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Mexico Readying Draft of NatGas Distribution Policy for Release This Year

The Mexican energy ministry (Sener) expects to release a draft of its natural gas distribution policy as early as the first quarter of this year.

“Currently, a study is being carried out with funds from an analytical program supported by the Inter-American Development Bank (IDB),” a ministry spokesperson told NGI. “Based on this study, we will issue a public policy document, a draft of which could be available by March 2018.”

The study entails a diagnosis of the local distribution market and a review of international practices. Once the analysis is finalized, the ministry plans to develop specific policy proposals that would promote the gas distribution business in Mexico.

How and where the policies are applied will depend on the results of the study. Measures potentially on the table include the use of funding from the IDB, coordination mechanisms for state and municipal permitting, and incentives for natural gas vehicles, according to the spokesperson.

The distribution policy is a parallel undertaking to efforts by the energy regulator, the Comision Reguladora de Energia (CRE), to update the regulatory framework for local distribution companies (LDCs).

The distribution business makes up a relatively small part of the Mexican natural gas industry, whose growth over the last decade has been driven by power and large industrial users. The residential and services sectors accounted for less than 2% of national gas demand of 7.62Bcf/d in 2016, according to Sener.

The latest round of energy reforms, which began in 2013, have so far resulted in the liberalization of wholesale prices and a fledgling gas market with multiple suppliers, both of which benefit the distribution business. Yet other barriers remain.

For one, industry sources say there is a need to educate consumers about natural gas, something which Sener is considering in its market diagnosis. Liquefied petroleum gas (LPG) remains the fuel of choice for a majority of Mexican residential consumers, with only 6% of households using piped natural gas for water heating or cooking, according to data from the local census bureau.

Moreover, not all urban areas are served by an LDC. Since the distribution sector was opened up to private investors in the mid-1990s, a handful of companies, including Spain’s Gas Natural Fenosa (GNF) and France’s Engie SA, have set up shop in Monterrey, Mexico City and a few other areas. But service coverage is not yet nationwide.

“This is changing given the recent distribution permits that the CRE has issued to various companies,” said a spokesperson for GNF in Mexico. “We now have new permits in the southeast, specifically in the states of Campeche, Yucatan and Tabasco.”

CRE’s ongoing regulatory overhaul is also intended to reduce entry barriers for new participants and boost competition in the LDC market.

As an initial step, the regulator approved a decree last month to create a unified distribution zone encompassing the entire Mexican territory, eliminating the final vestiges of the geographical concession model in use since the 1990s. CRE also plans to issue open access rules for distribution systems and publish a new tariff regime that would allow LDCs greater flexibility to compete with LPG distributors.

Other challenges include streamlining the permit application and review process at the state and municipal levels.

“At the federal level there have been some changes and improvements to the current regulatory framework, which now means that municipal governments are going to receive more applications for construction permits,” the GNF spokesperson said.

“This means that as distributors, we will have to develop closer relationships with municipal authorities to explain our projects. Likewise, it will mean more revenue for the municipalities, which will unleash economic growth. But it also means greater pressure to issue these permits.”

Access to physical supply is also a challenge in some regions of the country, according to GNF, since much of the existing pipeline infrastructure is concentrated in northeast and central Mexico.

“This is an ongoing issue that will depend on the progress made by pipeline companies,” the spokesperson said.

Private developers are building out a network of pipelines in the northwest that would allow gas produced in the Permian Basin to flow across the border into a historically underserved region of Mexico. A marine pipeline under construction along the Gulf Coast would also connect South Texas gas exports to states in southern Mexico that currently suffer from supply shortages.

Most of the pipelines, anchored by supply agreements with the federal power utility, are scheduled to come online this year or next, although various projects are facing delays due to conflicts with indigenous communities.

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