Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.
This 30th Q&A in the series is with David Madero, Director of Energy Solutions, at Acclaim Energy in Mexico City. Madero began his work at Acclaim Energy, an energy consultancy in Mexico City, in 2019, following 20+ years of public service within the Mexican government.
Madero was the first-ever director of the Mexican pipeline operator Cenagas, which he led from 2014-2018 following the passage of Mexico’s energy reform. Under his leadership, Mexico’s natural gas transmission system operator took over the pipeline assets from state oil company Petroleos Mexicanos (Pemex) and conducted the first open season for capacity.
Prior to joining Cenagas, Madero worked at the Energy Ministry (Sener) and as the senior advisor to the energy minister and in senior policymaking positions for oil and gas in both downstream and upstream. In addition, he has worked in the Finance Ministry, in the infrastructure development bank, in the pension supervisor and in Mexico’s Central Bank.
Madero is an economist by trade and holds a PhD in Economics from the University of California at Los Angeles (UCLA). He received his undergraduate degree in economics from the Instituto Tecnológico Autónomo de México (ITAM).
NGI: What are your thoughts on the impact of the coronavirus to the global and Mexican energy markets?
Madero: Covid-19 is generating a decline in the supply of all the goods and services industries, and that generates a strong decline in energy demand across the world. While it may be temporary, we have to try to understand what the optimal responses should be to the provisional disruption.
What we have been seeing is a decline in the demand of crude that has generated a collapse in prices for oil and natural gas, because there is a physical limit for their storage, and that is generating negative prices.
So, what should be the best response to this situation? That is hard to know because, as you can imagine, it is difficult to cut the supply of these types of goods. However, a temporary reduction in supply, if possible, would be an effective way to counter some of the lower demand and possibly limit the effect in the market. Not knowing how long the shock will be makes designing the optimal response more complicated.
We see similar circumstances in natural gas. However, gas does not have a single worldwide market, but rather local markets, determined by transportation infrastructure. In these local markets, we are seeing the same phenomenon, though a little delayed. However, the impact has been strong in certain geographic locations with stranded gas. In those places, there can be more supply than demand and there is no physical way to send the gas to areas of high consumption. This has generated negative prices in West Texas, for example, which is similar to what is happening in global oil as well.
It probably would be best to try to contain the supply using any measures available, and I think a possible response would be to cease shale gas drilling and completions to try to reduce supply. Nevertheless, even as this happens it is not clear what the price effect will be and how long the market will hold up as it waits for an increase in demand.
This analysis also applies to liquid and processed fuels, where we are seeing almost no storage options, which is generating problems and sending prices downward. It is more feasible to stop or slow down the process of refining, but even if you do, given the sunken demand, you have the same problem where you do not have enough storage options available for crude oil.
One thing to add is that with all that is going on, we cannot lose sight of the fact that the energy sector – worldwide and in Mexico – is in a transition. This process means moving towards cleaner and more efficient energy. If we do not continue moving towards that model, we are going to end up far behind in terms of competitiveness as a country. Though currently the long-term productivity of the country does not seem too relevant, it is important to keep in mind how and when Mexico will return to a period of sustained economic growth once this temporary shock is over.
NGI: One thing that we’ve seen emerge, as a significant issue during this crisis, has been the availability of storage options. How does Mexico stack up in the global industry in terms of storage capacity for natural gas?
Madero: Considering that my professional focus has been largely in natural gas, and from that perspective, Mexico lacks sufficient natural gas storage. Mexico historically used natural gas line packing, increasing and decreasing the pressure in national pipelines as a very short-term operative measure to deal with the daily fluctuations in demand. The pipelines’ pack cannot store much, but this was the strategy utilized for a long time in our country.
In recent decades, and with a long-term vision in mind, we started to use liquified natural gas (LNG). With LNG terminals in Altamira and Manzanillo, this allowed us to have gas stored and to have better control of the pipeline’s operational conditions by modifying the speed of the regasification process. This, of course, provides more flexibility when used together with packing and unpacking pipelines. That is what Mexico currently has in terms of storage options.
What has changed recently is that new natural gas pipelines have begun operations in Mexico. Those pipelines, on one hand, increased the possibility to utilize packing and unpacking, and this allowed for more reliability of supply, which is helpful. At the same time, these pipelines are now importing large quantities of natural gas, reducing the dependency on imports through the LNG terminals. Using LNG regasification with more flexibility allows day-to-day operations of natural gas to be less hectic.
