tells us to turn in al Qaeda fighters," one tribesman hailing from near the site of Thursday's strike mused. "But how can we do that when there's no government present to turn them into? And why would we do it when there's no government present to protect us from retaliation?"

It's going to take more than drone strikes to eliminate al Qaeda from its strongholds in this Yemeni province. The militants killed, locals say, are largely replaceable, while the tens of civilians killed over the past two years has only heightened distrust of the central government among noncombatants, pushing some young men into al Qaeda's arms. However, the long-term solution to combatting the militants' presence -- ameliorating pervasive poverty and underdevelopment -- is far easier said than done.

Either way, in the aftermath of Thursday's strike, the possibility of defeating al Qaeda in al-Baydah feels further away than ever.