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 19th Q&A in the series is with Alejandra López, Director at FTI Consulting Strategic Communications in Mexico City, where she works as an energy sector consultant and strategist with a particular focus on oil, gas and power. Since joining FTI in 2016, López has specialized as a consultant in crisis management, media relations, internal communications, public affairs and corporate reputations with particular emphasis in long-term strategies. Previously, López worked as an energy reporter at Mexico City-based newspaper Reforma from 2011-2016, where she covered the industry and implementation of the country’s historic 2013 energy reform.

López holds a bachelor’s degree in communication and journalism from the Universidad Nacional Autónoma de México (UNAM), where she graduated in 2012.

NGI: If you had to describe the Mexican energy market in one word, what would it be and why?

López: The first word that comes to mind is “challenging.” The energy sector is facing numerous challenges in several areas, but all are focused on finding a balance between energy demand and a constant, resilient supply.

Mexico is rich in resources that can be transformed and taken advantage of to generate this supply, however, the mechanisms needed to get there are being underutilized. One example, from the supply side, is hydrocarbons. The oil potential in Mexico is very big – there are 68 billion barrels of oil and 224 Tcf of natural gas in prospective resources that can be taken advantage of — however, exploration and production activities are focused on the areas that represent just 20% of this potential and there aren’t clear plans to develop the remaining 80% despite that the law offers an array of alternatives to develop them, such as oil auctions and joint venture with Petróleos Mexicanos (Pemex).

At the same time that we debate how to produce new resources, there is an effort to limit fuel imports. This is a true dilemma if we consider that the national production of natural gas available for the industry doesn’t cover even a third of the demand and that the national production of gasoline and diesel is just 40% of what is required to keep the economy running.

On the demand side, a constant problem is a resilient supply of fuels, which is constantly compromised by the lack of reliable transportation systems or deficiencies in storage that are unequipped to handle logistical fluctuations. As a result, this impacts the ability to obtain the lowest possible prices, control of inventories, economic profitability, etc.

The biggest challenge of the energy sector is constructing a resilient supply system that guarantees available energy for the population at the lowest possible prices and that has sufficient redundancies to operate with flexibility.

NGI: In your opinion, what are the strengths of the Mexican natural gas market? And the weaknesses?

López: The natural gas market is perhaps one of the primary examples of the storage challenges that Mexico faces in fuels supply. Natural gas demand is constant, and a very important part of Mexico’s industrial sector depends on it. For several years, increased demand for natural gas has been one of the most important indicators of economic growth, given that more natural gas consumption — such as in the electricity or manufacturing industries — implies growth in these sectors.

One of the strengths of the natural gas market in Mexico is that it has access to various supply sources that give the system flexibility to manage the flow of gas that is imported – via land from the United States in pipeline or via the ports as LNG – and the gas produced in Mexican fields. Also, Mexico is in the region that sells the world’s cheapest gas. This is a double win for the national market in terms of price and proximity.

However, these strengths are diminished when considering transportation and distribution. Transportation of natural gas from the United States faces the challenge of limited infrastructure in Mexico. Even though several pipelines have entered operation in recent years, many others have been delayed or had interruptions during construction.

Also, from a market point of view for natural gas, there are regions of the country that could benefit from the use of more natural gas, and from substituting other fuels – such as wood, in terms of residential needs, or the burning of fuel oil to generate electricity – for others that are not only more affordable, but also more environmentally-friendly and healthier for people. Some areas of the country that could benefit from more availability of natural gas are Guerrero, Baja California and the Yucatán peninsula, to mention some.

NGI: What is the importance of natural gas to the Mexican economy and what are your thoughts on the development of the country’s natural gas market in recent years?

López: The role of natural gas in the Mexican economy is increasingly relevant.

In the last decade, we went from consuming approximately 5 Bcf/d in 2009 to more than 7 Bcf/d in 2019. This growth has been accompanied by an increased demand in the country’s productive sectors. In fact, natural gas is entwined with the development in several economic sectors in Mexico. Some of them, such as the electricity sector, wouldn’t survive without access to this fuel.

