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For Obama and Pena Nieto, a delicate 'first dance' around energy

U.S. President Barack Obama meets with President Enrique Pena Nieto of Mexico in the Oval Office of the White House in Washington November 2
U.S. President Barack Obama meets with President Enrique Pena Nieto of Mexico in the Oval Office of the White House in Washington November 2

By Edward McAllister

NEW YORK (Reuters) - When the conversation between President Barack Obama and his newly elected Mexican counterpart Enrique Pena Nieto turns to the controversial topic of energy during their meeting this week, both are apt to step carefully.

The two countries have abruptly changed positions over the past decade: Mexico, once the growing energy power, is struggling to maintain production; the United States, once a guaranteed importer, is enjoying a lucrative energy boom.

However, the thorny issues of foreign investment in Mexico's oil production sector or swapping different types of crude oil between the two nations will likely only be brought up in private, if at all.

Although Mexico's aging refineries could operate more efficiently using some of the light crude emerging from U.S. oilfields, state oil and gas monopoly Pemex has long avoided incremental imports in order to maintain its reliance on the heavier crude produced domestically.

Meanwhile, U.S. pipeline exports of natural gas to Mexico have surged, and could double within a few years as new projects link Latin America's second-largest economy with major U.S. producing regions, despite concerns in the United States that exports could push prices higher at home.

Less divisive topics, such as climate change and how to improve cross-border energy efficiency, are expected to be discussed, Sergio Alcocer, Mexico's deputy foreign minister responsible for the United States, told Reuters.

"This is more like the first dance of the season," said Bill O'Grady, chief markets strategist at Confluence Investment Management. "You get to see each other, get to know each other. But Mexico is still trying to figure out how to reform its own state oil company."

SOME KIND OF A SWAP?

Mexican oil and gas output remains flat while national demand increases, creating a dilemma for Pena Nieto, whose opponents vigorously oppose foreign investment in the country's energy sector.

Although Mexican crude is a staple for Gulf Coast refineries, crude oil imports from Mexico have dropped a third over the past decade, sinking below 1 million barrels per day last year for the first time since 1994, according to government data.

Mexico has duly shifted its focus. A month ago Pemex touted a new two-year deal to boost crude exports to China by 30,000 bpd.

Talk of some kind of oil "swap" has also circulated, based on the idea that U.S. producers could get a better price for their light-sweet crude in Mexico while Texas and Louisiana refineries built to run on heavy-sour grades could get more of that type of oil from Mexico, albeit at lesser rates than in the past.

There is little indication yet that Pemex is angling for U.S. shale oil, or that U.S. companies are pressing to sell it.

GAS BONANZA

As lawmakers engage in an increasingly fierce debate in Washington over whether natural gas exports would drive up fuel prices at home, foreign companies are racing to export more to Mexico, where demand is growing fast.

U.S. natural gas exports to Mexico rose by 24 percent in 2012 to all-time highs, according to U.S. government data.

The capacity to export will double by the end of 2014 as Mexican power plants hook up to pipelines running from the giant Eagle Ford play in Texas and further afield.

Companies like Sempra Energy, Japan's Mitsui and Kinder Morgan are all planning to build new pipelines in Mexico, potentially reducing its dependence on imported LNG from overseas.

Alejandro Martinez, the top natural gas executive at Pemex, said exports of U.S. gas to Mexico and Mexican oil to the United States present "a natural exchange" for the two countries.

"I think we have to have a much greater integration," he said in an interview with Reuters this week.

INVESTMENT ESSENTIAL

Whether Obama and Nieto will discuss the more delicate matter of Mexico's allowing foreign investment in its struggling oil sector is unclear. Development of the country's large shale formations is still on hold as it considers its options.

Mexico has the fourth-largest shale gas resources in the world after the United States, China and Argentina, according to a U.S. government report on global shale deposits in 2011, though it remains to be seen how they will be developed.

Pena Nieto has pledged to open up Mexican oil production and exploration to more outside investment in order to ramp up growth.

"When push comes to shove, it's U.S. companies that have the technology and experience to help Mexico develop its deepwater and onshore unconventional resources," said Ed Morse, managing director of commodity research at Citi Group.

Traditionalists who view Pemex as a symbol of Mexican self-sufficiency strongly oppose the prospect. Jorge Buendia, political analyst and director of polling firm Buendia & Laredo, said Mexico was therefore likely to avoid open talk of oil and gas with the United States for now, though "back-room" discussions would no doubt take place.

Raising the subject frankly would lay the new president open to accusations that he was selling Mexico out to those looking "to steal" its oil, and imply that the industry was falling behind, Buendia added.

"The current situation doesn't lend itself at all to bringing this subject up in public."

(Additional reporting by Dave Graham and David Alire Garcia in Mexico City, and Nia Williams in New York; editing by Prudence Crowther)

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