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.

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.

The layout of Mexico’s gas infrastructure can be explained by the location of commercial and industrial centers in the country, coupled with the location of its hydrocarbon deposits. What this means is that large areas of the country lack access to natural gas. It’s not surprising that these same areas are Mexico’s poorest.

In the states of Guerrero, Oaxaca and Chiapas, for example, energy demand is not sufficient to justify a commercial natural gas pipeline. Furthermore, developing infrastructure in these states is a complex task. The Sierra Madre del Sur mountain range covers almost the entire area of Guerrero and isolated areas of Oaxaca and Chiapas. This geography means demographic dispersion. Numerous small towns with strong indigenous roots are dotted about the landscape.

Here, the notion of communal property prevails. Unwritten rules and customs hold important sway in the social order. Economic activities are primarily agricultural and meant for local consumption, capital is scarce and the population receives almost zero preparation for the realities of the global labor market.

In this context, infrastructure development is not well received by the area’s inhabitants. We’ve seen this with stalled pipelines in other parts of the country. The perception is that a natural gas pipeline is not infrastructure that is beneficial to them. There are no industrial activities in their villages and employment opportunities will be temporary during the construction period, and typically poorly paid. Moreover, large infrastructure projects carry environmental impacts that are not always mitigated or adequately repaired by developers.

Opposition to an infrastructure project for communities is also an opportunity to draw attention to its social needs. Blockades, interruptions and even physical damages to facilities are a currency of exchange with state and federal authorities to obtain some benefit, often exploited by regional leaders. Companies may face violent resistance or even extortion in order to build on a community’s land.

This makes projects more expensive and increases the risks to development and operation. In some cases, a pipeline segment may remain unfinished for a long time. The low demand for gas at the end of the route implies the absence of an anchor client that is able to mitigate risk. Therefore, pipeline development in these states is a reckless and sometimes surreal adventure for a private company.

The hydrocarbons law that resulted from the energy reform in 2013 included the concept of ‘social pipelines.’ This was basically an acknowledgment that the market is not a sufficient mechanism to get natural gas to certain segments of the Mexican population and the state needed to intervene to help develop infrastructure.

The declaration of a project as a social pipeline by the Energy Ministry, with the support of the Ministry of Finance and Public Credit (SHCP) and the energy regulator CRE, gives the green light to  Cenagas to prepare a project intended to bring economic development to underserved areas. The participation of SHCP and CRE has to do essentially with financing.

Cenagas, along with CRE, is meant to arrange the tender process for social pipelines and sets conditions that do not increase rates to existing users of the Sistrangas pipeline system. The fact that a social pipeline uses public resources means that it also has to get through the lower house of congress and into the federal budget.

All in all, they are not easy to develop given limited state resources. Despite this, the first five-year plan issued by Cenagas for the 2015-2019 period included two social projects: a Lázaro Cárdenas pipeline to Acapulco to gasify the state of Guerrero, and one that would go from Salina Cruz to Tapachula to promote economic activities in Chiapas and Oaxaca. The second pipeline was conceived as the extension of a strategic project that would complement or replace the existing pipe that goes from Jaltipan to Salina Cruz within the Sistrangas.

The truth is, little progress was made in these projects. They weren’t properly designed to begin with.

Although a new five-year plan is not yet in place in the new government, natural gas is being singled out as a way to economic development. Canagas’s vision encompasses several projects that aren’t social pipelines.

As a way to improve natural gas connectivity to the south of Mexico, Cenagas has highlighted the reconfiguration of the Cempoala compression station to move gas in a bidirectional way, two new compression stations in Tecolutla and Lerdo in the state of Veracruz, the conversion of an existing pipeline into a gas pipeline running across the Isthmus of Tehuantepec, the interconnection of the Sistrangas with the Mayakán pipe in the Yucatán, a floating storage and regasification unit (FSRU) in Dos Bocas and the inclusion of virtual pipelines as the solution to take gas to remote areas.

The key will be ensuring that these projects are feasible from both an economic and technical standpoint. For example, to improve supply to the southeast it is not enough to reconfigure Cempoala. The technical solution is to raise pressure moderately at several points to improve flow of gas over long distances. Tecolutla and Lerdo are projects that were in the pipeline and it is important that they come to fruition.

Connecting the Mayakán to the Sistrangas will also be crucial. This can improve the quality of flows to the Yucatán, which improves the reliability of gas service.

Finally, a much more sensible idea than social pipelines is to bet on virtual pipelines. This supply scheme can have immediate benefits with lower development and market risks. If Cenagas acts as a promoter of these activities, according to the principles of open access, allowing private actors to take on investment and operational risks, the goal of gasifying remote areas can create markets that in the future will lead to the construction of an economically viable gas pipeline.

In order to bring compressed gas or low-level liquefied natural gas to the states of Guerrero and Chiapas, the existing Morelos pipelines and the Sistrangas Jaltipan-Salina Cruz segment can be used as a platform. From there, the development can evolve from virtual pipelines to low pressure pipelines of plastic material, as we have seen with social pipelines in Colombia. If the special economic zones planned by the government manage to make synergies with these virtual pipelines, construction of lateral pipelines can be viable in the long term.

The necessity of the FSRU project in Dos Bocas and the conversion of the oil pipeline depend on whether the marine pipeline will enter into operation or not. If the marine pipeline does not start operating soon, the FSRU would be the buoy that would meet the natural gas demand of Tabasco, Campeche and Yucatán, since Cactus production would continue being used in the Sistrangas.

This would considerably limit the possibility of diverting volumes to the Mayakán. A pipeline running across the Isthmus of Tehuantepec to bring gas to Salina Cruz would also be pointless as there would not be enough gas available.

But if gas starts flowing through Montegrande from the marine pipeline into the Sistrangas as it should, the potential for commercial proposals looks promising, assuming Cenagas does not load the dice in favor of Pemex. The marine pipeline and an FSRU in Dos Bocas can coexist if there is a process of adequate, open and competitive allocation of transport capacity originating at both points.

This market solution will leave some users in better positions than others, but this is more acceptable than one in which the government, through Cenagas, CFE or Pemex, determines a gas allocation scheme and transport routes.

With a market allocation for the molecule and transport systems, not only will new projects become viable that pay for the diversification of supply, but the door will open to a gas model in which Mexico can take full advantage of its logistic potential in a North American context.

The Isthmus of Tehuantepec project can serve as a platform for Texas gas that crosses over at the narrowest section of Mexico to be liquefied on the Pacific to be sent to the Asian market. A project of such scale will involve a shipper that must pay a significant fraction of the transportation capacity installed in Mexico. This will ease the financial burden on the CFE, improve the utilization of installed capacity and allow for anchoring projects with a more social aspect. Open non-discriminatory access put in this way can help promote the development of the south.

We’re still trying to see which way the current government will act in terms of natural gas. On Thursday in Mérida, the head of Cenagas, Elvira Daniel, said the pipeline spat stalling the marine pipeline had to do with the position of the director of the CFE, and not Cenagas. This is a good sign. Hopefully, wisdom prevails. In the gas sector, both the state and the private sector are crucial to success. Smart energy policy combined with thriving private enterprise will lead to projects that help bring gas to the entire country.