CRE Warns Gas Imports Could Outweigh Production

If new natural gas production does not come on-stream in Mexico in the next two to three years, the country will have to import more than half of its gas needs, according to a new report from the country's energy regulator Comision Reguladora de Energia. The country now imports about 7% of its gas, mostly from South Texas.

Electric power demand in Mexico is forecast to grow at an annual rate of 6% in the next 10 years, which will require an annual investment of US$5 billion. However, the existing infrastructure will only last until 2004, CRE warned, and new investments are necessary to install more generating capacity and modernize transmission and distribution grids.

At the same time, natural gas demand will grow annually at a rate of 9% in the next 10 years, requiring an investment of US$2 billion per year to finance exploration and production programs, and add storage and distribution facilities. Despite its large known gas reserves, Mexico is a net importer of natural gas, importing most from the United States.

According to CRE, the electric and gas sectors will require a combined investment of about US$100 billion over the coming decade to meet the projected increases in demand. To attract this type of investment, CRE said that Mexico's government will have to provide clear and well-defined rules for the energy sector, earn the credibility of investors and promote competition and a level playing field for private investment against established public industries.

CRE currently oversees 162 generation permits totaling 11,999 MW installed capacity, which represents a US$6.92 billion total investment. That's compared to year-end 1995, when CRE's generation permits totaled 232 MW and an investment of US$145 million.

The private sector, said the report, is developing 42% of the capacity and sells power under contract to the state-owned power company, Comision Federal De Electricidad (CFE). CRE also reported that when it began natural gas distribution and transport management in 1996, there were 381 kilometers of gas pipelines and networks in Mexico, with a total investment of about US$131 million.

Today, CRE oversees 35,518 kilometers of natural gas distribution pipelines and associated infrastructure serving 10 million in 24 states. All told, the investment today is about US$2.2 billion, CRE said. Distribution hubs include Mexico City, Monterrey, Guadalajara, Toluca-Tlaxcala, Saltillo, Tijuana and Mexicali.

Whether to open up the country's energy sector to more private investment now falls into the hands of Vicente Fox, Mexico's new president, who begins a six-year term today. Fox, who surprised opponents with an upset in July's elections, has promised reforms within the government to make it less political and more efficient. A former Coca-Cola de Mexico executive, he wants to overhaul the country's tattered infrastructure by constructing new roads, ending government corruption and improving the educational system.

Fox also has vowed to reform the state's monopoly-run energy industry, criticized by industry and CRE as energy prices have risen (see Daily GPI, Nov. 7). While the CRE allows private investment for power plants and pipelines, Mexico's Petroleos Mexicanos (Pemex) is the state-run energy monopoly. It has long provided the government with one-third of its overall revenues, and its investments are more limited than those made by the private sector.

Whether the new president plans to open up the country to more private investment remains questionable. Because he was elected as an outsider, Fox is expected to have some trouble getting an aggressive agenda passed with the legislature. He has vowed to reduce Pemex's financial disincentives, but so far, no plan has been laid out. A reform plan proposed by former Mexican president Ernesto Zedillo in 1999, which was rejected by the Institutional Revolutionary Party (PRI) parliamentary group in Mexico's senate, is expected to be revised by Fox and resubmitted to the Congress this month.

In an indication that standards for reform will be proposed, Fox this week appointed businessman Raul Munoz Leos to run Pemex. Munoz, who has no political ties, is a chemical engineer and a former executive with the Mexican unit of DuPont Co. Fox also appointed another businessman and chemical engineer, Eduardo Martens, as Energy Minister. Martens will oversee the more privatized power sector.

Munoz comes into his post facing the task of ramping up gas production, as Pemex is the only company within Mexico supplying gas. He also faces reducing Pemex's plump workforce --- it has about 130,000 employees, which is more than double the number of comparable private companies.

In a speech following his appointment, Munoz said he would work to increase competitiveness at Pemex, but added that it would be an important source of future revenue for the government.

©Copyright 2000 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.