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 new year brings with it an interesting new gas tender scheme by pipeline operator Cenagas to balance the Sistrangas national pipeline system. On Feb. 1, Cenagas will begin receiving natural gas supplied by different marketers in scheduled operations, for delivery during the next gas day and even in intraday operations. As a result, state utility CFE will lose its de facto exclusivity in the sale of the fuel for these purposes.

This measure, a priori, seems promising for the marketing companies that ventured into Mexico after effective open access was achieved in a 2017 open season. Beyond the volumes actually delivered and the inherent potential savings because of the competitive process, the implications of the Cenagas process deserve to be analyzed.

These transactions do not make Cenagas an intermediary or marketer of last resort. The idea behind vertical disintegration was that Cenagas would be truly independent without conflict of interest in order to achieve effective open access. Pemex, as the owner and operator of the national pipeline system Sistrangas, never had the real intention of letting other marketers use the system's capacity to deliver gas, and its dominant role as a marketer discouraged interest in entering the Mexican market. Cenagas just wants to contribute to the continuity of the supply of natural gas in Mexican territory. The justification is operational, not commercial.

It is worth remembering that the manager figure of a pipeline system is inspired by the European experience. Particularly in Spain, as part of its balancing actions to reduce losses, Enagas purchases and sells gas at its virtual balance point in the organized gas market. Although these purchases correspond to different denominations -- operating gas, mattress gas and heel gas -- in essence it is the acquisition of gas to maintain the proper operating conditions of the system. When carried out in the organized market, Enagas seeks to promote liquidity, efficiency and transparency through an automated auction mechanism with which the Spanish manager satisfies its gas needs.

The opportunities for market development in Mexico are broad. It would be desirable for Cenagas in its effort to balance the system to copy the Spanish experience. An example of this is the publication of the purchasing program for the upcoming year of operations. This transparency exercise would help the different agents in Mexico to have a qualified vision regarding expected balance conditions. Purchases, anticipated or intraday, should be public at all times in an electronic newsletter, a situation that ensures a transparent process and the perception of impartiality. More important, the volumes and prices resulting from the transactions need to be made public, which facilitates accountability related to the distribution of the cost of balancing and contributes to price discovery within the framework of a market that is not as liquid and competitive as the American.

Given the ambivalence of the government of Mexico regarding private participation in the energy sector, the tender announced by Cenagas is a good sign. It is a step in the direction of market promotion, and not back to vertical integration. Since the tender is extensive in terms of reception points, it is expected that Pemex will actively participate as bidder in places such as Cactus and Burgos, where the country's great gas processing centers are, and Playuela, the commercial point from where Ixachi production is being injected and in the various fields that directly inject into pipelines without the need for processing. 

However, the inclusion of cross-border points and the Altamira liquefied natural gas (LNG) terminal opens the door for import gas marketers to have a window of opportunity. Even at domestic production points, these marketers can take gas from the first-hand sales (VPM) regime and resell it discounted to Cenagas.

If the acceptance of proposals from private marketers were to materialize, Cenagas would mark an important contrast with respect to the dominant discourse of the last year in which CFE has expressed restraint about its contracts with private companies. This opens the possibility for agents other than CFE to supply balancing gas and therefore suggests an adequate differentiation of objectives and a more entrepreneurial vision in the direction of Cenagas. 

Market agents should appreciate the subtlety of Cenagas’ plans and seek its continuity and consolidation. In the Sistrangas, open access exists that allows the participation of marketers, but this isn’t the case in the rest of the gas network. In nonintegrated pipelines, the dominant user is CFE and to date, CFE does not show any intention in making assignments of the capacity it maintains idle.

It would also behoove the Mexico gas market if Cenagas were able to maintain a degree of independence from Pemex, as it has done with CFE in this process. 

Cenagas is not an authority or a regulator; it simply has to make sure the system works. The information requested from potential participants may be sensitive to the strategy of a marketer that attempts to compete with the dominant national company, Pemex. The operator should be interested in the volume and price at which a bidder is willing to deliver gas, nothing more.

In this regard, and given that the activity of independent management is regulated by the CRE, it would be important that the rules of operation of integrated systems include safeguards and surveillance mechanisms that maintain confidentiality collected by Cenagas in the evaluation phase.

As a public entity, it is complicated to implement an effective scheme that escapes the Kafkian government purchasing apparatus. It is an achievement that deserves mention that this mechanism has been outside the scope of the Law of Acquisitions, Leases and Services of the public sector, thanks to an opinion issued in 2016 by the Ministry of Public Administration. Within the framework of its mandate established in the Hydrocarbons Law, Cenagas can continue to protect the public interest simply by signing internationally accepted agreements with its potential bidders. In the selection of companies, due diligence related to credit quality and presentation of guarantees for non-compliance should prevail.

The central question of the scheme is how much gas will be needed. It is expected that the balance conditions in the Sistrangas will improve now that the marine pipe is in place. The Montegrande interconnection will allow for the injection of gas from the marine pipeline to the Huimilpan area, improving the pressure conditions in the center of the country and in the Bajío. This might make the regasification of LNG in Manzanillo to be injected into the system at Guadalajara unnecessary. During the spring-summer period of 2019 the rolling gas needed was around 45 MMcf/d. The incremental capacity resulting from new interconnections far exceeds that volume. In this sense, if no surprises occur, the requirements will be sporadic and be smaller volumes. However, consumers in the Southeast will not be exempt from shortage situations, but purchases of rolling gas will not necessarily solve this.

The second relevant question is whether the measure will bring economic benefits. The answer is obvious. Regardless of volumes, in 2020 pipeline gas to improve operating conditions will mean lower costs. The competitive nature of the auctions, coupled with the $11/MMBtu CFE was charging for LNG, will make this so. Along the same lines, the controversial “switching cost,”  which sought to compensate CFE for burning LNG at its power plants, should no longer have any justification.

Despite some limitations, the Cenagas initiative must be seen as positive for the market. Even with anti-market rhetoric, there are also pragmatic positions within the current government that deserve to be highlighted and that, with a little luck, can have a demonstrable and positive effect on the Mexican gas industry.