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.

Monterrey map

The big investment news in Mexico is Elon Musk’s intention to build a ~$5 billion Tesla plant in the thriving northern city of Monterrey. President López Obrador brought the issue to national attention when he expressed his objections to Musk’s choice of Monterrey, due to what he said was water scarcity. But Musk was adamant, and spoke personally with López Obrador over the matter.

Unlike locations in the south of the country, Monterrey and the State of Nuevo León in general is the area of the country with the best conditions for access to reliable and efficient energy. Natural gas flows in abundance from Texas. It arrives cheaply, continuously and through many pipelines. Nueva Era, Kinder Morgan, and Sistrangas with injection points in Reynosa, Argüelles and Cd. Camargo all flow to this industrial area.

There are also numerous power generation plants that ensure the stability of the regional power grid. With an energy market interconnected with the United States, the proximity and accessibility of natural gas supply are critical elements that provide comparative economic advantages over other areas in Mexico.

The above is true with or without the impulse of nearshoring – the practice of transferring a business operation to a nearby country. But the business world in Mexico has high expectations about the country’s economic future under the assumption that this global relocation of production processes will benefit investment in Mexico. The proximity to the U.S. market is a unique geographical circumstance. But it is not enough to make the manufacturing of goods viable and profitable.

In particular, the relationship between nearshoring and energy security is decisive for investment growth. A reliable supply of gas and electricity with diversified suppliers favors stable and predictable energy prices. Competitiveness and the existence of hedging mechanisms is crucial for companies to reduce their general operating expenses. One worry is price interference. Price controls affect the sustainability of the energy infrastructure, which in turn will lead to deficiencies in the operation and eventually interruptions in the delivery of energy.

Power and gas flow without variations is an essential condition for industries that require high energy consumption. Electronic component manufacturing, data centers and logistics control cannot tolerate minimal interruptions. An unstable power supply is an operational risk  that can lead to financial losses and damage the reputation of companies. Not having gas storage that mitigates or corrects the effects on gas delivery in aberrational cases such as the winter storm Uri 2021 will undoubtedly be an aspect to be evaluated by those who plan to move their operations from Asia to North America. 

Companies are not just looking for reliable natural gas and power supply. They also seek to form part of a conglomerate in which energy consumption entails corporate social responsibility, with the purchase of certified natural gas, for example. In this regard, the Mexican government must work to improve its environmental, social and governance metrics.

But the most serious problem these days is undoubtedly poor sector regulation. The Comisión Reguladora de Energía (CRE) faces an enormous challenge: to supervise the maintenance and growth of the supply of natural gas and electricity in Mexico. 

The CRE has already proved careless regarding open access in the gas pipeline network. Today, the technical and operational standards for natural gas transportation operators do not seem very effective. Sistrangas, operated by Cenagas, has accumulated more than five months of operating under system alert conditions, affecting user nominations and applying severe penalties for imbalances. There has been no public pronouncement by the CRE. They should demand an explanation of the causes and the design of a corrective action plan.

In electricity matters, supervisory tasks have also been omissive in monitoring the performance of the electricity market. Today, market participants do not know for sure if the market is free of manipulations. Nor do they know which transmission lines are congested or not. 

In one of its most basic tasks, which is the granting of permits, the CRE seems to favor the activities of Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) at the expense of other agents with projects that compete in the market with the state firms.

Permit application evaluation times have been excessive under the pretext of the pandemic. Currently, when business activity has returned to pre-pandemic normality, the CRE has announced that it will only address 50 matters per month. This announcement is discouraging and increases the risks of improper mechanisms in the regulated markets.

Ultimately, energy sector regulators have the central task of protecting the interests of users, that is, energy consumers, by creating favorable conditions for energy security and efficiency. This includes companies dedicated to producing goods or services, present and future. This task implies a deep understanding of the way in which the energy industry works in a globalized environment and amid complex supply chains for manufacturing firms.

For nearshoring to be successful, it is imperative that Mexican regulators get involved in the creation of robust and reliable energy infrastructure. If the probability of energy interruptions is high in Monterrey, Mexico City, Guadalajara or Tabasco, no amount of private calls would convince a businessman to put billions of dollars of investment at risk.

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 2019 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.