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 eighth Q&A in the series is with Tania Rabasa, who worked for more than 10 years at both of Mexico’s state-owned energy companies, Petróleos Mexicanos (Pemex) and Comision Federal de Electricidad (CFE). She was also a consulting partner for the energy practice at Solana Consultores. Rabasa is currently a board member of Voz Experta as well as a member of the Mexican Council on Foreign Relations, the Javier Barros Sierra Foundation and the Centro Tepoztlán Víctor Urquídi. She holds a Master’s degree from El Colegio de México and a Bachelor’s degree in Economics, Politics and Philosophy from York University.

NGI: How important is natural gas to the economy of Mexico?

Rabasa: Given the importance of the industrial base in the Mexican economy, the availability of natural gas is an important driver of growth. According to the Mexican Institute for Competitiveness (IMCO), the most competitive states in the country, such as Aguascalientes, Nuevo León, Mexico City and Querétaro all have access to natural gas, while less developed states such as Michoacán, Chiapas, Oaxaca, and Guerrero are all off the network. The lack of natural gas infrastructure acts as a disincentive for local investment. Not only is natural gas an important facilitator of growth, but shortages can disrupt production and reduce economic activity.

NGI: How do you think the natural gas industry in Mexico is developing and what do you think could be done to improve the process?

Rabasa: I think that it’s important to recap the past so that we can look into the future. Historically in Mexico there was only one producer, supplier, importer and marketer of natural gas and all the infrastructure was developed and owned by that one single entity, which was Pemex. In 1995 the regulatory framework changed to allow the participation of Mexican as well as foreign companies in transportation, marketing and distribution, however infrastructure was not developed to meet growing demand.

Production also dropped. While natural gas production reached an all-time high in 2009 of around 7 Bcf/d, today we are producing less than 3 Bcf/d of dry gas. In contrast, demand almost tripled from 3 Bcf/d in 2000 to almost 9 Bcf/d this year.

Growing demand, declining production and a lack of infrastructure resulted in shortages of natural gas from the second quarter of 2012 through the second half of 2013. To deal with this problem, Pemex implemented a system that restricts the amount of natural gas used by industrial clients known as “critical alerts.” According to a paper published by the Central Bank of Mexico, those critical alerts reduced Mexican GDP by 0.28 percentage points in the second quarter of 2013.

The natural gas shortages of 2012-2013 marked a turning point in the evolution of Mexico’s natural gas industry. In 2012, the national pipeline system was 11,300 km. We’ve since added 8,000 km of gas pipelines.

Particularly important was the decision to have Mexico’s state-owned electricity company, CFE, play a key role to develop the interconnected pipeline system. It created a supply strategy that was reliable and optimal under different circumstances that didn’t depend solely on one basin or one supplier.

Building infrastructure was an important first step to developing a strong natural gas industry in Mexico along with the new legal framework. But it’s not enough. Further infrastructure is needed along with developing gas storage facilities and higher domestic production. And incentivizing consumption of vehicular natural gas.

NGI: What is the economic impact in Mexico of importing a large percentage of its natural gas from the U.S.?

Rabasa: Shale gas has experienced a remarkable boom in the United States. In 2000, it represented only 1.6% of total natural gas production. By 2010 this figure jumped to 23%. In the Permian basin alone, production was 3 Bcf/d in 2013, almost tripled by 2018, and in the next four years is expected to reach 22 Bcf/d. Prices keep dropping, and many power firms in Mexico as a result have switched to natural gas as a source of energy. Industrial demand has also increased sharply.

Importing the cheapest natural gas from the world’s largest natural gas reserves to satisfy growing local demand from industrials as well as for electricity generation makes economic sense. Especially when compared with the prices of alternative fuels like fuel oil whose prices are three times as high. However, diversification is crucial for energy security. In that sense, dependency is not so much the problem, but vulnerability is. Some diversification has been happening which helps in reducing Mexico’s vulnerability. For example, Mexico can import from the Eagle Ford, as well as the Permian Basin. That said, plans for storage projects, for example, cannot be pushed aside and increasing domestic natural gas production continues to be crucial.

NGI: Mexico’s liquefied natural gas (LNG) consumption is often overlooked. How important is LNG in terms of Mexico’s current energy matrix? How do you think Mexico’s LNG market will evolve in the upcoming years?

Rabasa: Mexico has boosted its natural gas import capacity via pipeline to about 11 Bcf/d. But the country can also import up to 1 Bcf/d of LNG from three regasification terminals.

But there is an opportunity to reconvert these terminals into liquefaction export terminals. Mexico is adjacent to the cheapest natural gas on the planet. Once domestic demand is covered, it makes sense to reconvert some of the existing regasification plants. Manzanillo, for example, has the shortest distance to Asian markets to be able to supply LNG, and also has access to cheap gas from the Permian via Mexican pipelines. In Altamira, the main source of physical gas is the Eagle Ford basin, and its export markets could be Europe, as well as South American countries, such as Brazil and Argentina.

NGI: What does Mexico need to do to develop its own natural gas reserves? How long do you see that taking and, if developed, how much could national production add?

Rabasa: The National Hydrocarbons Commission (CNH) see Mexico’s proved natural gas reserves, or 1P reserves, at 10 trillion cubic feet, and proved, probable and possible reserves, or 3P reserves, at around 30 trillion cubic feet. The latest estimate by the CNH is that production could reach approximately 4.25 Bcf/d by 2024. For that to happen, significant investment is required, as well as an adequate royalty scheme.

NGI: Does Mexico need new exploration and production bidding rounds for natural gas?

Rabasa: That is one option, but there could be other alternatives. Whether through bid rounds or Pemex E&P, what is most important is to make the decision on the best route, to start investing and start producing.

NGI: You mentioned natural gas storage. Do you think there would be significant interest from private or foreign companies to construct and develop facilities in Mexico?

Rabasa: Mexico currently lacks any underground storage facilities and relies on its LNG terminals for short-term balancing. I think creating storage facilities is fundamental for a healthy natural gas industry and also in terms of energy security. It has been argued that building indigenous storage may not be critical initially, since there are storage assets available to Mexico in the U.S. border regions. But, in terms of energy security, I do believe it is fundamental to develop storage facilities in Mexico. Not only does it contribute to energy security, but it also improves operating conditions and it also strengthens the industry.

Cenagas, the state-owned independent operator of the Sistrangas, Mexico’s main natural gas transmission network, announced last year that a depleted gas field known as Jaf in the state of Veracruz would be the first facility. The project is under revision. Additional information has yet to be released regarding what the government plans are for developing it and other storage facilities.

There are several storage options around the country. Evaluating which type of facilities and where it would be most convenient to start developing them is part of a broader strategy. The current administration has a golden chance to design a natural gas strategy and transform Mexico into an important natural gas hub.

NGI: The Yucatán peninsula has had serious problems with natural gas supply. How can Mexico solve this problem?

Rabasa: The south of Mexico suffers from natural gas shortages because of declining domestic production of associated gas at offshore oilfields. Not only is supply limited but it is also very often high in nitrogen content.

I think the fate of the state of Yucatán is a great example of the opportunities available in Mexico to use natural gas to promote growth. Mexico’s President Andrés Manuel López Obrador has, I believe adequately, announced a special program to develop Mexico’s southeast region, which has lagged behind other regions of the country. The supply of natural to that region is a necessary condition for its growth.