NGI Mexico GPI
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.
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.
June is here, meaning the government of President Andrés Manuel López Obrador turns 18-months-old, equivalent to approximately a quarter of the six-year term, the presidential period that has been institutionally respected in Mexico since the mid-1930s. Historically in Mexico, in the second year, projects are defined and investment decisions occur, with business actors taking into account the synchrony between new opportunities and the chance these may end with the six-year term. We now are basically aware of what the priorities of the government will be.
The attempt to break this cyclical dynamic occurred during the presidency of Carlos Salinas de Gortari (1988-1994), a political figure who in the popular imagination and in López Obrador’s speeches personifies the enemy of the nation, and of the interests of the poor. Salinas de Gortari signed the North American Free Trade Agreement into being and conducted an extensive privatization program. In a context of the end of the Cold War, these changes were presented to the population as transformative engines that would move Mexico from a quasi-Soviet scheme to one of economic modernity, commercial opening and gradual political opening too. Decisions would begin to be made based on quantifiable parameters, rates of return, with macroeconomic health a priority. The opening of the energy sector loomed on the horizon and Salinas de Gotari pushed through a law to make way for private investment in cogeneration and self-sufficiency in the power sector.
The elections of the summer of 1988, in which Salinas de Gortari’s opponent was none other than the son of Gen. Lázaro Cárdenas, the politician who had expropriated the oil industry and created Petroleos Mexicanos (Pemex) in 1938, were wrought with fraud. The person blamed for the widespread problems seen in voting was the Secretary of the Interior Manuel Bartlett. Thirty years later, Lopez Obrador named Bartlett, a politician with more than 50 years of experience, as the head of state power firm CFE.
Today, Bartlett has become the most important figure in Mexico’s energy sector, and CFE has proven an inexhaustible subject of news stories, not to mention headaches for private sector investors. With the same serious tone he held for so long as a politician, Bartlett last year forced the transport companies that built and operate natural gas pipelines in the service of the CFE to change the terms of their contracts. He claimed the contracts were unfair to Mexico. Though international arbitration was avoided, the conflict generated a climate of tension that escalated for a few months in the middle of last year. But he got his way, and in September, the government celebrated the new contract terms, claiming they meant a tangible and measurable benefit for CFE, for the treasury, and for the general public.
More recently, CFE management has presented itself as the executing agent and underlying solution to the natural gas supply problem in the Yucatan peninsula. With the Cuxtal pipeline and power project, CFE imposed its terms, setting aside alternative solutions, and ignoring the fact that Cenagas should have been the entity responsible for finding and procuring a solution that caters to all users.
In a similar vein, the electric company’s gas marketing arm has begun reaching out to industrial consumers, distributors and other marketing agents to offer excess capacity it has contracted on its numerous pipelines tendered in the past administration. Although the positive nature of this approach is undeniable, there does not seem to be any modesty in exhibiting its dominant role in the market, nor the tacit hoarding that endows it with bargaining power that cuts off the possibility for acquirers to make commitments long-term.
The spring of 2020 seems to have brought with it a new wave of actions that tests the conditions of certainty that energy infrastructure investors crave. As I said in this column in May, the Energy Ministry and power system operator Cenace have sought to change the rules of the electricity sector with administrative acts that do not comply with the law. Giving Cenace the power to put reliability as a criterion above economic efficiency simply opens the door for discretion to permeate other technologies.
There has been a flurry of activity in the courts to try to block the decree. The case with the most media attention is that of Greenpeace, which obtained an injunction ordering the suspension of the orders.
Accusations from public figures of corruption in renewable power projects, without evidence, have been thrown around on social media. Those in favor of public works have come up with slogans such as “clean energy, dirty businesses.”
Recently, a new decree by energy regulator CRE changed the transmission rates applicable to self-supply and cogeneration activities when loads are located in different sites interconnected to the transmission network, and are seen as damaging to private operators. Although for a long time the issue of porting fees has been questioned from a cost allocation perspective, the CRE’s decision appears on the face of it to be politically influenced. A rate change like the one at the end of May should be based on a secondary regulation that has not yet been issued along with a general review of transmission rates in the industry. But a comprehensive tariff review of the transmission network seems to be a long way from CRE’s agenda.
Although the Energy Ministry, Cenace and CRE were the protagonists of the changes, there is much to suggest that they come at the behest of the CFE. Bartlett’s antagonism to private investment in the electricity sector is neither recent nor is it unprecedented. In this he shares much in common with the president. In 1988, both were active in the PRI political party. Both worked hard at the ground level forging alliances in unions, and developing intelligence and partnerships that would allow them to ascend the ladder. The arrival of Salinas de Gortari meant the displacement of old school politicians by technocrats with degrees from North American universities, and a command of English and quantitative jargon. Bartlett had to continue in the rough work of dealing with unions and then in the morass of the public education system as Secretary of Education, while economists like Ernesto Zedillo and financiers like Carlos Ruiz Sacristan made the big infrastructure decisions for the Treasury and Pemex. López Obrador, meanwhile, did not meet the new profile of the PRI. He left and became a fighter for social justice. Today, renewable energy, the energy transition, unconventional drilling including hydraulic fracturing, and energy auctions are all associated with what they see as the opportunistic technocrats who usurped power and ruined the country. The energy reform in 2013 in their version is only the latest example of the usurpation of power and betrayal of the people of Mexico.
Today, the national heroes destined for glory and symbols of sovereignty are CFE and Pemex. The villains are all those who affect the interests of the heroes. The big question for which there is no clear answer is, where does natural gas fit into this? The important point is, cheap gas from Texas is a real boon for Mexico. The strategy for producers and marketers seeking to place their gas into Mexico should be one of low-profile coexistence with the state actors. There is a chance for everyone to gain. Even if the importation and commercialization of gas are lumped together with the villains, everyone in Mexico’s energy sector is highly aware of the crucial role of natural gas as a fuel in the electricity sector. And nobody wants their lights to go out.
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