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 21st Q&A in the series is with Severo López Mestre Arana, senior partner at Galo Energy, a Mexico City-based consulting firm which advises clients on strategy decisions and opportunities in the Mexican energy industry. López Mestre is an expert in energy policy and regulation and has worked in the Mexican energy industry for 20-plus years, beginning as the advisor for the assistant secretary for energy operations at the Ministry of Energy from 1998-1999. He then worked at the Comisión Federal de Electricidad from 2001-2010 as the senior advisor for both the chief legal counsel, from 2001-2005, and the chief administrative officer from 2005-2010.
López Mestre was CEO at Mexenergy from 2010-2014 prior to joining Galo Energy in 2015. He is a founding member of Sustentabilidad para Mexico AC (representing the World Green Building Council in Mexico) and executive advisor of its board.
López Mestre holds a law degree from the Instituto Tecnologico Autonomo de Mexico (ITAM) with postgraduate studies in regulation, policy and administration at the University of Chicago and the University of California, Berkeley.
NGI: What are your thoughts on the first year of the administration of President Andrés Manuel López Obrador, particularly in regard to natural gas and the changes in the energy industry?
López Mestre: I think this year has been landmarked by politics. That’s normal for a new administration, particularly one that has come in with a very ambitious program. Therefore, the new administration has tried to come in strong politically, and they have done so with a series of symbols and movements. I think some of the things that we’ve seen in the first year of this presidency will change as the administration moves along.
López Obrador is a very pragmatic leader and understands the importance of public and private investment in energy and the industry for Mexico and its economy. That said, politics sometimes take the forefront, both in Mexico and in the U.S. When this happens, the dialogue between regulation, competition, technical policy and plain politics doesn’t flow. That’s why it’s been a very intense and difficult year for investments -- largely because of the discourse and the symbols presented in the administration’s language, which have generated some uncertainty and that mainly respond to the political base and its needs, not to policy, investments and regulation.
Some of the language used has not been very encouraging for some sectors regarding investment. We see a lot of examples of that, like the threat of taking the natural gas contracts to international arbitration. It finally had a favorable solution, but the whole ordeal was more of a message or symbol to show “we’re the new guys on the block and we’re coming strong,” I believe.
I think the administration is trying to find what philosophical, political and practical content can you give to the idea of “energy sovereignty in Mexico.” That’s the key. The president is doing his job by pushing politics, though I feel like his staff and cabinet are not necessarily following at the same speed. The cabinet should be proposing many ideas -- in an almost brainstorming way – about how Mexico could redefine sovereignty and energy without using the 1970s symbols. I think that is a cabinet problem, and not necessarily a López Obrador problem.
I think they can do really interesting stuff to redefine that model of sovereignty, though the cabinet has been very short on ideas so far. There are no new ideas at this point that align with the concept of establishing Mexican energy sovereignty that aren’t backward looking. It’s easy to fall back on old concepts like “state-owned enterprises and government investment,” but where is the political creativity to merge in markets, sustainability, renewables, international integration? So, I think that’s what’s really lacking at this point: ideas of what can be done to really make Mexico energy sovereign, if that is in fact the main objective of the administration as has been announced. We need to move forward beyond the ideas from the 1970s that won’t solve the issues of the 2020s and beyond.
López Obrador is pragmatic, so I think it’s time for his staff to live up to the expectation and put some new policy ideas on the table in the energy industry.
NGI: What do you forecast for Year Two and what do you think lies ahead for Mexico’s energy’s industry?
López Mestre: I think that the symbolism needs to unwind a bit. We have to move towards a more concrete or specific policy agenda. In the next few years, we’ll need to define in a clearer way what’s going to happen to Mexico regarding renewables, for example, or natural gas infrastructure.
Mexico is sitting in a natural gas paradise position on the globe. Natural gas is overflowing in the U.S. In some places in the U.S., natural gas still has a negative value and producers are desperate for someone to take it away. We have to start to capitalize on those realities, and that means moving into a more technical energy policy scenario. A bit less symbolic, a bit more technical.
We must capitalize on the opportunities available. If Mexico doesn’t capitalize on these opportunities on behalf of political symbolism, I don’t think we’ll achieve the results needed and the new administration will fail dramatically in its ambitious pursuit of presenting “a successful political and economic development alternative model to the world”. Results are needed, and those come when you execute. To execute in the energy industry, you need technical decisions.
We need to define where we want to be in several areas, such as renewables, natural gas and oil. The country has to start planning, refocus and redefine energy policy to prepare for what is needed in the future. There’s immense global thrust based on climate change and serious health issues to push away from hydrocarbons, though Mexico is making plans for a refinery, for example. Members of the cabinet need to keep these things in mind when deciding where this administration will navigate to.
I think there are wonderful opportunities for Mexico and the development of the energy industry. They can only be achieved if strategic planning allows them to flourish and grow. The new President needs to be correctly advised by people who have a clear long-term vision for the industry. The long-term stakes for the country of not having the right people in the right place are just too high.
NGI: In your opinion, what are the biggest concerns of potential investors or people looking to do business in the Mexican energy market?
López Mestre: What I see is that there are several different actors that make up the energy industry.
