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 17th Q&A in the series is with Verónica Irastorza, Associate Director at NERA Economic Consulting, a global firm dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. Irastorza has been with NERA since 2014, where her work has focused on projects involving electricity markets, renewable energy, electricity and natural gas regulation, pricing, arbitration and due diligence. She has since August been a board member at the University of California at Berkeley Goldman School of Public Policy and was a visiting scholar there from 2013-2014.

Previously, Irastorza worked at Mexico’s energy ministry where she was the deputy secretary of energy planning and transition in 2012, as well as the general director of energy planning from 2007-2010. She also worked at Petróleos Mexicanos (Pemex) from 2010-2011 as the deputy director of planning, and previously at NERA from 1999-2007.

Irastorza holds a master’s degree in public policy analysis from the University of California and a bachelor’s degree from the Universidad Iberoamericana in Mexico City.

NGI: In your opinion, what are the biggest strengths of the Mexican natural gas market?

Irastorza: Mexico has one of the oldest and most extensive gas systems in the world and proximity to the United States is as an important strength for the Mexican gas market. The U.S. is by far the largest gas market in terms of supply, infrastructure and number of trades, and it experiences comparatively lower prices than other countries due to developed regulation and new technology. Mexico is already taking advantage of this easy to access and cheap supply that is not available to other countries due to geographical conditions.

Mexico has considerable gas reserves. According to Mexico’s National Hydrocarbons Commission (CNH), there are 324 Tcf proved, probable and possible, or 3P reserves. To put this figure into context, there are enough reserves to satisfy 12 years of national consumption, and there are still many areas that haven’t been explored. The Permian Basin (in Texas), which is one of the largest in the world, has gas reserves of approximately 281 Tcf.

NGI: What are the biggest weaknesses in the Mexican natural gas market?

Irastorza: Gas production has been decreasing since 2010. In 2010 Mexico produced 7 Bcf/d and now it is producing only 4.8 Bcf/d, while demand continues to grow. A large part of that gas doesn’t go to the market, it is used by Pemex itself. In addition, the infrastructure is limited and many states do not get gas or not in the quantities needed. The north of the country enjoys cheap supply and availability from the U.S. However, there are regions like Baja California Sur and the southeast of the country where there is not a reliable supply due to a lack of transport infrastructure. As a result, we have seen natural gas-fired electric plants running with diesel that is much more expensive than gas.

There has been a lot of buzz in terms of hydraulic fracturing and it is not clear if the current administration will support it or not, and most of Mexico’s prospective gas resources require use of this technology to be extracted. Furthermore, the bidding round for natural gas exploration and production was cancelled this year, which creates a very unlikely scenario for the development of domestic natural gas production in the near future.

In terms of quality, about 80% of Mexico’s natural gas production is associated with oil production. Most of oil production comes from the Campeche region, where large quantities of nitrogen were injected to extract oil. According to CNH, national gas production has about 18% of nitrogen and in the southeast region the percentage is even higher. This means the heating power is not as high as it should be and further processes have to be applied before the gas can be used. Therefore, gas is flared at some production points due to the high cost of nitrogen separation. Even when gas burnt volumes have decreased compared to 2016, the trend for 2019 is rising.

NGI: If you had to describe the Mexican natural gas market in one word, what would it be and why?

Irastorza: Opportunity. We are next to the only truly competitive gas market in the world. The Mexican market could be further integrated into the North American market, where leading regulation and state of the art technology have been developed. In the United States, gas prices are about 2.3 times cheaper than prices in Europe and 2.8 times cheaper than prices in Asia. For example, this month, the average price for U.S. gas (Henry Hub) was around $2.50/MMBtu, while the price in the UK (National Balancing Point) was $5.70/MMBtu, and in Japan (Japan Korea Marker) it was $7/MMBtu

NGI: How important is natural gas to the Mexican economy and what is your opinion on the development of the natural gas market in Mexico in recent years?

