Recipe for a Tex-Mex Pipeline Project: Considerations in Permitting a Cross-Border Gas Transportation Project*

I. SETTING THE TABLE: A HISTORICAL OVERVIEW OF REGULATORY APPROACHES IN MEXICO AND THE UNITED STATES Hunger Pangs in South Texas. Since the first gas discoveries were made in the Burgos Basin of Northeast Mexico sometime around 1945, Texas energy companies have been eyeing the Mexican landscape in anticipation of a time when a real natural gas market would develop between the two neighbors. In those days, U.S. gas demand was growing and, to a geologist, Mexico's Burgos was nothing more than an extension of the same fields in South Texas which would ultimately feed into the Big Inch pipeline as it snaked from Longview up to New Jersey. So that gleam in the eyes of the Texas wildcatters when they looked south was understandable. But in those days, investment was not on the menu. Mexican law made direct participation by U.S. capital in the Mexican oil and gas industry impossible. In 1938, virtually the entire private petroleum industry, dominated by American, Dutch, and British companies, was summarily expropriated by the Mexican government, and Pemex1 was installed as the sole entity authorized to exploit hydrocarbons.2 Where oil and gas were concerned, an atmosphere of latent animosity lingered for many years between the two neighbors which could (and in some circles still can) become acute upon the mention of foreign investment. Until the mid-1990s, Mexican legislation limited the role of foreigners to that of purchaser of production, supplier, or service contractor of Pemex working for cash. There were always a few cross-border business arrangements that drew outside the lines, small pipelines serving dedicated offtakers,3 but the opportunities were small and limited. There was even one major flirtation with rapprochement, a major longterm pipeline natural gas sales contract entered into between a Texas company and Pemex in 1979,4 but that venture ended in disappointment. Oil was not the only fulcrum for tension between the Mexicans and U.S. capital. After the 1938 expropriations, Mexico led the way among developing countries in fomenting a statist economic philosophy that questioned the role of private, let alone foreign, capital in the national economy.5 It later nationalized the electric industry, and over a period of some thirty-four years passed legislation that increasingly shut capital out of the nation's economy, culminating in the xenophobic 1973 Foreign Investment Law (FIL).6 The possibility of a real cross-border energy market in Mexico seemed so far away that the industrious Texans forgot about Mexico and turned their energies elsewhere. A Dog's Dinner: The Growth of the U.S. Gas Industry. Meanwhile, growing gas demand north of the border pulled progress in its wake, and the decades after the second World War saw the buildout of the U.S. pipeline grid, eventually creating a solid northsouth corridor from South Texas all the way to Canada. In keeping with our own business culture, entrepreneurial effort was in the vanguard during this period, with the regulators scrambling to keep up. Imbalances between entrepreneurial zest and regulatory response characterized the development of the U.S. market. The classic conflict of the pipelines' natural monopoly and the need for competition marked the two ends of the seesaw. Along the way there were numerous tumbles as the U.S. gas grid and U.S. regulation slowly came of age together. California in 2000 was hardly the first energy crisis to touch the U.S. gas industry. Through the 1970s, pipelines acted as both transporters and marketers, and wellhead price controls seemed to be the right recipe for controlling the pipelines' natural monopoly. However, these controls had the unfortunate side effect, among others, of discouraging gas production. This, in turn, gave rise to shortages and rising prices for the utilities that bought from the pipelines. Responding to these shortages, Congress enacted the Natural Gas Policy Act of 1978 (the NGPA), which gradually phased out regulation of the price and terms under which producers sold their gas to interstate pipelines. …

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