The very sophisticated actors, that can actually decode the political messages, are continuing full speed ahead. They are still pumping money into the Mexican energy industry. They are investing. But they are a minority.
Most other investors – both national and international -- have held up. I think this is why we are seeing slowing economic growth. They want to wait and see what happens. The speeches, comments and symbolism that we have seen from the administration have sent the message that: The national companies -- Pemex and CFE -- are very strong, and we’re not sure as a government if we need or want private investments.
Even though the president has said on several occasions that the country needs both – to strengthen national companies and receive private investment – the message that most people heard is that the country is reconsidering or potentially averse to private investment. This “noise” has cost us a lot of potential investment. That has been very, very hard for Mexico.
This brings me back to the point that members of the cabinet don’t seem to be running at the same pace as the president. This was seen with the natural gas pipelines conflict. It reached a point when the president had to intervene personally to resolve the situation. It seems like it could have been avoided entirely had there been better synchronicity between the president and his cabinet. I think some of the information is being framed incorrectly by members of the cabinet and, as a result, Mexico and potential investment for the country suffers.
NGI: Looking back at López Obrador’s first year, what are your thoughts about all of the changes we’ve seen to the energy regulatory bodies, such as the CRE, CNH or Cenagas?
López Mestre: I have mixed feelings. I think in the media, the idea has been that all of the new people that entered the regulatory bodies this year don’t have the technical expertise or profile required.
But, I think it’s a mixture. That always happens to some extent. Autonomous regulatory bodies being invaded by politics happens almost everywhere, not just in Mexico. It also happens in the United States.
That said, it was not a good sign to see some of the members of these regulatory bodies and the commissioners stepping down in the way they did, prior to completing their terms and under pressure from the administration. That’s never good for the regulatory bodies.
There’s an idea in this presidency that these regulatory bodies aren’t necessary. If someone sat down and explained the need and purpose of these regulatory agencies, that attitude might change. Politics was the name of the game this year, which I think affected who left and who entered these regulatory bodies. Hopefully, now that these people are set, a better understanding of the importance of the roles of these agencies will be cultivated.
What you can’t have is these sorts of moves that we’ve seen to put political allies into important regulatory roles. That should not happen. These institutions need stability and need to be heterogenous mentally and technically.
It’s been unfortunate to see such drastic and high-volume changes of the people in the regulatory agencies, which sent a confusing signal to the world. The message that was sent to the international community was: We don’t know what this administration is going to do. Are they going to burn down the house? They’re not, but that was the message sent, and as a result, investments have been delayed. Infrastructure investments that we desperately need have been delayed as a result of decisions that generate uncertainty.
These are some things that need to be improved and understood as the administration moves forward. Investment flows with stability, so if there is more of it in the upcoming years, investment will likely improve as a result. The attractiveness is still there in Mexico, though there is a need to recoup some of the credibility that has been lost as a result of all the changes in the regulatory bodies this year as well as some very unfortunate energy policy decisions.
NGI: What do you think will push the Mexican natural gas market forward and what is needed to do so?
López Mestre: I’ve spoken over the years with many national and international companies involved in the natural gas industry. The common theme that always emerges is: Once you put natural gas in an area, the area booms. I’ve heard this from Europe, Canada, the U.S., Latin America and Mexico. It’s almost magical. Once natural gas is available in an area, industrial development follows.
The Mexican market is starving for natural gas. The Pacific side of the country, the south Pacific area of the country, such as Guerrero and Oaxaca; they need natural gas. They need it to create something there.
Infrastructure is the first step. Natural gas infrastructure in Mexico has almost doubled in the last five years, which is huge in terms of the amount of investment that has been required. Infrastructure development needs to continue and more is needed to create the redundancies that the system requires. Storage is also needed.
As that advances, that will trigger more development and more demand. As the natural gas market continues to develop and the fuel is more readily available to industry, commercial and residential sectors, more options and opportunities for development will be generated.
The bottom line for infrastructure development is the demographic profile. And the demographic profile in Mexico is one that will be starving for natural gas development and power. So, Mexico has a big sign on it that says: opportunity. The demand is there, so the prospective is great if you ask me. The opportunities in the natural gas industry in Mexico are tremendous.
NGI: What are your thoughts on Mexico’s demand for natural gas and how much do you think the country will need in the short and long term?
López Mestre: One figure we hear and see is 8 Bcf/d or 9 Bcf/d in terms of actual demand for the country. I believe that the projections for demand in Mexico are actually falling short.
I think some of the forecasts underestimate how much industry and opportunity will come as a result of natural gas pipelines being installed in certain areas of the country. We’ve just had several new pipelines come online and development should accompany that, which might bring more demand for more natural gas.
The pipeline network is continuing to grow and some very relevant investment from the U.S. side is interested in getting involved in the market, simply as a result of more access to natural gas. I think that the future for natural gas looks even better than the scenarios that are being forecast. If we have the right conditions in terms of business environment, without any additional political blows, the investment in natural gas can pick up in the short and mid-term.
Demand growth should continue as the grid strengthens and becomes more integrated from north to south in Mexico, and I think it will actually surpass the demand figures that have been forecast.