Irastorza: Natural gas is very important for the Mexican economy. It has had a steady annual growth of 3% for more than a decade. More than half of the gas is used for electricity generation. Most of the electricity produced in the country comes from natural gas plants. During the last decade many fuel oil plants transitioned into natural gas, as it is cheaper, efficiency increases and emissions decrease. This has been the major driver of consumption and it has a huge economic impact. The whole economy needs electricity and if it gets cheaper, by using more efficient gas, the whole economy is better-off.

There are significant differences between gas demand in the different regions in the country; this is related to the corresponding industrial characteristics. The second largest user of gas is the oil industry (in the southeast) and next is industrial processes, which together consume about 20%. The residential sector is still tiny, since most households still use LPG. Mexico is perhaps the country that uses the most liquefied petroleum gas for the residential sector.

It is expected that natural gas demand will keep increasing. According to the Cenagas survey of the market earlier this year, gas consumption could reach a value of 14.5 Bcf/d by 2024, representing an increase of 80% comparedto today’s levels. The Energy Ministry in its latest forecast has a more conservative figure of a 30.3% increase by 2032. What is certain, is that gas consumption will see a significant increase in the coming years.

NGI: What are your thoughts on the role of Cenagas and its importance in the Mexican natural gas market? In your opinion, what should be the role of Cenagas in the Mexican natural gas market?

Irastorza: As previously mentioned, North America has the most developed gas market in the world and it does not have any central operator like Cenagas. The central operator is needed for electricity, but not for gas. Gas is different than electricity for many reasons, including storage and the speed at which each travel. While electricity travels at the speed of light, gas flows like a galloping horse. In many countries, having a central operator has resulted in markets that are not fully competitive. Given that Mexico starts with a national monopoly (Pemex), Cenagas was a way to open the system for others to access it, without privatizing the infrastructure.

For Cenagas to encourage the development toward an integrated North American market, we need both Cenagas and CRE to keep the gas molecule and its transport capacity separated, provide transparency regarding prices, costs, and operations and make sure that tariffs reflect their underlying costs. Social pipelines have a high risk of being politicized and inefficient, and thus, competitive processes to develop new infrastructure must be in place and the cost of these pipelines should not be rolled-into the transport tariffs for the other pipelines. My opinion is that Cenagas has an important role during the transition but that eventually, we should move toward a competitive market without a central operator.

NGI: In the last two years, Mexico has begun to sell and trade natural gas and realize transactions on its monthly IPGN price index. What are your thoughts on the development of this index?

Irastorza: It is a great effort since this is new for Mexico. Nonetheless, it will take time to develop a price index that reflects adequate economic signals like Henry Hub or Houston Ship Channel. Practically speaking, the usefulness of published commodity price information depends on the underlying competitiveness in the commodity itself and in Mexico we are not there yet.

The competitive financial market uses published price indexes in liquid markets as a reference price to trade and settle natural gas futures contracts. Similarly, buyers and sellers of natural gas utilize price indexes to determine the price in contracts. The Henry Hub in Louisiana was created by those financial markets (New York Mercantile Exchange) as the entry point for trading in gas price risk, and the West Texas Intermediate hub in Oklahoma has always been the principal U.S. point at which to settle crude oil futures contracts. Such “real” commodity futures trading hubs are created and come from the competitive financial markets, not regulators or governments.

NGI: In August there were 26 natural gas marketers that reported transactions on the index. Do you think that number will continue to grow, or is the market still largely dominated by Pemex and CFE?

Irastorza: I think that it will take some time for the market to grow, and the speed will depend on the underlying regulations that allow nondiscriminatory market access to new market players. Pemex and CFE are still the dominant market players in terms of gas commercialization (selling and usage).

NGI: In your opinion what are the biggest challenges in the energy and natural gas industry currently?

Irastorza: The main challenge for the industry worldwide is to move toward more sustainability and preparing for climate risks. It is unavoidable to move toward sustainability, and we are already seeing companies moving in that direction, but not as fast as we need. In terms of climate risk, energy companies have to analyze their vulnerability to hazards including floods, rising sea levels, droughts, storms, etc. and prepare for them. Energy demand will also change as a result of climate change.