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 ninth Q&A in the series is with Oscar Roldán, head of the National Data Repository at the National Hydrocarbons Commission (CNH), where he has worked since the regulatory body was founded in 2009. His career in the energy industry began in 2001 in Mexico’s Finance Ministry, where he worked on a new fiscal regime for Petroleos Mexicanos (Pemex). He also worked at the Mexican Energy Ministry from 2007-2009.

Roldán holds a bachelor’s degree in economics from the Instituto Tecnológico Autónomo de México (ITAM) and a master’s degree in Statistics and Econometrics from the University of Essex in England.

This is Roldán’s final interview while at the CNH, as he will soon be leaving his role.

NGI: How important is natural gas to the Mexican economy? 

Roldán: Natural gas is without question the fuel of economies. It is the motor, the pillar. Even more so for an economy like Mexico where more than 50% of the electricity generation uses this fuel. Therefore, it is even more strategic and necessary for the development of the industrial sector. The industrial sector in Mexico practically hasn’t increased its consumption of natural gas, and not because it hasn’t wanted to, it is because there have been storage problems for natural gas since 2000. The consumption of natural gas for the industrial sector has been stagnant since 2000. That is because of the lack of natural gas.

Even when more natural gas was produced, it was dedicated to the generation of electricity. The transformation of electricity generation began in 2000 when Mexico reduced use of fuel oil to produce electricity to begin to use combined-cycle plants, and that increased the demand for natural gas dramatically.

Natural gas is necessary for the growth of the Mexican economy and the generation of cheaper electricity. We are right next to a market where the price of natural gas is very low. We are also a country where the gas resources are abundant.

It is a paradox that we have so many problems with the consumption of natural gas. It is the pillar of the economy and is far more important than oil.

NGI: We have seen significant changes in recent months in the Mexican energy regulatory bodies, particularly the Energy Regulatory Commission (CRE) and the National Hydrocarbons Commission (CNH). What do you think of these changes and what do they mean for the country and the energy sector? 

Roldán: Without question I think these changes weaken the energy sector. The regulators exist to act as a counterbalance and that counterbalance is very important. The regulators are referees and they are there to assure that the rules of the game are followed as established by the law. The Energy Secretary can’t be the referee, a policy adviser, and sit at the head of the board of Pemex. There is a natural conflict of interest.

The industry requires referees that are neutral that don’t depend on the governments in power and that act as independent institutions. It has been historically proven that these institutions are necessary for economies to function correctly. What is happening now in Mexico is that the institutions are being weakened, and that, without question, isn’t good for anybody.

It isn’t good for Pemex either because the regulators review their exploration and development plans in an autonomous way. If there had been an independent regulatory commission in Pemex back in 2000 or the late 1990s, for example, Pemex probably wouldn’t have been approved to inject nitrogen into the Cantarell field, which was a terrible decision now looking back at it from a long-term point of view. Or, in 2004, for example, the over-production of Cantarell probably wouldn’t have been approved to produce 2.2 million b/d of oil.

So, that is the value of the regulators and independent institutions. If we would have had autonomous regulators at that time, without question the giant error of injecting nitrogen into Cantarell wouldn’t have been committed, nor would it have been over-produced. 

NGI: Do you think natural gas imports from the United States to Mexico will continue to increase in the next few years?

Roldán: I am convinced that, yes, imports will continue to grow. Currently around 90% of the natural gas that is consumed in Mexico comes from the U.S. The vulnerability that we have in regard to natural gas is gigantic. This administration is very worried about energy security in gasoline, however, when the real problem is natural gas. You can import gasoline from any country in the world. We import more than 90% of our natural gas consumption from just one country, and really from just one state, which is Texas. That makes us very vulnerable.

So, are we going to continue to consume more natural gas imported from the United States? Of course. As we saw in the recently announced National Development Plan, there isn’t a clear policy regarding natural gas. They say we’re going to be energy self-sufficient, but, how? It’s easy to say we are going to be self-sufficient regarding energy, but there’s no real plan for how to do that. The only thing that we’ve seen in regard to the proposals of this administration is to increase oil production, but we don’t how we are going to reduce the dependence on the U.S. for our natural gas demand. I think that is really the Achilles heel of the energy policy of this administration.

