Daily GPI / NGI The Weekly Gas Market Report / Mexico

Mexico's Natural Gas Security Outlined in CNH Chief’s Four-Point Plan

Mexico's National Hydrocarbons Commission, the CNH, has outlined a proposal for a four-point plan to strengthen the nation's security in respect to natural gas.

The proposal was explained by CNH President Juan Carlos Zepeda during a recent interview in Mexico City with consultant George Baker, head of Mexico Energy Intelligence. Baker provides policy research and advice through Houston-based Baker & Associates.

The two men spoke at a time of rising political tensions as candidates vie for the office of president in an election set for July 1.

The CNH is much more than the organizer of the upstream auctions that have broken the state monopoly of oil and natural gas by the 2013-14 energy reform. 

"Our true metier," Zepeda said, "is that of a technical agency that provides analysis to the Energy Ministry and guidelines to industry regarding oilfield operations, and, we are the contract administrators now of more than 70 blocks."

The apolitical nature of the CNH cannot be overemphasized in an energy sector that for decades was highly politicized and still is, in many ways. In Mexico's recent past, the long breach between one Mexican administration and the next has led to abrupt political and economic changes, as well as violence on more than one occasion.

The CNH appears to be keeping the same cool head that it showed in the face of the withering criticism that it met in the wake of the hugely disappointing results of the first upstream auctions.

Zepeda's first recommendation to the next government, whose six-year term begins on Dec. 1, is that it should make every effort to strengthen Mexico's energy security in relation to natural gas.

He explained the four measures regulators need to pursue toward that goal: diversified supply sources, incentives for production, tax breaks for gas production, and underground storage facilities.

"Today, about 90% of our imports come from the U.S., and mainly from Texas,” Zepeda said. “This is good news as prices are low” compared to the price for liquefied natural gas (LNG), “but we should consider that Texas is also vulnerable to supply disruptions caused by hurricanes.

"It seems to me that the government should consider strengthening our capacity to import natural gas in the form of LNG. There are floating gasification and regasification vessels that could have a role in Mexico."

Production also should be encouraged by having CFEnergia, the gas trading arm of CFE, the state power utility, serve as the “market maker” for natural gas.

"I mean that any CNH contractor who produces natural gas should be able to sell his gas at competitive prices to CFEnergia,” he said.

Offering tax incentives for gas production also would be a positive, he said. In the United States intangible drilling costs, such as noncommercial wells, may be written off in one year. In Mexico, the costs have to be amortized over four years.

Tax incentives would be key to jumpstart the development of unconventional gas resources.

And underground gas storage facilities have to be developed, he said. In more than 20 years since gas storage by the private sector was authorized, not a single cubic meter of gas storage has been built in Mexico.

Meanwhile, state-owned Petroleos Mexicanos said natural gas production in January fell 5.5% year/year to 3.117 Bcf/d from 3.299 Bcf/d. Crude oil production in January fell by 4.5% from a year earlier to 1.929 million b/d from 2.02 million b/d.

Mexico Energy Intelligence is a commercial and policy research and advisory service offered by Baker & Associates (www.energia.com), a management consultancy based in Houston.

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