Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.

This seventh Q&A in the series is with Luis Vázquez, one of the most seasoned veterans of the Mexico energy industry. In 1973, he and his brother Óscar co-founded Diavaz, a commercial diving and oil services company to maintain structures and platforms in Mexico’s booming crude industry. The company grew and diversified over the years, and in 2003 moved into producing dry natural gas. Since then, Diavaz – now Grupo Diavaz -- has continued to expand and evolve its operations, providing a variety of services to assist oil and gas development in mature fields. In 2015, Diavaz won rights to develop onshore oil and gas fields in the Mexican auction Round 1.3.

Vázquez, who chairs Diavaz, was named this year as the new president of the Mexican Natural Gas Association, AMGN. A chemical engineer and graduate of Ryerson University in Toronto, Vázquez discussed the current state of Mexico’s natural gas industry with NGI’s Mexico GPI.

NGI: How do you think the Mexican natural gas market has evolved over the last few years?

Vázquez: At this moment, I can say that in the last few years we have had an important expansion in the pipeline network, with the objective to increase the amount of natural gas in the country and to generate more capacity and less redundancy in the pipeline system in Mexico. At the same time, Mexico is located in the region of the world with the lowest available natural gas prices and it is important to take advantage of that.

There is still a lot to do, though. There are regions of the country that require access to natural gas, such as Oaxaca and Guerrero, and we must continue with projects that allow us access to more cities and strengthen the energy security of the country. To do so, we must talk about where natural gas storage infrastructure can be considered and combine that with what infrastructure is currently available, as well as with new storage projects such as salt caverns and LNG storage terminals.

It is important to maintain the development of necessary infrastructure so that more homes, businesses and industries have access to natural gas. In that same tenor, there is a lack of incentive to use vehicular natural gas, principally in public transportation, which would allow -- in addition to considerable direct savings for the users -- to diminish the contamination in large metropolitan areas such as Guadalajara, Monterrey or Mexico City and other parts of the county where pollution has increased.

NGI: What else can Mexico and the government do to establish a free market for natural gas? What limitations are there currently in the market?

Vázquez: It is necessary for federal, state and municipal authorities to work together with regulatory bodies and the industry, with the goal of maintaining a constant dialogue to detect duplicity in regulation. This would assure compliance and coordination of the transmission times established in the laws, regulations, rules and authorizations, and allow for local authorities to rely on better information and to understand the importance of awarding permits for the installation of this infrastructure. A major step was the publication of the General Law of Improved Regulation in May 2018.

It would also help to have a new regulation for the distribution of natural gas that incentivizes investment and the development of new networks, as well as to add value to the networks that already exist. This would reduce the administrative and regulatory burden and support the right of consumers to choose the energy that can be best adapted to their needs.

NGI: What type of independent companies that aren’t state-owned buy natural gas in Mexico?

Vázquez: The purchases of natural gas in Mexico that are being done by private companies apart from sate firms Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) are divided in two types: final consumers that buy natural gas, either as raw material or as fuel to produce goods or services, and vendors of hydrocarbons that buy natural gas with the objective to supply to final consumers.

In both cases, today’s market in the private industrial sector is principally supplied by imported gas from private vendors.

NGI: Under what terms are these companies buying natural gas? Are the contracts daily, monthly or annual?

Vázquez: The final consumers buy fundamentally with annual contracts. Currently, the majority of the cases of transport capacity are contracted under annual terms as a change in vendor requires time and processes that are too complicated to allow for changing providers every month. In the case of the private vendors, the supply strategy depends largely on the commitments assumed through supply contracts with final consumers and a strategy of origin that allows for optimization to obtain a commercial margin.

NGI: Is it difficult for a private company to buy and sell natural gas in Mexico given that CFE and Pemex continue to be dominant in the market?

Vázquez: The private companies can buy natural gas from private vendors different than Pemex and CFE, taking into account that their possibilities to be serviced depend on geographic location. That means the companies have to have firm reserved commitments for transport capacity, the financial conditions to access a sale on credit, size and consumption profile. The processes can vary among vendors, but generally it starts with an initial contact to establish a relationship, exchange of information between parties, consumption profiles and obtaining a target price.

After that process, the negotiation of the contract follows, including the presentation of the credit guarantees and notifying transporters and distributors involved in the delivery. Those processes can be carried out in less than a month. For an interested company to conduct commercial hydrocarbons activities, the process is initiated by obtaining the vendor permit from the Energy Regulatory Commission (CRE).

NGI: What are the biggest and most important trading hubs for natural gas in Mexico?

Vázquez: The fundamental reference price in Mexico is related to two markets in the U.S., the Houston Ship Channel price...and the Permian and Waha in West Texas. In Mexico, there still aren’t hubs where fixed prices are determined or where reference prices aren’t related to a pricing formula set in the U.S. That development will depend fundamentally on the participation of private hydrocarbons producers in Mexico.

NGI: Do you think Mexico will create or form a hub or hubs at some point?

Vázquez: Yes, in markets such as in western Mexico (Guadalajara once a new pipeline is connected) and in the southeast (from Veracruz to the Yucatán peninsula once gas from the marine pipeline enters operation), but all are related to the prices in southern and western Texas.

NGI: What are the priorities for the Mexican Natural Gas Association in 2019?

Vázquez: We are working on several important items. Among them is joining forces with all levels of government with the objective to develop infrastructure that allows for natural gas to be sent to the south and southeast of the country, to generate jobs and to contribute to the economic and social development of the region.

We are working to continue the expansion of the existing infrastructure that will allow for natural gas to be distributed to all of the corners of the country, as a benefit to companies and Mexican citizens. We want to offer natural gas to more residential consumers that is economic, ecological and safe.

We also want to develop a strategy together with the government to expand the network of vehicular natural gas supply stations and increase the number of vehicles, drivers and heavy and fleet transporters that use natural gas. That would help to reduce contaminating emissions in the large cities and offer important economic savings in fuel consumption for businesses in the transportation sector.

We want to reduce electricity generation from contaminating fuels such as fuel oil and replace them with those more environmentally friendly fuels, such as natural gas.

NGI: What are the largest challenges and obstacles in the natural gas industry currently?

Vázquez: We consider that the current challenges include conclusion of the construction of pending infrastructure and to continue with the planning needs that are required by the country, such as increased storage with a strategic vision to assure energy security that has been established by the Mexican government.

In that same sense, we must provide more natural gas access to final consumers. Today, a large number of people still use wood to burn for energy, which represents a health risk.

NGI: Is there a concern that, as a result of limited natural gas supply in Mexico, there will be electricity blackouts if infrastructure isn’t improved or without more national natural gas production?

Vázquez: The natural gas pipeline network began its expansion in 2012. This has facilitated capacity growth to offer more natural gas to the center and northwest of the country. That allows us to take advantage of the availability of natural gas in Texas at a price lower than the international rates. At the same time and with the objective to achieve energy security, the country undoubtedly requires increased national production. We have large reserves of natural gas and tremendous potential if given the opportunity to produce more.