Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column as part of a regular series on understanding this process, written by Eduardo Prud’homme. This is the fifth in the series.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO Chief Officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas).
The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.
In a nation’s energy sector, the difficulty in planning resides in the complexity of imagining a future given present information. It’s additionally difficult to imagine a local future given global economic uncertainties while taking into consideration the goals of competing interest groups. That said, the right combination of excellent data, technical skill and good judgment can result in the construction of credible future scenarios that allow for proper planning.
The goal is to visualize future energy demand so as to identify possible alternatives to meet it. Among any set of alternatives, however, energy security and economic efficiency above all should guide decision-making. A good long-term plan should assess where infrastructure is needed, what projects should be developed, their size, when they need to come online, and how they should be developed. A good plan is relevant not only to governments and their economic development promotion objectives, but also for investors seeking profitable projects and energy users who seek to optimize consumption options.
In Mexico, national oil company Pemex and state power utility Comisión Federal de Electricidad (CFE) were historically the designers of energy planning and infrastructure. Their vertical integration in some ways facilitated the construction and operation of projects. However, the scope of their vision was limited by the size of the government’s budget. Meager public resources in relation to the needs of the Mexican economy explained the call for, and consequent opening of, the market through the different energy reforms of 1995, 2008 and 2013. The idea has been to derive in private participation the necessary resources to improve energy infrastructure in Mexico and thus finance economic growth.
Sector planning traditionally reflected the aspirations of management at Pemex and CFE and was built on projections developed by the Energy Ministry (Sener) that emanated from information from the state companies themselves. Their resources, operational experience and relationship with consumers made the proposals of CFE and Pemex for projects almost incontestable.
Though it’s undeniable that the aim of the Energy Reform of 2013-2014 is one of openness and liberalization, and in this sense preserving the notion of an integral or centralized planning system seems contradictory, much was done in designing new laws and regulations to make sure that the process would reflect the needs of all participants in the market.
In the electricity sector today, the Prodesen power sector development plan ensures that the vision for the future of the electricity sector comes from technical experts at power grid operator Cenace, with the participation of the CRE. CFE does not take part in planning -- the message being that the state company is but one actor within a competitive industry.
In the natural gas market, the integrated system managers are responsible for proposing a five-year plan to expand infrastructure. In the particular case of the national pipeline system Sistrangas, its operator Cenagas is responsible for proposing to Sener a five-year plan every five years, reviewed annually. Both the plan and the annual reviews must be presented to the CRE for it to provide its technical opinion, although neither the hydrocarbons law nor any regulations indicate whether that opinion is binding.
The state, through Sener, is above all an information provider with the right to certain judgments regarding the relevance of projects, including strategic projects and those that serve a social function. The planning system aims to reflect the legitimate aspirations of the government's public policy, allowing different economic agents responsibility for executing the construction and operation of infrastructure. Certainly the state, through the system manager, can help articulate efforts while assisting in minimizing risk. But in the end private agents, those who are the suppliers and consumers of gas, are the ones who take on most of the risks and correspondingly reap the larger share of the benefits.
It’s important to note that the natural gas plans for Mexico are not restrictive. If a company identifies a potential project and manages to coordinate efforts with stakeholders in executing it, nothing prevents them from doing so and nothing forces them to be part of the integrated pipeline system.
Cenagas is responsible for preparing the five-year plan as the independent manager of, and guarantor of open access on, the national pipeline system Sistrangas. Cenagas determines which projects should be included or discarded in the plan based on whether they effectively meet the needs of the market. They are able to do so because Cenagas simultaneously considers the interests of gas suppliers and consumers. The fundamental principle at Cenagas is to provide a level playing field for all agents in the gas system, both in daily operation and in the development of the system for the longer term.
Based on Cenagas’s proposals, on October 14, 2015, Sener laid out the first five-year plan for 2015-2019. This plan was made up of eleven strategic projects and two social coverage projects: 1) Tuxpan-Tula gas pipeline; 2) La Laguna-Aguascalientes gas pipeline; 3) Tula-Villa de Reyes gas pipeline; 4) Villa de Reyes-Guadalajara gas pipeline; 5) San Isidro-Samalayuca gas pipeline; 6) Samalayuca-Sásabe gas pipeline; 7) South Texas-Tuxpan gas pipeline; 8) Jáltipan-Salina Cruz gas pipeline; 9) Colombia-Escobedo gas pipeline; 10) Los Ramones-Cempoala gas pipeline; 11) Salina Cruz-Tapachula gas pipeline; 12) Lázaro Cárdenas-Acapulco gas pipeline; and 13) "El Cabrito" Compression Station.
In broad strokes, this plan reflected a strategy to strengthen the capacity to import gas from Texas, have trunk pipelines that carry gas from the borders to the center and west of the country, and improve the way in which gas is distributed on routes east-west from the trunk routes. In designing this first plan, domestic production was not seen as the central supply option for Mexico out through 2019. Reality has confirmed this perspective.
Since then, each year Cenagas has revised the original plan based on demand and supply projection exercises. Although there have been adjustments, the conclusion has not changed: domestic production will continue to decrease in the coming years, at some 100-200 MMcf/d annually, and demand will grow at important rates, with increases of between 300-450 million MMcf/d per year currently projected. System balance in the medium term can only be achieved with an increase in imports, or through a managed demand policy.
These annual technical reviews have resulted in the removal of some projects from the plan. Unfortunately, in terms of execution time, Cenagas plans have not been met, with new pipelines delayed beyond what was expected and precarious conditions for system balance still not overcome as of this year.
The latest revision of the plan can be read, in Spanish, by clicking here. This document narrates what happened since the first plan in 2015. The vision of the new government of Mexico is yet to make it into the document; the five-year plan for the 2020-2024 period, to be published before the first quarter of 2020, will reflect the goals, market interpretations and intentions of the new administration.
Cenagas will likely call on the results of the recently held “consulta publica” or public consultation process in designing this new five-year plan. The recently concluded public consultation is the third such exercise of directly collecting information from users, developers and intermediaries to quantify future gas requirements.
According to all available information, this latest public consultation saw broad and enthusiastic participation, with events taking place with authorities and representatives of the industry in Mérida, Mexico City, Monterrey, Coatzacoalcos, Culiacán, Aguascalientes and Morelia. The results of the consultation will be published on May 6.
The value of the five-year plan lies in the quality of the information it provides. Therefore, it is vital that it is impartial, that it identifies what is best for the market, not merely Pemex or CFE, and that technical credibility is demonstrated in the construction of future demand and production models. A plan should serve as a tool in decision-making and not as a means of propaganda.
It’s crucial to investigate what caused the sector to deviate from the initial five-year plan in order to evaluate ongoing and future projects. It’s not enough to mention the worrisome delays; it’s well worth diagnosing their root causes so that the five-year plan also contributes to risk management for all public and private sector agents.
Finally, in the longer term it would be wise to cede the job of information supply to natural gas market intelligence companies. The state should focus more on having public, robust and detailed historical databases so that planning is open and debatable. In a market environment, dedicating resources to planning in the energy sector makes sense only if it occurs in a process of continuous improvement.