Nevertheless, Mexico needs underground natural gas storage that has more capacity and can be strategic. Underground storage would provide for several days of gas consumption to be in storage and allow the country to deal with supply interruptions, and guarantee more flexibility should there be a natural disaster, such as the hurricanes in southern Texas in recent years, or simply a major maintenance in one of our main import pipelines.
For years, Mexico has also needed operative storage options for natural gas. An underground storage facility that could not only serve as a strategic solution, but as an operational one, but that would require less rules for natural gas to enter and exit storage. This would improve operational flexibility and would be a more efficient solution than continuous use of LNG regasification for this purpose.
The previous administration analyzed possibilities for underground storage options and arrived at the conclusion that the best option was to locate one in Veracruz in a depleted field named Jaf. It is close to the port of Veracruz and has the size and location to be very useful and economical as a storage option. I think this project should be revisited, as it could assist to assure that Mexico has natural gas storage available should there be some sort of interruption.
NGI: Currently, is there an opportunity for commercial and industrial clients to obtain natural gas in Mexico?
Madero: I think the availability of gas has increased substantially in several regions of Mexico. It has also improved in places where historically there has been natural gas and infrastructure but there was no available capacity. The availability of natural gas has experienced massive growth because of investments and pipelines in recent years. Some of the pipelines are still to enter into operation, but the growth and ramp up of natural gas infrastructure and investment in Mexico has been significant.
The phenomenon has allowed more capacity to be available for imports, which has coincided with a significant boost in production of natural gas in the U.S., particularly in the southern region of the country, following the development of shale gas. This has resulted in a significant increased supply and historically low prices for natural gas in the region.
Therefore, more supply from the U.S. and additional import capacity available to Mexico, have increased natural gas availability in Mexico. We still have not been able to take advantage of all of this natural gas, because we still have some physical bottlenecks. Some pipelines and compressors are yet to come online and some interconnections are yet to be constructed.
As a country, we need to take advantage of this infrastructure to be able to import much more natural gas, to utilize as much of the capacity as possible, and make it available to the market through open seasons. Recent developments and communications from Cenagas and state utility CFE are quite encouraging.
In that sense, some persisting regulatory bottlenecks are being tackled; capacity available for commercialization is increasing, and could be placed competitively. There are now new vendors in Mexico that are trying to compete in an industry historically controlled by a dominant player. New conditions are currently developing to allow them to compete in the industry.
I am optimistic that there is and will be enough gas available for the industrial and commercial consumers in Mexico, given that there is more capacity for imports and more production of cheap natural gas in the U.S.
NGI: Can the clients that have a natural gas contract in Mexico receive better price and service conditions?
Madero: What I am seeing in the market are new and old vendors actively trying to reach more clients. These market players are now moving quickly to commercialize gas with the regulation that currently exists, that allows them to compete by offering gas at the best conditions to the clients.
Competition is always good for the client and the price and service options are improving as a result. With increased rivalry among vendors, consumers are able to make better decisions and achieve better market conditions.
I think the current market landscape in Mexico allows the largest consumers of natural gas to find and work with large vendors, while smaller companies that use less natural gas also have several smaller vendors to choose. The current and new entrants that want to participate in the natural gas market are going to find a market that is continually improving to become more efficient.
NGI: Given the current conditions in Mexico, can any company that accesses natural gas receive the same treatment and conditions?
Madero: I think that the conditions are still there for any interested party, and this is because there have not been large-scale changes since the energy reform. I think equal access for all entrants remains intact in the current laws, and regulations.
In practice, the sector needs a very professional regulator. An economic regulator, that clearly understands the problems, and is interested in providing the best conditions to the consumer at all times. I think that, with the change in administration and the change in some of the public policies, there was some confusion early on, but I am sure that the regulator, like any economic regulator, will ultimately act in the best interest of the consumer.
NGI: Do natural gas consumers have service options that can be adjusted to fit their individual needs?
Madero: Yes. As I mentioned, the natural gas vendors are adjusting to offer those services. Not all of the natural gas vendors can attend to all clients, for example some seek out larger consumers such as electricity generators and industrial companies, others look for clients that need financial coverage or hedges, while others look for middle and smaller sized business consumers to offer them the quantities needed with less of a hassle.
The smaller clients typically want bundled service offerings. They do not want to worry every day about daily supply and capacity. They look for a hands-off service. I am seeing these services develop and I have a lot of optimism that the industry that commercializes natural gas is making adjustments quickly to provide for all types of consumers.
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