“Buying gas in Mexico is easier now in the sense that you have more options to buy the molecule given that you have almost all the big vendors selling wholesale,” Santiago Villarreal Bravo, General Manager at GasCorp, told NGI’s Mexico GPI.

 “There’s BP, there’s Shell, there’s Trafigura, for example, that are bringing a lot of gas to Mexico and they are selling to other smaller traders,” Villareal said in an interview at the 8th Mexico Infrastructure Project Forum in Monterrey, Mexico. “Currently, the Mexican market is working in two levels — wholesale, where the big and small traders with some big final users are — and retail, where the vast majority of the commercial and industrial final users are.”

Villarreal, who is based in Houston, has been with GasCorp Natural Energy since March 2022. For over a decade, Villarreal has been active in the development and deregulation of the Mexican energy industry, particularly relating to the natural gas and power sectors. He has negotiated numerous import-export transactions between Mexico and the U.S. Villarreal now oversees the overall operation of GasCorp, an emerging U.S.-Mexico trading company. 

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Before joining GasCorp, Villarreal helped establish the Mexico branches for major international oil companies and continuously participates in industry committees on both sides of the border.

Villarreal holds a bachelor’s degree in law from the Instituto Tecnológico Autónomo de México. 

Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Villarreal is the 95th expert to participate in the series.

NGI: How has the decree by Sener, which aims to require companies to purchase natural gas from the state energy companies, CFE and Pemex, affected the market?

Villarreal: Above all, it’s created significant uncertainty for the final users, since in most of the cases there still aren’t specialized teams for purchasing natural gas or power. To close or even start negotiating volumes, our clients required a lot of our time to go through the impacts of the decree. We have a couple of experienced clients whose first question was: Do I have to buy from CFE or Pemex, if I don’t want to change my supplier. They are worried because they’ve read about the decree and the risk they will run if they don’t source natural gas from Pemex and CFE. So, we have to explain to them that the rule doesn’t apply to them because they aren’t a Cenagas user or, even if they are, they are assigned capacity. 

Those talks alone took two or three months. So, then it’s a six-month process just to exchange emails and have some calls and meetings, which is all due to this decree that really had no logic or solid policy behind it when issued that could justify what it set out to do. This period lasted for the first half of 2022. In the end, as always, the market is resilient and the need for gas prevailed and now after the Supreme Court ruling has almost vanished the issue for good. 

NGI: What do you think will be the fate of the Sener decree? 

Villarreal: For now, the Supreme Court has ruled that the decree is no longer applicable. That has been a good message, but it’s just temporary and they still need to continue to analyze and review all of the arguments of the Cenagas users that filed injunctions, known as amparos, that claim unconstitutionality. I think, in the end, the Supreme Court will rule that it is unlawful and that will conclude the controversy by disallowing Sener to make those changes and disallow them to have the unilateral authority to enforce such a decree. 

Outside of CENAGAS, the other private systems have not followed that rule and there has been no change in the terms and conditions of their existing contracts. Finally, just as an example, the amount of gas that CFE and Pemex would have to buy to supply all of the existing contracts would be a huge amount of gas — like 7 Bcf — which would be almost impossible to purchase. So, it never made sense and everybody knew that it wasn’t a real possibility, but the damage that it caused affected the entire Mexican economy.
NGI: What is your process, as a trader, to sell natural gas in Mexico?

Villarreal: After the onboarding process, the “KYC [Know Your Customer]”, we execute the industry approved framework agreement commonly known as “NAESB [North American Energy Standards Board]” and a transaction confirmation in which we include the details of the deal (term, delivery points, volumes, price, etc) with the final user. 

At the same time, we need to coordinate with the infrastructure to be able to deliver that gas. Depending on where the user is, I go through the normal channels of nominating that gas to certain systems, such as Cenagas or private companies, but 99% of my clients are in Cenagas path or behind the local distribution company city gates. 

