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 10th Q&A in the series is with Arturo Carranza Guereca, a consultant at Mercury LLC and an expert in the energy industry, where he has advised both private and public companies. He worked previously as the head of the President’s Office at the National Institute of Public Administration (INAP) and as a partner consultant at Solana Consultores. An expert in public affairs, Carranza studied international relations at the Universidad Iberoamericana in Mexico City and has a master’s degree in public administration.

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

Carranza: Currently, natural gas is essential to the development of economic activities in the country, particularly for electricity generation and industrial processes, which in 2018 contributed 31.2% to national gross domestic product.

For the health of the Mexican economy, it’s necessary to continue to make natural gas a priority. Not only am I referring to the need to increase domestic production -- something that has received little discussion but I consider to be the principal challenge of the new government -- but also to the obligation to continue developing transport and distribution infrastructure. This is crucial for Mexico to reach the 4% annual growth rate this government has set out to achieve.

NGI: There are currently several natural gas pipelines that are stalled. How does that affect the Mexican energy sector and do you think there will be a solution in the short-term?

Carranza: Currently the effort to provide gas to the country through the construction of new infrastructure is starting to run into some obstacles. The government of President Andrés Manuel López Obrador has criticized the contracts that were signed in previous years that allowed private companies to construct and operate natural gas pipelines. In particular, the president has referred to seven natural gas pipelines that are stalled whose construction was approved by the Comisión Federal de Electricidad (CFE), through contracts to companies such as Grupo Carso, IEnova and TC Energy.

The criticisms of López Obrador in regard to these contracts have at least two serious implications. On the one hand, they hurt the development of the natural gas industry, which is dangerous if we consider that electricity generation and the Mexican industrial sector depend on this fuel.

On the other is the mixed message being sent to investors, who hear praise for the decisions made in previous years but at the same time see that the new government is making an effort to modify the contracts.

The outlook for the companies involved in the construction of the natural gas pipelines, regardless of what happens, isn’t very encouraging, but they at least hope to maintain intact the contract terms that they signed with the CFE.

In recent days members of the government have shown they are committed to modify some aspects of these contracts that they consider “abusive.” The president has not toned down his critical discourse, even as key allies, such as the Canadian ambassador to Mexico, have voiced their displeasure.

NGI: What impact could the CFE arbitration over clauses in these contracts have on the sector and the flow of natural gas in the country?

Carranza: In a context where the country needs to reactivate investment to drive economic growth, it’s hard to understand that the CFE would seek international arbitration to modify these contracts. The CFE request, in addition to being a mixed message, generates distrust. It adds to a series of erratic decisions, such as the cancellation of the airport in Texcoco, that diminish Mexico’s attractiveness.

The CFE announcement doesn’t only impact the enthusiasm of investors. It will also have a clear impact on the government’s ability to guarantee the supply of natural gas throughout the country. In particular, it will affect the supply of natural gas to regions that urgently need it to generate electricity and satisfy demand, such as in the Yucatán Peninsula.

NGI: How do you view the development of the natural gas market in Mexico in recent years?

Carranza: Since the beginning of the shale gas revolution and the increase in the production of natural gas in the United States, Mexico has been able to take advantage of its proximity to access natural gas at competitive prices. It was during the second half of the government of President Felipe Calderón that Mexico initiated a process aimed at bringing more gas to the country. Mexico began to construct natural gas pipelines and reconvert electricity generation plants.

The development continued in the government of President Enrique Peña Nieto. During his six-year term (2012-2018), according to the Energy Ministry (Sener), 17 new natural gas pipelines were constructed that totaled 4,639 kilometers.

These efforts contributed to creating very competitive manufacturing and industrial sectors for Mexico. Also, it put the country on the right path toward meeting its international commitments with regard to climate change.

NGI: Do you think Mexico has established a free market for natural gas and what limitations are there currently?

Carranza: The construction of the legal and institutional framework for the energy sector has been the determining factor to allow the country to have a reasonably developed and reliable natural gas market.

