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 26th Q&A in the series is with Daniela Flores Ramírez, Head of Midstream and Downstream at Talanza Energy Consulting in Mexico City, where she has worked since 2019. At Talanza, Flores specializes in the analysis of natural gas and liquids markets and the implementation of processes to guarantee regulatory compliance, as well as supply, demand, and infrastructure needs for clients’ energy projects.

Prior to her work at Talanza, Flores worked as the Deputy General Director of Natural Gas and Petrochemicals at the Mexican Energy Ministry (Sener) from 2017-2018, where she oversaw the design and implementation of public policies aimed to develop a market for natural gas to promote greater use of the fuel throughout the country. While at Sener, she also worked as an advisor to the Deputy Energy Minister from 2016-2017, as well as the Director of Economic Analysis in the Natural Gas and Petrochemicals division at the ministry from 2015-2016.

Flores holds a master’s degree in Urban Studies from El Colegio de México and a bachelor’s degree in Economics from the Instituto Tecnológico Autónomo de México (ITAM).

NGI: What is your opinion on all of the changes we saw in the Mexican energy industry during the first year of the Andrés Manuel López Obrador (AMLO) administration?

Flores: I don’t think that the decisions made in the first year of the administration should surprise anybody. The President had been saying during his campaign that he was going to make some of the changes that were made, such as the cancellation of the oil and gas auctions, the cancellation of the Pemex farmouts and the electricity auctions. That was expected.

What is worrying is the reaction of the federal government to these cancellations in terms of what is to come…At the end of the day, there is a need to compensate for all these things that aren’t going to happen. And all we’ve seen so far are initiatives to promote public investment. I don’t think that there has been a firm or definitive plan that says, “if there aren’t going to be oil auctions, these other activities and opportunities will be introduced to compensate for that to achieve our goals.”

Pemex’s priority fields, for example, they planned for 20 or so to be producing by the end of 2019, and there are only six that are doing so, and only a small part of the budget was committed to developing them. That is a sign that we are delayed, and that the plans in place for Pemex to compensate for what was lost by cancelling the oil rounds, are far behind.

I think that is one of the principal problems, and I have a lot of uncertainty about what will be the role of private investment in the energy industry during this administration. What we want to know is if private investment is important to this administration, and if so, how is it going to participate and be involved. It is the government that will decide this, as well as request and approve permits to allow foreign investment, and if there is no defined policy or plan in place, or one that changes from one day to the next, it creates significant risk for private companies looking to participate in Mexico.

What the companies that won fields in the previous oil auctions have at this point is certainty. Their contracts haven’t changed much and they know, more or less, what is expected of them, what the government will request, how it will be requested, and what they need to do to comply. That is one of the benefits of the oil auction rounds.

If the current government wants to give Pemex a dominant role in the industry, it can. But it is clear that Pemex as it is, with its history and what we’ve seen in the past year, can’t function alone. And that isn’t necessarily a bad thing.

If the government wants to make Pemex the center of the industry, remind people that it is the pride of Mexico and wave the flag behind it, that’s fine. But tell the private players what their role will be and assure them that their participation will be stable.

On the gas side of things, it’s the same story. The first year, we had the renegotiations of the natural gas pipelines. It worked out, the contracts were renegotiated, both sides agreed to the terms and said they considered them to be satisfactory, or at least that neither side would lose as a result of the agreement.

As for this year, it seems that the fundamental thing in terms of gas is: What is the CFE going to do with its surplus and excess gas and capacity? How are they going to manage it? Who are they going to give it to, and how will that be decided?

And that brings us back to the same thing: Clear and stable rules are needed so that the private companies know how they are going to request capacity and how they will be able to participate. Will there be auctions? Will they have to sign a bilateral contract with the CFE? I think it will need to be the most transparent process possible with the clearest rules possible. I think it would need to be as fair as possible and allow for participation of all members of all sizes within the gas industry – vendors, distributors, producers, everybody.

So, in summary, I think the decisions that have been made were expected, but what is worrisome is that the reaction within the industry wasn’t as expected to compensate for what has been lost. If the government wants to reach its goal of energy sovereignty, which is a very ambitious goal, there should be a tremendous amount of investment in exploration and development. But, it seems that Pemex doesn’t have the financing or support to do so alone. So, the government needs to establish clear rules to allow for better participation from the private companies if they in fact hope to reach that goal. If that continues to be delayed, it will create further risk within the industry.

NGI: Your company, Talanza Energy, works with private clients and companies. What do they say about the state of the energy industry and the changes the AMLO government has made since taking office? What is their current perspective on Mexico?

Flores: The people that I have spoken with in the private sector still have a lot of interest in Mexico, particularly in the natural gas sector. The natural gas industry in Mexico is still very young and there are still so many things that need to be done to develop this young industry.

