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

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A few days before the start of 2022, the government of Mexico presented a list of 10 priorities for Petróleos Mexicanos (Pemex) for the remainder of the López Obrador presidency. There’s nothing new here. The central purpose is achieving energy autonomy, which now includes using the Deer Park refinery in Texas. The volume of crude processed in 2021 at six refineries would almost triple in 2023 with the inclusion of the refining capacity of Deer Park, Dos Bocas and the Cangrejera petrochemical complex. This is the main focus on Mexico ‘s energy policy.

Looking ahead to 2022, private agents that want to remain in the Mexican natural gas market must not be perceived as contrary to Pemex’s strategy, or they must work directly with Pemex. Despite the persistence of a legal framework that promotes competition, Mexico’s current energy policy sees competition as contrary to its interests. The same goes for the electricity and gas sector, and the goals of the Comisión Federal de Electricidad (CFE). These guidelines will mark investment decisions at least until October 2024, when President López Obrador leaves his position.

Beyond any technical or fundamental analysis, every investor or member of the board of an energy company must ask basic questions that are not typical of a modern market. Does my project affect Pemex? Does it serve Pemex? 

Short On Details

Natural gas was not among the priorities revealed by the government on Tuesday (Dec. 28), although there was mention of boosting gas processing capacity in the southeast from 1,750 MMcf/d to 2,830 MMcf/d. Officials also discussed developing the Lakach deepwater field, which has reserves of almost 1 Tcf of unassociated gas. The southeastern gas capacity would improve through maintenance at the Nuevo Pemex and Cactus processing centers. But the incremental budget presented by Pemex for this is barely $70 million a year. A change of this nature generally costs four times this much. Government austerity is not compatible with prudent industrial practices and the most likely result is that Pemex will barely manage to process a little more than 2.1 Bcf/d in the best scenario. Furthermore, in an effort to meet expectations with such limited resources, accidents and shoddy work could occur.

In previous columns, I have discussed that if Pemex were to produce more natural gas, it would not necessarily mean an increase in supply for other market agents. Pemex’s self-consumption is massive. Improving the crude refining process to obtain more and better gasoline would lead to a greater need for hydrogen. One way to obtain it is with natural gas. Thermal requirements in the six refineries and Cangrejera would grow, and natural gas would meet part of this demand. If the promise of covering half of the national demand for fertilizers is fulfilled, the use of natural gas as an input to obtain ammonia would have a real effect on the remaining balance for the industry and users in distribution areas. 

From a national perspective, the 10 goals of Pemex will not change the trends in the natural gas industry, and therefore it does not seem to solve the present problems. The plan places industrial transformation activities as a priority without warning that the operating levels of Minatitlán, Salina Cruz, Cangrejera and Dos Bocas would undeniably affect the precarious natural gas supply in the southeast region of the country. The industrial sector won’t be able to grow because of the persistent shortage that prevents long-term gas delivery commitments. 

More Gas Needed

The only way to increase the supply of dry gas would come from new operators. However, the lack of infrastructure and the market power that Pemex controls limits this. For natural gas, Pemex not only charges a processing fee, it also withholds many of the liquid hydrocarbons obtained. Clearly, the economic incentives to improve supply are perverse in the extreme.

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Private operators and users lose with the Pemex plan. Neither economic rationality nor an understanding of industry risks form the basis for the 10-point plan. For example, Pemex justifies the investment of $1.459 billion in the Lakach field as a way to avoid losing out on previous investment. This vision not only exhibits limited financial expertise but also fails to consider other options. Pemex said it is unable to substitute gas imports with production at a cost level that allows it to compete with the basins north of the Rio Grande. 

In the end, fundamentals will prevail over rhetoric. Between now and 2024, we need to act with financial prudence, modest expectations and a bit of stoicism.

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.