The strengthening of the regulatory bodies, which were being developed with vigor to break apart the monopolies of Petroleos Mexicanos (Pemex) and the CFE, and the creation of system operator Cenagas, have been key pieces to assure clear and credible rules to promote competition in the market.

The future challenge for Mexico will be to continue to develop infrastructure that allows for more consumers to access natural gas. In addition to natural gas pipelines to transport and distribute natural gas in all of the country, it is very important to create storage to hold the molecule. I am convinced that there is a formidable opportunity in Mexico to construct liquid natural gas (LNG) terminals, in both the Pacific and Atlantic regions of the country. Storage for LNG, in addition to improving supply, provides additional capacity to resolve demand surges in a quick and efficient way.  

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

Carranza: According to the final projection from the Energy Ministry in the previous government, the internal production of natural gas, in a minimum production scenario, will grow 18.8% in the period from 2018-2032 to hit a volume of 4.892 Bcf/d in 2032.

In 2032, according to the same projections from Sener, the internal demand will increase to 9.92 Bcf/d. This means that there will be a sizeable difference between production and demand of natural gas that can only be covered with imports.

It is worth mentioning that the minimum production scenario outlined by Sener includes the development of the areas awarded in the auctions held during the previous administration to Pemex and private companies, as well as the development of other blocks that were expected to be awarded in future auctions. That also includes some additional production by Pemex from joint ventures with private companies and the migration of service contracts to the contractual models that were approved as part of the energy reform in 2013.

NGI: What should Mexico do to produce more natural gas in the country and import less?

Carranza: Aside from the fact that Mexico contains important hydrocarbon reserves, this government will do all that it can and employ all legal instruments possible to increase the production of oil and natural gas.

Under the direction of Octavio Romero Oropeza, Pemex has made it clear that the road it will take to produce hydrocarbons will be through service contracts. With that decision, the government will have to increase public investment for Pemex to be able to reach the operative goals that it has established, and in terms of natural gas that means an additional 2.7 Bcf/d by 2024.

Some analysts consider this goal -- more than ambitious -- to be improbable. Even though I am among those, I do think that there are more possibilities to reach the goals if the government encourages joint ventures between Pemex and private companies. An oil-producing company like Pemex can produce quickly with a partner. 

NGI: Which of the issues in the natural gas sector does Mexico need to resolve urgently, and what are the most pressing issues and challenges in the energy industry currently?

Carranza: The fall in the production of oil and natural gas is, in my opinion, the most important and urgent challenge for this government. If there isn’t a solution soon for this issue, public spending won’t be able to grow and President López Obrador will have more restrictions when financing his big projects, such as the new Pemex refinery, the Santa Lucía airport and the Mayan train (Tren Maya).

The construction of an environment of confidence and certainty in the energy sector is indispensable to this. The government must establish coherence between what it says and what it does.

It would also help if the government opened more spaces and opportunities for investment. That implies, from an oil standpoint, a resumption of the oil auctions, as well as the joint ventures between Pemex and private companies. 

NGI: We have seen many 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? 

Carranza: During the current administration, President López Obrador has sought to gradually weaken the energy regulatory bodies with two main arguments. The first is that the regulators’ bureaucracies are costly, which contradicts with the government’s goal of austerity. The second argument is linked to the straitjacket that regulatory decisions represent for Pemex and CFE. 

Though the government hasn’t wanted to dissolve the regulators -- though it is important to remember that the government has the capital and strength to do so -- it has sought to integrate people aligned with the President’s political project. In that way, the government is trying to avoid that the CRE and CNH question, contradict and reject the energy objectives of this administration.

The relationship that López Obrador is constructing with the regulators is not ideal for the energy sector nor for the country. In an ecosystem where multiple agents coexist, such as in the energy industry, we need to count on strong and independent regulators that are capable of putting limits on the state-owned companies and that promote the participation of private entities.