NGI: What do you think Mexico should do to produce more natural gas and import less?

Roldán: Without question, there should be support for the private sector. We know that this administration is committed to strengthening Pemex and increase oil production. But little has been said about natural gas. Obviously, you can’t do everything. Fiscal resources are limited. What needs to be determined is how is the private sector going to participate in the production of natural gas? The auctions that were done in the previous administration had a lot of success in terms of natural gas. That instrument has been abandoned so far as the new administration develops a new model, though it needs to be analyzed and reviewed when determining what to do.

The way to do so in my mind is to have natural gas auctions...design contracts, design bidding processes that are focused in producing natural gas from our basins such as Burgos and Veracruz in particular. The government should already be announcing these rounds. The private sector has to prepare. We aren’t seeing any certainty in regard to how the government plans to produce more natural gas. If they are preparing something, which they probably are, it has to be announced for the private sector to process the information. The basins have to be studied before a bidding process so that it can be successful.

A strategy for natural gas has to be prepared that is focused on the participation of the private companies in production in Mexico. One thing to keep in mind is that the production of natural gas doesn’t generate a giant economic profit. So, something should be done that allows private companies to explore and produce as quickly as possible and provide incentives to do so. The situation is very critical and unfortunately we don’t see the urgency to do anything like we are seeing in the development of a refinery, for example.

NGI: How do you think the natural gas market in Mexico has developed in the last few years?

Roldán: It continues to be emerging. For a developed market you need supply and demand. We have plenty of demand, but the truth is we don’t have much supply. We are a market that totally depends on the U.S. for natural gas. We depend on the price that the U.S. sets. We depend on the capacity that we can import from them.

So, in terms of a Mexican market, we hope that there will come a day where we achieve self-sufficiency in terms of natural gas where we have consumption points, production points and distribution points for natural gas produced in Mexico. We have the demand and the production potential, but at this point, we depend entirely on the U.S.

NGI: Do you think Mexico has established a free market for natural gas?

Roldán: No, honestly. We continue to depend on auctions to be able to produce natural gas. We depend on whether the government in power decides to allow private companies to explore and develop natural gas or not. If we had a lot of producers exploring and producing natural gas, we would be able to say that we have a free market.

We started to take steps toward a free market in the past administration precisely because we saw the problems and growing dependency on the U.S. for natural gas. In Mexico, the blame for problems is often put on previous administrations. The new energy policy of the previous administration did have to goal to direct Mexico towards the goal of self-sufficiency in natural gas, which is a process that isn’t accomplished overnight. It takes years.

I used to say that to ask for oil production from the new companies awarded contracts in the previous administration was like planting a tree. If the tree doesn’t provide fruits in a year, you don’t cut it down. It is a process that takes years. There aren’t magical formulas to generate immediate production.

To have a free market, you have to take certain steps. That includes the incorporation of various producers. If the new bet is that Pemex is going to produce most of the natural gas, you are taking a step backwards and returning to a monopoly and are again a step further away from a free market. Without question we were going in the right direction towards a free market, but now that has stopped and seems like the country is headed further away from that.

NGI: Do you think there will be more auctions for oil and natural gas exploration and production in the current administration?

Roldán: It does seem that there will be auctions, which are being prepared. The fundamental thing is not just there are auctions, but that they are successful. What is a successful auction? It is one in which you achieve participation from private companies, as well as where those private investors guarantee a profit and income for the government. The auctions of the previous administration were very successful, lots of contracts were awarded and the taxes that are being paid and will be paid on those contracts are very high. Some of the companies actually pay more taxes on their contracts then Pemex.

If there are auctions, that would be great and very good news. The key will be how will they be designed? What type of contracts are they going to use? Will they return to the model of service contracts? That model hasn’t worked in Mexico for years. We’ve tried since 2000 in several different ways using different service contract models, and they haven’t worked. You can say whatever you want about why they didn’t work or blame the “neo-liberals” or whatever you’d like, but if the formula has been attempted so many times and hasn’t worked, and doesn’t work in other parts of the world, well, who knows what new strategy they might try to use to make them successful.