As for how you acquire the gas, there are different ways. Buying gas in Mexico is easier now in the sense that you have more ways to buy the molecule given that you have the big vendors that are selling wholesale. There’s BP, there’s Shell, there’s Trafigura, for example, that are bringing a lot of gas to Mexico and they are selling to other smaller traders. This is because the cost of onboarding small volumes for smaller traders makes sense financially to act as wholesalers. So, that’s how we do it. 

We go through the process of getting the client, onboarding them, taking care of the credit guarantees and doing whatever they need to get them to accept the proposals. We might have volumes in specific areas where they are interested where we can acquire the gas in the short term or long term, because now you can do that.

In the specific case of GasCorp, we set up everything to be vertically integrated. We are buying the gas in the U.S., which is usually close to the source or the basins, and then we acquire the services, which in some cases can be long-term or short-term acquisitions of capacity, which is often determined by pricing forecasts. Then you gather the gas, move the gas to the border, you import to Mexico and then you use Cenagas or whatever is the cheapest carrier in order to deliver to the final user.  

That is something that at least for now, in the wholesale market, is working in the traditional ways of a developed market, similar to the U.S. and Canada. In the retail market, it is completely different because the companies are not used to having a different supplier. 

There is still a lot of education required for small or medium buyers who are becoming familiarized with the retail market. A lot of money can be saved if these companies market their volumes, so there is still a lot of learning to do for the small C&Is [commercial and industrial users], for which the retail market is still quite new. So, those are really the differences between the wholesale and retail markets, and the lack of infrastructure is still a huge barrier for both.

NGI: What price indexes do you use when trading natural gas in Mexico?

Villarreal: Normally it is between two indexes, Houston Ship Channel and Waha. Henry Hub is the one if you want to do something on the more financial side plus Nymex. On the retail side, you go with Houston Ship Channel or Waha, depending on where you are. It’s usually Ship Channel Plus, but now in the west it could be Waha Plus. 

NGI: Do you think Mexico needs a domestic price index?

Villarreal: Yes, it would be the next step in order to give more incentives to build up more infrastructure. If the prices are receiving a sign that the local indexes are going up and up and up, that means that something is happening and that there is more demand in the market. It would push the market, and the companies that operate within it, to create and build more infrastructure.

On the trading side, the communication and reporting regulations could open an opportunity for some companies to manipulate the market much easier given a lack of rules like there are in the U.S., such as FERC regulation and ICE obligations to publish price information, for example. We saw price manipulation in some recently liberalized markets in Texas and California, for example, and on more than one occasion. So, that would be a risk for Mexico. Also, if you wanted to implement that regulation, it would probably take ages and would be complex, as doing so would be quite technical. 

So, the risk of market manipulation would be a con. The pro for Mexico would be that a price index would drive infrastructure development, which is what Mexico really needs.

NGI: Would you say the lack of infrastructure is the biggest challenge right now in the Mexico natural gas market?

Villarreal: It’s definitely the biggest or second biggest challenge. The lack of infrastructure is one of the top two. I would say that at the top is more than one issue, honestly. There is a small basket of the top issues facing the market. One of the things in the basket, I would say, is market development. The market is there and it is growing but it is limited due to the lack of incentives offered by the federal government to members of the industry. If you want to make Mexico more competitive or more attractive to foreign investment, you have to give them the tools to come. 

And, if there are government-led incentives to develop the market, then you of course would need more infrastructure to do so. You’d need more infrastructure to allow the gas to be delivered, or to assure that there would be the availability for cheaper power or cheaper gas. What we’re seeing in Texas is a good example, particularly what we’re observing in Waha, where gas has gone to negative prices. There, they can’t move the gas even if the demand exists. There are buyers looking to purchase the gas but there’s no way to get it out due to a lack of infrastructure. Even in the U.S., the buildout of infrastructure is slow, mostly because the goal of the Permian is oil and liquids, and not gas.