Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.

AMLO

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). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.

The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.

The beginning of a year should be a time of reflection and hope. In the case of 2021, almost anything would be better than 2020. The physical conditions and fundamentals of the Mexican market promise growth for the natural gas industry. But the political environment does not look good. Past expectations of pragmatism winning over ideology within the government no longer have any foundation in reality. An economy that has been sluggish since 2019 today more than ever requires new investment, but President López Obrador is doing his best to scare it away.

Despite this, Mexico persists as a land of potential opportunities; and 2021 will be decisive in turning these opportunities into realities. If not, maybe they will just be postponed until the arrival of another government. 

Demand for natural gas remained robust during the 2020 pandemic, and gas exports from Texas to Mexico saw record levels last fall. Don’t expect this trend to change in 2021. There are many reasons for this, principal among them the fact that long distance pipelines came online in 2020. Today, daily line packing of less than 7 Bcf in the national gas pipeline system (SNG) does not represent operational risk given the new injections it receives from interconnections in Zapotlanejo, El Sauz and Montegrande, which maintain pressures at adequate levels. With proper management, and if idle capacity from unused firm-base contracts is released, users should have no reason to incur imbalances.

Overall, the import capacity in operation far exceeds Mexico’s demand and the lack of saturation at points of entry should allow payback transactions to proceed without systematic cuts. And yet, Mexico’s two peninsulas have serious gas supply continuity problems because there is a lack of projects to reinforce and expand interconnections between specific segments of the network. Critical alerts are in the past, but Baja California and Yucatán will continue to have limited gas availability. Cuxtal has not been the definitive solution some hoped for and the important thing now is to ensure the continuity of routes from the sources of origin of gas. Proper supply to Baja California will only come when the necessary expansion of the Rosarito Gas Pipeline occurs with the construction of the Energía Costa Azul liquefaction terminal. Solutions for those two issues may not be in place in 2021.

Another variable that has not ceased is CFE’s desire to maintain ownership of firm-based capacity that far exceeds the needs of its generation plants, its current supply commitments with other generators and its incipient commercial work with non-electric users. CFE has announced in different forums its intention to optimize its transport capacity contracts on both sides of the border, which involves a selective transfer limited to certain time periods. These intentions have little to do with the appetites in the market. Today marketers and large users with contracted capacity seek to have certainty regarding the maximum daily amounts that they can manage to serve their user portfolio. The intermittency that bothers CFE so much in its operations in the electricity sector is what it offers to its potential clients or assignees, without such intermittency being inherent in the secondary capacity market. 

CFE intends to become the largest natural gas marketer in Mexico, but instead of focusing on identifying user needs and designing commercial solutions that meet them, they prefer to privilege operational restrictions and offer their remaining resources as if it were a concession to the rest of the agents. Although the Hydrocarbons Law provides for the principle of “use it or lose it,” regulators are increasingly beholden to the government and the state companies. The prognosis in this area is not encouraging. Policymakers in the energy sector do not view with sympathy any private participation that poses a threat to CFE or Pemex’s market power. The cost is fewer options for consumers. In 2021 we will most likely hear more ideological and radical messages that could see legitimate lower-cost and more efficient competition overwhelmed by the national energy champions. Energy sovereignty will continue to be won at a very high cost for the user of energy.

Another issue to keep an eye on in 2021 is new rules that discourage bilateral transactions between individuals. There are already multiple cases in which new regulations or tariffs are published without the due administrative consultation process and impact analysis. The popularity of the president and the criticism of past public policies are enough to disregard the legal framework still in force. Today a company that participates in the energy sector must understand that to carry out its activities it does not require a permit in terms of the law, but rather a concession granted by grace of the sovereign. Market participants must persist with a certain degree of stoicism. In 2021 the transaction costs of doing business in Mexico will likely grow, especially if the functions of energy regulators are absorbed by the Energy Ministry, as the president himself has already suggested. 

Elections for public office in Mexico, including governors, local authorities and lower house deputies will take place in June. If President López Obrador’s Morena party manages to snag a two-thirds majority in the lower house, we will have the real possibility of him reversing the energy reform of 2013-2014. If not, the government will continue to effectively reverse the mechanisms and objectives of the reform by other means. On the other hand, a defeat for his party may mean the appearance of a real counterweight that makes it clear, with some legal consequences, that current energy policy does not follow the principles as stipulated by law. Perhaps if this were the case, in one year when I write this column we will then recognize in López Obrador the pragmatic politician who governed Mexico City with an eye to both social services and investor confidence.