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.
For a while now, CFE Internacional (CFEi), a company incorporated in 2016 in Delaware, has been among the 15 largest marketers of natural gas in North America. According to the latest NGI Top North American Natural Gas Marketers rankings, in the second quarter this U.S. subsidiary of Mexico’s state utility Comisión Federal de Electricidad (CFE) ranked an impressive 12th with transactions that averaged 3.8 Bcf/d during the period.
CFEi imports gas into Mexico. CFEnergia, meanwhile, is the Mexican company in charge of marketing this purchased natural gas. It receives the gas mainly through cross-border pipelines, but also some LNG shipments. The two CFE subsidiaries are organized to operate in coordination with one another. Although their fields of action are different, to understand their effect on the overall natural gas market, one must review the contracts they manage together.
CFEi sells gas acquired through both short-term and long-term contracts. Some of these extend out to 2034. A couple of contracts signed between 2016 and 2017 with WhiteWater Midstream LLC for an aggregate volume of 450 MMcf/d with increasing commitments throughout their term are now under the spotlight for allegations of corruption. Trafigura, Apache Corp, ARM Energy and Santa Fe are other companies with which CFEi has or has had long-term contracts for a total volume of about 2 Bcf/d.
Regarding the contracting of transportation services, the CFE subsidiaries manage reserved capacity in different gas pipelines through more than 70 contracts. About thirty contracts in the United States allow it to move the purchased gas to the border. Once the gas is imported, CFEnergia nominates transportation, LNG storage and compression services in approximately 40 contracts. Its counterparts are all private companies.
As a CFE assignee, CFEnergia manages contracts in Mexico whose maximum daily amounts add up to more than 17 Bcf/d — although their systemic effect is much smaller — and more than 10 Bcf/d north of the border. CEnergía has the authority to use the capacity as it deems appropriate. Its basic purpose is providing the cheapest supply to CFE’s electric power generation plants. It also has interests in the marketing of natural gas to third parties. This part is of the greatest importance for the energy markets.
The structural reform of 2014 means CFE must compete in an electric energy market, under an economic dispatch system, with some restrictions related to the stability of the network. CFE formulates offers and power system operator CENACE dispatches power based on which firm offers the lowest variable cost of generation. This premise allows CFE to seek to optimize its value by minimizing its cost of supply.
CFE anchors natural gas infrastructure and its subsidiaries optimize the value of the contracted capacity, both to give flexibility to CFE’s own electricity generation and to take advantage of the gas market. In principle, the idea does not seem to be contrary to the rationality of markets. However, the dominant role of CFE in the gas network can lead to some fundamental contradictions.
[Mexico Matters: Cross-border energy trade between the U.S. and Mexico reached $42 billion last year. Understand this burgeoning trade flow — the projects, politics and natural gas prices — with NGI’s Mexico Gas Price Index. Know more.]
Although the 2015-2019 Five-Year Natural Gas Pipeline Expansion Plan has been the trigger for much of the recent natural gas transportation infrastructure in Mexico, the history of CFE as an anchor user of projects developed by the private sector is long and fruitful. Systems such as the Mayakan, Gasoducto Morelos, Naranjos-Tamazunchale, and Energía Occidente de México have routes that extended the scope of the old national pipeline system,or SNG, operated by Petróleos Mexicanos (Pemex) until the end of 2015. This system expanded its pipeline capacity thanks to investment agreements sponsored by CFE that financed the construction of compression stations in Soto La Marina, Altamira, Gloria a Dios and Bajío.
The list of strategic projects continued. The LNG terminals in Manzanillo and Altamira, whose original purpose was to meet gas requirements for specific generation plants that did not have a guarantee of supply from Pemex, gradually became the infrastructure that allowed for system balancing in moments of greatest precariousness in supply.
In its eagerness to convert generation plants that burned liquid fuels to combined cycle plants, CFE began to take gas to unprecedented regions, where Pemex never made a concrete effort to create a market for natural gas. The Sasabe-Guaymas, Guaymas-El Oro, El Oro-Mazatlán and El Encino-Topolobampo systems have opened possibilities for development in the Mexican Pacific and today these gas pipelines could serve as a platform for logistics solutions with a global impact, such as the export of liquefied natural gas to Asia.
CFE also helped develop the marine pipeline and the Wahalajara system.
So for more than two decades, project by project, CFE has been creating a gas network configured to its requirements. It is a system that does not depend on domestic production. Long-term contracts between the CFEs and private carriers have made this possible, along with the 2014 reform.
In the Sistrangas national pipeline network, CFEnergia has accumulated greater capacity year after year. In July 2020 it had an aggregate daily maximum amount of 1.9 Bcf/d. Today this figure is almost 2.6 Bcf/d. This position is clearly contrary to the government’s constant complaint that CFE is left with stranded capacity due to past government decisions.
Energy Minister Sener’s official letter that conditioned the contracting of capacity in the Sistrangas to the acquisition of gas or transportation services from CFE runs contrary to the reality of the market.
The weight of CFEnergia in the supply of gas in the country is greater than that of any other marketing company and transcends the requirements of the electricity sector operated by its parent company. As such, CFEnergia delivers approximately 650 MMcf/d to clients other than CFE’s generation firms.
Other generators, minor marketers and Arcelor Mittal, the largest industrial user in the country, are included in this group. BP is around 185 MMcf/d, Macquarie 56 MMcf/d and Shell 100 MMcf/d in terms of reserve capacity on the Sistrangas.
Being a subsidiary of CFE, and given that this is a productive state company with an explicit profit purpose, CFEnergia has all the incentives to charge with high margins. At the same time, it must reduce costs for its preferred client, which is a related party, the generation companies owned by its parent company. One possible way out of this conflict is to discriminate between clients, charge them at differentiated prices and exercise their market power with regard to the continuity of flows; a scenario that is not very conducive to competition in Mexico and to the competitiveness of North America.
In this sense, that 12th place in the ranking does not seem very encouraging for the Mexican user, despite the public nature of the CFE brand.
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.
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