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.

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

Although Mexico’s energy sector is open to private sector competition, energy policy since December 2018 has been directed toward ensuring that state oil company Petróleos Mexicanos (Pemex) and state power utility Comisión Federal de Electricidad (CFE) remain the main providers of energy needs to the population.

The “rescue of energy sovereignty” is one of the most commonly heard phrases in the speeches of current government officials and President López Obrador himself.

The intentions of this phrase can be interpreted in a concrete manner by reviewing the figures for the 2022 federal budget presented to the Mexican Congress during the first days of September.

[Survey Says: NGI editor Christopher Lenton and energy expert and columnist Eduardo Prud’homme dive into the results of NGI’s fifth survey of the Mexican natural gas market. What are active buyers and sellers telling us about what the industry needs? Tune in to NGI’s Hub & Flow podcast to find out.]

According to the proposed budget, the public spending in the energy sector in 2022 would be 6.5% higher in real terms than the budget approved for 2021.

To give an idea of the importance that the current government places on the “strengthening” of Pemex and CFE, the proposed outlays equal 4.8% of Mexico’s gross domestic product (GDP), greater than the amounts allotted for education (3.5% of GDP) and security (1.2%).

The investment budget for Pemex includes a 17% increase to reach $21 billion, a level that has not been observed since before the 2014 energy reform.

This increase in public resources is accompanied by changes in Pemex’s fiscal regime which formalize the fiscal support measures approved for the company in recent years. Consequently, the revenue transferred to the government by Mexico’s sovereign oil wealth fund, the Fondo Mexicano de Petróleo (FMP), will decrease significantly.

With the emblematic “energy sovereignty” project, the Dos Bocas refinery in the president’s home state of Tabasco will receive federal support via the energy ministry budget of more than $2 billion.

López Obrador’s bet seems to not be the most sensible in financial terms, as it injects resources into a company that hasn’t been profitable in 12 years, and whose multimillion dollar losses are largely attributable to its refining unit.

Meanwhile, the spending budgeted for CFE increases by 6.5%, equaling 1.65% of GDP. This increase is not for investment, though. The amounts contained in the budget are for operating expenses, mainly the acquisition of fuel and the production of electricity. 

The budget for 2022 also includes $3.6 billion in subsidies for electricity rates. While the energy transition is central to the North American and global energy agendas, CFE’s investment budget will be reduced by 9% versus the amount approved for 2021.

Upon reviewing the 2022 budget, a few major ideas can be deduced.

That Pemex is allotted more resources than areas such as education and security shows the relative weight of energy policy in terms of importance for this government versus areas such as education and security.

In their vision, it is not enough to take measures that obstruct private investment that arrived after the structural change of 2014. It is also necessary to dedicate substantial public resources to revert the situation and reinforce the presence of the national champions.

The next three years of this government will not be a time of moderation in the official discourse or friendlier treatment of private investment.

The design of the investment program shows the scant attention that the government pays to projects that are not in the sights of Pemex or CFE, even when these projects could mean the strengthening that the government obsessively seeks.

One example is the absence in the budget of any natural gas storage projects that would greatly enhance the country’s energy security.

Although the intention of adding this type of infrastructure has been announced by the government at various forums, especially since Winter Storm Uri, there is no indication that there will be any public resources to address this problem.

It’s possible that this omission means a preview of what types of projects will be in the purview of private investment. But this would contradict the intentions shown in the recent tender by CFE for the Tehuantepec Isthmus Corridor: The developer must transfer the property to the state-owned firm.

On numerous occasions CFE has suggested that private energy infrastructure to be developed must give an equity stake to the state company. Such investment commitments must show up in the federal budget.

One critical aspect that could significantly alter the final execution of the budget in the energy sector has to do with some of its underlying assumptions.

Very likely the fuel price projections did not take into account the most recent perspectives regarding the price of natural gas and of fuels in general.

Generating electricity will cost CFE more and the president’s promise of not raising rates for end-users will probably cost more than $20 billion.

With that said, the most worrying issue is the confusion between ends and means. The central objective of the energy policy is that the population and productive sectors have a supply of energy that is sufficient, efficient, continuous and secure.

The ideology of the current government sees that the instruments to attend to the needs of the country are the state-owned companies.

While it’s true that the projection of public spending destined to the energy sector is congruent with the current energy policy discourse, after nearly three years there is no indicator that the support Pemex has received in this span has brought improvements to the supply of energy to the population.

In the natural gas segment, one need only review the data of the FMP and the injections into the transport system that bring the fuel to users to prove this assertion.

Official speeches on the rescue of Pemex have highlighted the “stabilization,” and even the growth, of production.

 From 2015 to 2018, Pemex’s total production fell from 5 Bcf/d to 3.9 Bcf/d. In contrast, from 2019 to today, daily production has averaged 4 to 4.1 Bcf/d. 

Nonetheless, this comparison does not reflect the gas that actually met the needs of the market.

From 2015 to 2018, gas injections into the integrated pipeline system fell from 3 Bcf/d to 1.7 Bcf/d. 

The change in administration has not meant a change in the decline. In the years since 2018, gas from fields and processing centers delivered daily to pipelines has averaged 1.6 Bcf in 2019, 1.5 Bcf in 2020 and 1.4 Bcf in 2021.

The gross increase in production from 2018 to 2021 of 4%, much of which has been from private operators, pales in comparison to the 18% decline in injections of domestically produced gas for the same period.

This is explained in large part by the self-consumption of gas by Pemex and the form in which it treats, vents and operates the associated gas streams produced as a byproduct of oil extraction.

A substantial portion of what Pemex produces is reinjected into different fields to increase the pressure conditions that allow continuous crude production.

It’s not hard to see that in the priorities of Pemex, the needs of users are not at the top of the list.

Given this context, the actions of the government expressed in the budget show a strong disconnect between the speeches and the concrete results of Pemex and CFE.

The dependence on imports will not cease, and the risks of supply shortages are not being mitigated in an evident manner.

The energy transition simply does not exist in the considerations of the budget.

In his political campaigns, López Obrador used a powerful phrase that had a strong impact on voters given the social ills of Mexico: “For the good of all, first the poor.”

Now that he is in power, the manner in which he administers public funds, his policy could be summarized as, “To the detriment of all, first Pemex and CFE.”

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.