Mexico’s biggest growth opportunities include “natural gas and natural gas processing at the top of the list, including storage and completing the supply chain, such as the development of processing centers for LNG in ports,” Jorge Pedroza, energy director at PwC Mexico, told NGI’s Mexico GPI.
“There is a window of opportunity that won’t last very long and right now is the moment to carry out these investments which have been delayed by some economic barriers,” he said.
An experienced professional in the Mexican energy industry, Pedroza has been a director of the Mexico energy sector for PwC since 2004. Pedroza acts as a director of the Risk and Regulatory practice at PwC Mexico and his client list includes the energy, mining and infrastructure industries. He is also advising companies on regulatory compliance, risk administration, processes, business practices and digital transformation.
Pedroza has a master’s degree from the Tecnológico de Monterrey in Energy Administration, Energy Management and Systems, and holds two bachelor’s degrees from the Universidad Autónoma de Mexico (UNAM), including one in energy law.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Pedroza is the 90th expert to participate in the series.
NGI: What are your thoughts on the ongoing United States-Mexico-Canada-Agreement, or USMCA, disputes and what do you expect in the upcoming weeks from the consultations?
Pedroza: Given that the issue is strictly political, it’s difficult to have certainty about what direction the consultations will take. The only thing that is likely certain is that the potential sanctions established in the framework of the agreement would have both an impact on the economy, as well as an impact on the stability of the business environment.
Mexico has a lot in its favor, such as a proximity to the world’s largest economic power, installed infrastructure, fiscal discipline, and a stable exchange rate. However, there are three situations that have affected investment in Mexico, which are citizen security, uncertainty in the business environment and the lack of energy security. This includes a lack of investment in infrastructure for the transport and storage of gas, as well as a lack of investment in electricity transmission lines.
As a result of the consultation process, companies now must conduct risk assessment exercises that include a scenario in which their supply chains could be affected or their ability to import or export products might be impacted, which serve as an indication that the potential sanctions in the USMCA disputes will likely not have a favorable result for Mexico.
NGI: Do you think the United States, Canada and Mexico will resolve their differences in the USMCA consultations before they are taken to a dispute panel?
Pedroza: That is the scenario that best suits all parties, and for that reason, it is likely the probable scenario. However, the possibility that the disputes advance to the panel stage is still feasible and can’t be dismissed.
NGI: Recently, the Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) awarded contracts to private companies in the energy industry, such as New Fortress Energy Inc. and TC Energy Corp., for example. Do you think this a good sign that the state energy companies are now more willing to work and partner with private companies?
Pedroza: It’s always a good sign that private companies are identified and chosen to be commercial partners with the state-run energy companies.
However, the path to doing business this way is likely limited, given that the country maintains discipline in the free market and thus the state can’t provide certainty to all the investment decisions made by private companies. The model continues to be that national investment plans and programs define the route where financing is needed, such as energy infrastructure, development of industrial hubs, and the development of new industries in Mexico where there will be strong demand in the medium and long-term, such as the manufacturing of car batteries, for example.
NGI: Regarding your clients in the energy sector: What are their opinions about the state of the Mexican energy industry currently? Are they optimistic or pessimistic?
Pedroza: Companies have always been cautious with the understanding that political issues are an external factor in which they can’t really have a position. However, companies must be prepared and assess the risks in case of abrupt changes in decisions that impact the entire country.
At the end of the day, it is that mood that is considered when making investment decisions for the projects companies want to carry out, given that every decision carries risk and that risk must be considered and measured given the business environment and political context within the country.
NGI: In your opinion, what are the most pressing challenges in the Mexican energy industry right now?
Pedroza: There’s a lack of a comprehensive vision in the balance of energy sources the country needs, for example identifying what the needs are for Mexico regarding the installed capacity, not only for transportation and storage, but also for the upstream processing of natural gas where Mexico could recover some of the natural gas that it currently burns. Currently, this creates work limitations in several regions of the country and the lack of energy is a deciding factor for many new companies — for example those considering nearshoring opportunities — that want to set up operations in Mexico.
The vision must include identifying projects that meet the forecasted demand for the next 30 years and that require several sources of energy, not just one primary source. This vision must take advantage of the large potential of solar energy, which goes beyond just solar panels, and includes solar thermal collectors and farms that can substitute natural gas consumption for processes required in certain industries.
Additionally, such a vision wouldn’t be simply to list the projects, but to implement them. In that sense, there would be a great opportunity to attract private capital to be able to firm up projects that generate viable returns on investment and create cost-benefit opportunities that, instead of using the most accessible infrastructure available, would allow for them to be substituted and replaced.
NGI: Where do you see the best growth opportunities in the Mexico energy sector currently?
Pedroza: Without question, natural gas and natural gas processing are at the top of the list, including storage and completing the supply chain, such as the development of processing centers for LNG in ports for export. There is a window of opportunity that won’t last very long and right now is the moment to carry out these investments which have been delayed by some economic barriers. Given that natural gas has traditionally been accessible, it seems improbable that prices will likely return to be less than $5/MMbtu.
With the recent focus on the impacts of climate change, natural gas is the hydrocarbon that can help society reduce carbon dioxide emissions, though recently there has been considerable interest in green hydrogen as a vector for energy in countries such as Germany, Australia, Japan, and the U.S. The governments of those countries are doing a lot to create public policies and, for that reason, soon investments in green hydrogen could [potentially] compete with natural gas.
On the electricity side, there is a great opportunity to invest in electricity transmission. If that in fact is an activity that is reserved for the government, the transmission projects could be awarded to private companies through a bidding process. The lack of investment in transmission projects is generating higher costs to final users, both in rates as well as in limitations they create for companies seeking to expand operations.
NGI: What do you expect for the Mexican energy industry during the final 18 months of the current administration?
Pedroza: There will likely continue to be an outlook of uncertainty, not only in the current environment, but also likely in regard to expansion plans for the Mexican energy balance which, given a lack of clarity, isn’t seeing the flow of investments that the country currently needs.
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