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.

In February 2021, Winter Storm Uri exposed Mexico’s dependence on natural gas imports from Texas. The lack of gas storage facilities, the poor diversification of supply sources, and the inability to raise domestic production became evident. A year later, public discussion around infrastructure dedicated to energy security remains at a standstill. The expected storage projects did not occur, domestic production is stagnant, and gas imports are at all-time highs. A new crisis in Europe, this time geopolitical, has caused nervousness and concerns among market agents about the availability of natural gas and its price.

Some have compared Europe’s dependence on Russian natural gas to that of Mexico on U.S. gas. The behavior of the European electricity market this winter with marginal prices directly related to the price of natural gas also sows doubts about Mexico’s reliance on gas for power generation. In a context in which the López Obrador government seeks to reverse the opening of the energy sector, high electricity prices in places like Spain also serve as an argument against private sector competition in the energy marketplace.

Due to the current war crisis, President López Obrador on Thursday said that, if necessary, Mexico would resort to fuels other than natural gas to generate electricity. It’s interesting that in the open parliament triggered by López Obrador’s reform initiative, the spokesman for the government’s position argued that Russia’s Gazprom was a model to follow. The aberrations in Texas and Spain observed in 2021 would not occur if Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) were in charge of guaranteeing access to energy, he argued.

This position is not very sensitive to the economic reality of the relationship between Mexico and the United States. The connectivity of the Mexican gas network with 24 import points has provided the country with a substantial improvement in its energy security compared to a decade ago. Dependence on Pemex production put the country in an almost permanent situation of “critical alerts” in the natural gas segment. 

The gas network operated almost exclusively by Pemex did not have redundancies to bring gas to the main cities of the country. Service coverage on the northwest Pacific coast, in the States of Zacatecas and Colima was never in Pemex’s commercial intentions. El Bajío, an area whose economic activity has been linked to trade with the United States, had frequent gas supply interruptions.

Mexico’s energy security improved thanks to gas from Texas. By citing last winter’s problem as an example of vulnerability, the government ignores the hoarding that state-owned companies have over the capacity of the import pipelines. In an environment in which physical and commercial operations are governed by contracts and not by political tactics, the risk of supply interruption due to an order from President Biden is minimal compared to the risk presented by the concentration of transportation capacity of Pemex and CFE.

Today, with the hoarding of capacity in the import pipelines, the nomination and programming of import volumes largely depend on bureaucratic decisions. A market environment with more diversified capacity allocations would lead to a decentralization of business decisions. With this diversity, the probability of a widespread supply interruption would diminish.

Regarding the winter management of the European electricity market, critics within the government claim that speculation and the search for profit cause price volatility. In this value judgment they do not take into account that the conditions of gas scarcity were a consequence of Gazprom’s strategic behavior in managing gas inventories in European territory. 

The concentration of capacity makes such manipulation possible. In addition, the service managed not to be interrupted thanks to the benefits of the market. The flexibility of the contracts associated with the supply of liquefied natural gas (LNG) from North America made it possible to divert shipments destined for Asia to European destinations. 

On the other hand, the operational rigidity of Gazprom, which seeks to operate a gas pipeline at the same time that it markets the gas it transports, prevented the timely regulatory authorization of the Nord Stream 2 pipeline by the German authorities. Gazprom’s resistance to open access prevented the availability of a new source that could have alleviated winter shortages.

Open access as stipulated in the Hydrocarbons Law should allow marketers to maximize efficiency. But the Comisión Reguladora de Energía (CRE) has given its consent so that the principle of “use it or lose it” is not applicable to CFE. 

For its part, Cenagas has authorized CFE to transport new routes on the Sistrangas on a firm basis without an open season occurring. The López Obrador government is thus revealing the type of energy industry they want: one more aligned with the Russian statist paradigm than with the North American market. This vision makes the country more insecure in energy terms. In the long run, in an international environment of growing tensions, this alignment could cause a disagreement in the North American region between countries that should continue to be partners, as they have been for 30 years.

Mexico is no longer the only destination for surplus gas production in the United States. A global market encouraged by the new configuration of the world order makes it increasingly attractive to invest in liquefaction trains to bring LNG to Europe. Mexico’s government is risking a beneficial trade relationship for nothing. In the process, it is losing energy security.

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.