Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer column as the first in a regular interview series with experts in the Mexican natural gas market.
The first Q&A is with Meney de la Peza, who heads the hydrocarbons unit at Comisión Reguladora de Energía (CRE). Previously, she led CRE’s natural gas unit. The CRE, an autonomous regulatory agency roughly analogous to the U.S. Federal Energy Regulatory Commission, oversees natural gas regulations and permitting in Mexico. It also publishes the IPGN monthly natural gas price index, a compilation of post-transaction prices reported anonymously by shippers.
NGI: Under what terms are companies currently buying and selling gas in Mexico?
de la Peza: The buying and selling of natural gas in Mexico requires a permit from the CRE, but it is an activity with very small regulatory involvement. There isn’t a regulatory obligation to carry out transactions with the CRE under specific terms. There is the commercial freedom for every vendor under which terms to buy gas.
In the Mexican market, a lot has been done, and there is still a lot to be done. There has been an important increase in the number of new players and a much larger amount of transactions. Historically in Mexico, the largest seller was Pemex and the contracts were quite standard. The contracts were for the purchase of fixed amounts of natural gas for a certain amount of years. There were few alternatives and contractual schemes available.
Through the liberalization of the market, there has been a lot of advancement, particularly in regards to the vendor permits offered by Pemex’s refining branch, known as Pemex Industrial Transformation (TRI), beginning in 2015. To date, Pemex has since given up 40% of its volume of contracts to other marketers, which is a sign that there are important volumes of natural gas to be commercialized that is being done by other parties and not Pemex. They are offering new contractual selling and buying schemes in the market, which has made for a more developed market.
I think there is still room for growth in the amount of transactions. Some of the users are still conservative and prefer to have their guaranteed purchases of gas and make monthly orders, for example. Some are still using schemes that are more rigid, but there have been definitely advances in terms of players and transactions.
For example, vendors that have permits to commercialize natural gas report their number of transactions to us at the CRE each month. We then take the number of transactions to determine an average which we use to calculate prices that we use to set the IPGN. We have seen an important increase in the number of transactions reported. In 2016, there were 824 transactions reported in the entire year. In 2018, there were 3,128; almost three times the amount of transactions reported. That indicates more liquidity and that users are starting to buy natural gas in more flexible schemes and are signing fixed contracts with providers. It is a sign of more sophisticated activity both by the users as well as sellers. It is activity we don’t regulate, and just have the responsibility to report on. The terms of the contracts nor the price are regulated.
NGI: How are contracts being signed? Are there more monthly than daily or weekly?
de la Peza: The information we have, which is reported to us, is done in daily transactions. These include spot transactions, as well as things like gas deliveries for the following month, etc. We are still processing the information and at times it isn’t completely reliable because vendors don’t report all of their information to us consistently, which is something we are still working on. Based on this, I wouldn’t want to make a conclusion on what is the most common contractual form being used.
What I do know to be a fact is that the number of transactions is evolving and being done in a more varied way. This includes contracts signed with or signed by Pemex, for example. Many of the contracts that Pemex signs are annual, and the large part of the orders that Pemex receives are monthly, for fixed monthly quantities. I think that the new marketers that have entered have more experience in developed markets, such as the U.S. and others. They are offering users different alternatives in terms of the transactions that can be carried out. I think there are new types of transactions that are taking place in the market, though this is not something that the CRE has concrete data for so far.
NGI: How much of the natural gas being sold in Mexico is not originated by the state-run entities Pemex and CFE?
de la Peza: I think that CFE and Pemex continue to possess the large part of the natural gas market participation in the country. The amount of their participation of the two is comparable.
NGI: What kinds of companies are buying natural gas from the independents?
de la Peza: In terms of volume, the dominant sector that consumes natural gas in Mexico is the electricity sector. The large part of the electricity sector buys its gas from CFE Energía, a few buy from Pemex and there are a few independent players that sell to generators. The large part of the sales of natural gas that are made by vendors distinct from CFE Energía and Pemex are made to industrial users and distributors.
NGI: Is there a goal to increase the market share for outside companies, and if so, what is it?
de la Peza: What is established from a regulatory point of view, is the programmed cessation of the Pemex contracts. That established that Pemex, in a four-year window, has to make 70% of its natural gas commercialization contracts available in the market. According to the latest report from...February, 40% of the natural gas volume Pemex had under contract in 2015 has been acquired by private companies.
What happens with this program is that it obligates Pemex to relinquish volumes to make them available in the market but, if there isn’t a private vendor interested in taking it to a particular user, it doesn’t mean Pemex isn’t complying with its obligations. They have made 70% of its volume capacity available, as was the goal, and 40% of it has been contracted by private companies. When Pemex presents its results at the end of February, we will be able to see how much that percentage has increased. This is really the only goal we have from a regulatory perspective to assure more participation in the market by private companies.
NGI: How is CRE coming along in its efforts to publish daily IPGN prices?
de la Peza: Yes, we are continuing with the effort. We are working diligently with the vendors so that the report to us information in a more precise manner. We have found some inconsistencies in the way in which the information is reported. We are working on it and, internally, once we observe six months of information we consider reliable, we will begin to publish the prices. This hasn’t been accomplished yet, but we hope that we will be able to do this by 2019.
NGI: How many companies are contributing data to the IPGN price?
de la Peza: The number of vendors [contributing data] has been quite stable, and has stayed around 20; some months with 22, 23, 29 or 25, for example, but more or less has been within that range. These are the same vendors that are reporting daily transactions to us. Some don’t report daily, and we are working with them in hopes that they begin to do that. We can say with confidence that regularly there are about 20 active vendors that report to us daily.
NGI: Do you anticipate the number of companies contributing data to the IPGN will grow in the coming months?
de la Peza: We have awarded around 100 marketing/vendor permits. Some of these are for exploration and production, that require a permit to sell their production. This is so that they can sell their own production in the market. The challenge is that we suppose that if they requested a permit to sell, it is because they have the interest at some point to do so. It is unclear when or if they have plans to sell their production just because they have been awarded a permit to do so. They don’t have to do so immediately simply because they were given a permit.
That said, I do think the number of these permits awarded is likely to increase. We just haven’t arrived at the point when you see all of the companies that have permits selling natural gas but, there have been an important number of permits awarded that haven’t started operations yet.