I hope the present administration evaluates the different contract models and that they make the best decision so that the auctions are successful.

NGI: Is there concern that the lack of natural gas supply will lead to possible blackouts in the country if infrastructure isn’t improved?

Roldán: Look no further than the Yucatán Peninsula. They are currently in a state of critical alert and it appears the demand is now superior to the installed capacity in the state. Yucatán is a state that is going to collapse soon for the lack of natural gas, and even when natural gas is available, the demand will continue to increase. The demand for electricity in the Yucatán grows almost 5% per year, far above the 2.5% average in the rest of the country.

It is critical and as I said before, far more critical than the demand for gasoline. If you are talking about three states in the country having electricity shortages that have large economic importance to Mexico, such as Quintana Roo and Yucatán, where tourism is massive, then it is contradictory to talk about energy sovereignty when states as important as these are left without electricity.  

NGI: What issues need to be resolved urgently in the Mexican energy industry and what are the most worrisome challenges currently?

Roldán: Without question the most important issue that the Mexican energy industry is facing is the lack of natural gas, particularly for the generation of electricity.

We are in a scenario where we are having so much friction with President Trump and at the same time, 90% of our consumption of natural gas comes from that country. That’s frightening. For that reason, Trump knows he can do whatever he wants with us. Forget the tariffs. If they cut off the supply of natural gas, 45% of the country would be without electricity. It’s that grave. And Trump can do that any day that he wants.

If we aren’t paying attention to how exposed we are in terms of natural gas from the U.S., and Trump is currently attacking us from all angles, it could put us in a very delicate situation. Who likes to be so dependent on a country with a president that is being so aggressive toward us? Nobody. A strategic energy policy needs to be in place for natural gas in Mexico, and it’s yet to be announced.  

NGI: Do you think it’s feasible or probable that Cenagas will take possession or control of CFE’s natural gas pipelines during this administration?

Roldán: Whether it is feasible or not is a question of policy and what the government decides. What I can say is that it is desirable, beyond whether it is feasible or not. I say it is desirable because currently the capacity of many of the pipelines isn’t being used. CFE is paying, but gas doesn’t flow. In some cases, it is because there isn’t gas, such as in the Yucatán (Mayakán). In the case of the pipelines in the north, the combined-cycle plants aren’t ready to consume that gas. If those pipelines are passed on to Cenagas, it would put the capacity at the disposition of private companies that would want to use it and we would see new projects being developed.

Currently, some of the CFE pipelines have unused and idle capacity and they can’t do anything with it. Because of that, many investment projects that could be carried out are pending. One current case involves the projects that are being analyzed in the Pacific coast to liquefy gas to send to Asian markets. They depend on CFE freeing up capacity. Currently, more than 90% of the capacity of those pipelines is reserved by the CFE, but the gas isn’t flowing. If that gas was put in the hands of private companies, we would see many more projects. That’s just one example, but if private companies were given access to that capacity, surely there would be many more projects that could be developed.

NGI: There are several pipeline projects in Mexico that continue to be stalled and offline. How does that affect the electricity industry and do you think there will be a resolution in the short-term? 

Roldán: I think the biggest impact that exists currently in the electricity sector in the country is in the Yucatán peninsula and Baja California Sur. In the state of Yucatán, including Quintana Roo and Campeche, as well as Baja California Sur, they pay the highest electricity rates in the country, which are almost double the rest of the country. That’s where the biggest problem exists currently, and that’s a result of the lack of natural gas. But the lack of natural gas isn’t because there aren’t pipelines. In the Yucatán there is a pipeline that is practically new that connects Ciudad Pemex with Valladolid with a capacity of 350 MMcf/d. But there’s no gas, and it’s not because there’s no infrastructure. In the case of Baja California Sur, it does have more to do with infrastructure because there isn’t a way to send natural gas there unless a gasification plant is installed to allow for liquefied natural gas. The case in the Yucatán is the most critical in the country currently.