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 27th Q&A in the series is with Dr. Aldo Flores-Quiroga, one of the most experienced and decorated members of the Mexican energy industry. Flores-Quiroga is currently a visiting professor at the LBJ School of Public Affairs at the University of Texas at Austin and a Senior Advisor for energy & natural resources at FTI Consulting.
Previously, from 2016-2018, Flores-Quiroga was the Deputy Secretary of Energy for Hydrocarbons at the Mexican Energy Ministry (Sener), where he led a team of more than 180 government officials and coordinated key energy agencies in the historic opening of Mexico’s hydrocarbons sector, including upstream, midstream and downstream. He also oversaw the country’s oil and natural gas exploration and production auctions, which attracted billions in investment in deepwater, shallow water and onshore projects from 73 companies in 20 countries.
Prior to rejoining the Mexican government in 2016, Dr. Flores-Quiroga was the Secretary General of the International Energy Forum (IEF) from 2012-2016. Before leading the IEF, he was the Director General for International Affairs at Sener from 2007-2011.
Flores-Quiroga holds a Ph.D in Political Science, specializing in International Political Economy from the University of California at Los Angeles. He holds a bachelor’s degree in economics from the Universidad Autónoma de Nuevo León.
NGI: What are your thoughts on the international oil and energy market amid all the shocks we’ve seen in the last few weeks, such as coronavirus and price collapses?
Flores-Quiroga: We’re in a very unfortunate situation. A simultaneous demand drop and supply increase has resulted in much lower oil prices, and right now there is no certainty for the price floor.
We don’t know whether OPEC and other major producers, especially Saudi Arabia and Russia, will reach an agreement to cut production any time soon. This has opened the space to consider solutions that have stabilized markets in the past, such as reintroducing production quotas in Texas. Some even suggest international cooperation between the US, Russia, and Saudi Arabia. These might be unlikely alternatives, but the fact they are being mentioned points to the need for some form of governance to avoid a potential new bust-boom cycle.
We are in urgent need of clarity from financial authorities and central banks around the planet about the course they will take. It’s a very positive signal that they are now talking and have begun to announce important measures, most notably the US spending bill. Hopefully at some point we will see coordinated announcements by the European Union, the G7 or the G20 detailing how aggregate demand support and global relief will be provided.
NGI: At a local level in Mexico, what impact do you think these disruptions will have on the Mexican energy industry in the short-term, say the next three months or so?
Flores-Quiroga: It’s clear the situation is delicate for most if not all oil companies. They are adjusting their spending programs around the world. Pemex will have to adjust to the new circumstance too, cutting costs, crafting a new strategy amidst a completely new market reality.
NGI: Historically, when there are erratic shifts in oil price, as we’ve seen in recent weeks, how is the natural gas industry as a result?
Flores-Quiroga: We have two worlds for natural gas. One world is based on contracts linked to oil, as in Asia and Europe, although that is changing toward more flexible market-based arrangements. The other world relies on contracts based on gas-to-gas market prices, formed where plenty of buyers and sellers meet, such as Henry Hub.
In the first case, natural gas prices fall in tandem with oil prices. Asia is a market where this pressure is felt. How will production of associated gas fare is still an open question, but the environment is not favorable.
In the second case, the economics depend on the net effect of adjustments in the shale patch. If we assume low oil prices will result in a declining shale oil production and associated natural gas, with no compensating increase in supply from abroad, then prices have upwards support in the US. But there’s also downside pressure because industrial demand for natural gas will fall by more than residential supply will increase. Many factors are moving right now to ascertain a direction for the market. What this will mean for the US-Mexico border natural gas trade is still unclear.
NGI: What can Mexico do right now – the government, Pemex, CFE – to mitigate the potential economic impact and risks that are anticipated over the next few months?
Flores-Quiroga: We need a package of policies that is resolute, decisive, and supportive of an economy hit by internal and external shocks. The space for fiscal expansion is limited, but this is a situation where increasing the deficit moderately and with a clear exit strategy is justified. The spending required to weather this storm is substantial. Monetary policy has more leeway to support demand with lower interest rates. Adjustment to investment and social relief programs must also take place.
NGI: As someone who has significant international experience in the industry, from a global perspective, what are the thoughts on Mexico and what do people abroad think from the outside looking in about the current energy market here?
Flores-Quiroga: Other countries are more likely to win in the competition to attract energy investment given recent changes in Mexico’s energy policy, which is less welcoming of private investment. Service, technology, and financial companies did well when Mexico’s energy industry was exclusively state-run, and this will remain the case. Upstream private investment is unlikely to expand soon, but mid and downstream investment, if unimpeded, will continue to find a large and growing market.
NGI: When things do normalize, what could Mexico do to further develop the natural gas industry and increase investment opportunities?
Flores-Quiroga: Well, we’re going to have to wait until things go back to normal and see what the government’s policy will be. We do know that to increase natural gas production in Mexico much more capital outlays are required. We also know that the potential for expanding transportation and distribution networks is strong when markets are allowed to work appropriately. We just have to learn more about the policies and rules the government will adopt as the lessons from the last couple of years and the current crisis are fleshed out.
NGI: On a global scale, what are Mexico’s competitive advantages and biggest strengths in the energy and natural gas industries?
Flores-Quiroga: Mexico remains a country with a large and growing energy demand. It has a large pool of talent, engineers, and experience that can be deployed through the energy industry to meet that demand. Its potential oil resources are abundant. It has productive relationships with other key energy producers. It is located next to the largest energy market in the world. Those things haven’t changed amidst the current crisis and they will keep Mexico attractive for a long time. But attractiveness is relative. Does Mexico offer something better than other countries? The countries that enhance their policies, rules, regulations and the broad investment environment are more likely to have thriving energy industries. Hopefully Mexico will be among them.