Another way to evaluate the relevance that natural gas has in Mexico is by observing the impact on the country when there is a shortage. As explained by Carlo Alcaraz y Sergio Villalvazo in a 2016 analysis on the impact of natural gas shortages (such as in 2012-2013), the production of the manufacturing industry reduced by at least 4 percentage points and growth is clearly affected as a result. In just three quarters, it was found that the lack of natural gas reduced the national GDP by 0.28 percent.

In recent years, the natural gas market has become more tangible. Prices have improved as a result of being able to import natural gas without relying entirely on Pemex, and the creation of an independent operator (Cenagas) and the participation of the Comisión Federal de Electricidad (CFE) as a natural gas vendor has given a boost to the sector and allowed it to act more as a market.

NGI: A lot of people in the industry think it is necessary to implement fracking and develop unconventional fields to produce more natural gas and oil in the country. Do you agree that Mexico needs to develop unconventional fields to increase oil and gas production?

López: Mexico is rich in unconventional oil and natural gas reserves. More than 50% of our oil potential lies in these types of hydrocarbons. I think that electing not to develop them would be a lost opportunity for the future generations as you are passing up something that could provide development and riches for the country.

The debate about the development of these resources is largely based on the operative and environmental risks of thehydraulic fracturing (fracking) technique, however, we can’t continue to focus on the past. The techniques used in fracking have evolved and have been adapted to the social demands to make the practice safer, healthier and more operationally efficient. Mexico has an invaluable opportunity to take advantage of its resources and generate development and, for these opportunities to materialize, a robust regulatory framework is in place that doesn’t only depend on one authority – the oil authorities – but incorporates the supervision of other entities, such as environmental and social agencies.

The true challenge for unconventionals in Mexico is to promote development and employ experts and working groups that will evaluate the exploration areas, determine estimates of the potential resources, provide assurances that the projects will be profitable and create solid development plans. These unknowns are the true barrier for development for unconventionals.

NGI: There have been several disputes with local communities over infrastructure projects in recent years. What can Mexico do to mitigate these issues?

López: It’s clear that communities are looking to be more involved in the projects that influence their daily lives and the region where they live. Companies are now more conscious than ever of the weight the communities have and the requirement to obtain a social license to construct a project.

I think that the current framework allows for dialogue to be cultivated between the companies constructing the projects and the communities where they hope to operate, however, barriers such as language, ability to explain and understand the project and the negotiation of the benefits the communities receive as a result of the projects continue to create barriers. There are no manuals or guides for this, as each community makes a decision they consider best for themselves.

In this regard, it is possible to improve the relationships with the communities and to respond to their doubts, taking into account that the projects being developed must generate local development and improve the quality of life of locals. The people who construct an electricity generation plant or any oil project or infrastructure have to act as ambassadors.

NGI: In your opinion, where is the Mexican natural gas market headed and what can we expect in the upcoming years?

López: The Mexican natural gas market must continue towards the construction of a consolidated and resilient market where supply can be guaranteed to allow for more efficient operation and continued consumption growth. Natural gas is currently the fuel that generates the least amount of emissions and contamination and is available at a low cost in Mexico. That is an opportunity that the country needs to capitalize on to boost growth.

On the supply side, Mexico also needs to develop existing sources of natural gas. Mexico needs to develop local fields to more efficiently produce proven, probable and possible reserves and to discover prospective resources that are thought to exist. The plans to develop them need the support and backing of public policy to make them a reality.

Mexico is about at the halfway point to becoming a more gas-rich country. There are regions of the country where you can’t access natural gas and that limits the development of the country given the lack of economic and efficient alternatives. This is a subject that has been pending in the energy sector that is yet to be resolved.

Finally, I would say that the country must take actions to decide what is the best strategy to take advantage of its strategic position in North America. This entails producing its own gas reserves, while at the same time taking advantage of the synergies that already exist with the U.S. to generate a robust and consistent regional system.