What do I consider to be a worry for the private sector? The first thing is that the only supply points are controlled by Cenagas, CFE and Pemex. There are very few points of supply offered entirely by private companies. There is New Fortress in Baja California Sur, IEnova in Chihuahua and Baja California, a supply point in Coatzacoalcos, and a few other small ones in other parts of the country.

So, I think that it is what worries the members of the private industry. If you are interested in developing a new natural gas project in Mexico, you have to speak with those agents – Cenagas, CFE, Pemex – to do so, and that has presented a challenge. And they, again, are yet to establish clear rules. While CFE doesn’t say what its plans are with excess natural gas capacity, the industry is somewhat stalled.

There are other areas of interest, such as LNG. It also has its complexities. At the end of the day, if you don’t have CFE or a large industrial company backing an LNG project, then you can only really develop small LNG plants. That can be limiting, and doesn’t allow for the development of small, medium and large sized LNG plants and projects. With more flexibility in the market, it could allow for more projects in the sector, which I think have so much potential.

People and private companies are interested in participating in the LNG industry, though to do so, they think they need the support of CFE or Cenagas or someone from the government. To ease their fears, I tell them that the permits for LNG are awarded by the CRE or the ports authority (API) or state governments, like it is any other project. I think private companies should consider working together to present a new project, without necessarily seeking out the backing by CFE or the government before considering other options.

Another current issue in the industry is the Energy Regulatory Commission (CRE) and the Ministry of Energy (SENER). There is uncertainty in the industry about the rules that could change and how private companies could be affected. In addition, there is concern about the accumulation of permits within the CRE and SENER. There are so many permits that have accumulated in the CRE and left companies waiting for their permits to be approved, which is taking much longer than anticipated.

So, I think the main worry in the industry currently is how to access natural gas supply from CFE or Cenagas or Pemex, or from where?

NGI: What about opportunities? Where do you see the biggest investment opportunities in the natural gas industry currently?

Flores: Well, I think there should be opportunities in natural gas storage. There has to be a plan by the government to develop more storage options, particularly if they plan to achieve the goal of energy sovereignty. I actually think storage is perhaps the most important area where the government needs to develop a plan to meet its energy independence objectives. If anyone is to develop a storage project, it would most likely be through Cenagas.

Also, the natural gas prices are so low in the U.S., that the timing is ideal to import cheap natural gas to develop and increase storage options in a country that doesn’t have many. This would help the country to avoid future problems that might arise in the case of natural gas shortages.

It’s not only storage. It’s storage, it’s infrastructure, it’s lowered production. The truth is that the natural gas sector is still very fragile in all of its components. Production has declined significantly despite the investments that Pemex has made, and any growth in natural gas output in the country has been very limited. If Mexico wants to boost natural gas production, there would have to be a much more aggressive development plan for gas fields. And, with the oil and natural gas auctions cancelled, new natural gas production seems even less plausible.

So, as I mentioned, the natural gas industry is still very young and lacks redundancy that is necessary to continue to develop. I think Mexico should continue to produce natural gas and I think Mexico should continue to import, and I think the country should consider other points of imports, for example in LNG, to improve energy security and strengthen the industry.

Lastly, more infrastructure is needed. More distribution and delivery options and more redundancy are needed to have a robust and flexible system.

NGI: Do you think that, with the prices in the U.S. so low, that Mexico could consider importing 100% of its natural gas needs and cease efforts to increase national production?

Flores: I think Mexico is a country with considerable natural gas production potential. There are a lot of reserves, potential and basins thought to contain substantial amounts of natural gas. It is clear that more investment is needed.

I do think there could be a moment in which Mexico imports 100% of its natural gas needs, but maybe the national gas production could be used for storage, for example. I do think, however, that diversification is necessary, and 100% reliance on the U.S. for natural gas would be a risk. Production is also necessary if Mexico wants to boost its petrochemical industry through natural gas liquids.

One option would be to import up to 100% of the demand from the U.S., while using national natural gas production for storage, which would give the country access to more than 100% of demand. And, with the natural gas prices so low in the U.S., Mexico does need to develop a better strategy to take advantage of this opportunity while it exists. The natural gas prices might never be this low, and Mexico needs to take advantage, while continuing to produce nationally, for storage or NGLs.

NGI: What do you expect this year in the Mexican natural gas industry?

Flores: For the second year of the administration, I want to see how the Cuxtal natural gas pipeline advances. For me, it is a good sign that this administration has started work on this pipeline. This year will only be the first phase, but I’m intrigued to see what happens with the pipeline in the Yucatan peninsula and how the region reacts to the project.

As we know, that region has had a shortage of natural gas pipelines for years, so it will be interesting to see what happens, how the industry there develops and how they integrate natural gas into an area of the country where supply has always been scarce, and how the local economy and industry reacts.

Aside from that pipeline, it will be interesting to see if CFE announces any other infrastructure or pipeline projects. And if they are going to do so, it needs to be done now. Many people in the industry are desperate to learn of CFE’s plans for the year, as well as the rest of this administration.