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 13th Q&A in the series is with Pablo Zárate, managing director of the Strategic Communications Division of FTI Consulting in Mexico. He has been with the firm since 2014, based initially out of Washington, DC, and later in Mexico as the founder of the Energy and Strategic Communications teams. Zárate’s practice focuses on public affairs -- the intersection of regulation, policy, politics and media -- particularly within the energy and industrial sectors.

During his time at FTI, Zárate has advised a broad range of clients pursuing Mexico-related opportunities, from leading Mexican groups to Fortune 100 companies. He has also advised on reputational, policy and regulatory issues throughout Latin America. He writes a weekly energy analysis column for El Economista titled Más Allá de Cantarell (Beyond Cantarell).

Prior to joining FTI, Zárate served as adviser to two different secretaries of Energy in Mexico, as well as adviser to the Undersecretary of Energy Planning. In the political consulting arena, Zárate has advised candidates and incumbents at the state and local level throughout Mexico.

Zárate holds an masters degree in media and public affairs from The George Washington University, a bachelor’s degree in economics from the Instituto Tecnológico Autónomo de Mexico (ITAM), and another bachelor’s degree in political science from ITAM.

NGI: What is your opinion on the decision of the Comisión Federal de Electricidad (CFE) and private companies to consider possible international arbitration to resolve the contractual disputes regarding the stalled natural gas pipelines in the country?

Zárate: CFE’s strategy was certainly unorthodox. It’s the kind of strategy that, even with a positive resolution, triggers anxieties among the international investment community that are difficult to fully assuage over time. With the positive outcome and an emerging narrative that sounds more business friendly, the government has opened a potential path toward normalizing its relations with private companies and attracting much needed investment.

But it’s still critical for the government to show that surrounding issues with political noise driven by itself, and then seeking renegotiations, will not be the modus operandi of the administration.

With the most recent statements from CFE and government officials, it’s easy to see how the objective all along was to rework the cost structure through time. As a party to the contract, CFE does have the possibility to pitch to its counterparts the idea of renegotiating the terms. And, judging from the outcome, it’s clear that CFE was also able to address concerns from those contractual counterparts, hence the mutual agreement.

But to say that there was a big disconnect between this objective and the initial communications that emerged from the CFE and the government is an understatement. Whether the resolution is in fact seen as a win-win resolution over the long term -- given the evolving nature of the information and the narrative -- will largely depend on whether CFE and the government are able to explain why this was the best possible path to pursue their objectives for this unique set of projects. They still need to reassure not just the energy sector but overall investors in government-sanctioned projects that they understand how unorthodox the strategy was. And that this was an isolated case, not part of a potentially upcoming trend.

NGI: What impact did these contractual negotiations and the threat of international arbitration have on the sector and how does it affect the interest of foreign investors doing business in Mexico?

Zárate: In an overwhelming majority of large energy projects, seeking international arbitration is an explicit contractual right. But particularly for government-run entities, it should continue to be seen as a mechanism that’s used to resolve issues that are unable to be effectively addressed in good-faith negotiations between the parties. Otherwise, it can be confused with mere political pressure.

Given the reputational considerations at play, governments that announce arbitration-related filings need to be mindful of the signal that they send to a broad community of stakeholders if they are not able to articulate a substantive case explaining why this is needed and fair. Absent a clear, consistent story through time, investors are primed to start comparing this to other cases of governments pursuing arbitration just to turn up the pressure on companies and send a targeted message to their political bases. Under this scenario, country reputation suffers. 

NGI: How important is the Sur de Texas-Tuxpan marine pipeline to the supply of natural gas to Mexico and for the energy sector? And on a broader scale, how important is a secure supply of natural gas to the Mexican economy?

Zárate: As part of the biggest gas pipeline system between Mexico and the United States, this asset is key in the ongoing efforts to ensure that Mexico has cheap, reliable access to natural gas, which, in turn, has shown time and again to be a crucial factor to boost economic growth. The pipeline is expected to increase Mexico’s current import capacity by well over a third, so it’s a crucial part of the solution to Mexico’s gas supply shortage.

At the same time, it’s important to consider that the issue at play is broader than a single asset.

The seven projects that were involved in the arbitration narrative made it clear that the conversation was not about an isolated issue. When all is said and done, and there are a few chapters pending to get there, the right way to think about the issue will be under the context of systemic political risk and the overall capacity of Mexico to continue to deploy much-needed private investments into the expansion of our energy infrastructure.

NGI: What is your opinion on the development of the natural gas market in Mexico in recent years?

Zárate: It continues to evolve, despite challenges. On the contractual front, perhaps the most important development has been an enforced contract transfer program that has seen more diversity emerging in shipping markets with CFEnergía and smaller distributors entering a space previously controlled by the state. Changes in the vision of the role of CFEnergía are not immediately expected to hamper this growing diversity, so there is still optimism here.

Infrastructure development, particularly as the arbitration claims on the pipeline issues are fully resolved through private renegotiation, will continue to catch up with the growing demand that is currently not being supplied. If Mexico gets back on track in terms of sending continuously reliable signals of being open to investment, the mix of challenges and opportunity pretty much guarantee that our country will become one of the most vibrant, dynamic markets in the world.

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

Zárate: Regardless of the urgent need for it, the government has not yet been able to fully articulate a strategy that guarantees security of gas supply over the short-term, and how to phase-in an increase in domestically produced gas over time.

As new infrastructure projects come online, the share of gas imports seems bound to increase over time, even as we are already at record levels. This is a boon to gas consumers and Mexican industry, given how cheap imported gas currently is. But considering how much natural gas prospective resources Mexico has, to renounce proactively auction rounds and Pemex farmouts (joint ventures) is at best, a missed opportunity.

NGI: What are the most pressing challenges and obstacles in the Mexican energy sector currently?

Zárate: There’s an increasing number of technical, substantive challenges; that’s clear from every angle. But perhaps the biggest one, the one that has a transversal impact on all the rest, remains the ongoing, politically-driven narrative.

Rounds, farmouts and the development of new infrastructure are not being paused due to technical challenges. They are now paused as a response to changing political preferences that are, unfortunately, informed and driven by inaccurate statements that are still being accepted at face value. As “public affairs become more public,” as the president likes to say, there will be significant opportunity to inform key audiences and stakeholders and make sure that the narrative is not in conflict with reality.

Obviously, realigning the conversation with substantive evidence does require a sustained, coordinated effort from key stakeholders, such as scholars, industry players and more politically inclined groups. This is hard work. But, as several of the energy sector participants continue to acknowledge that the end of August looks much closer to new investment opportunities than what the end of July did, these kinds of ideas are surfacing more frequently. Leading voices from different organizations and backgrounds seem to be increasingly willing to engage in these kinds of discussions.