Freezing weather in Texas in February and the subsequent energy supply problems on both sides of the U.S.-Mexico border underline a need for greater energy integration between the two countries, Lorena Patterson, senior energy specialist and strategist, told NGI’s Mexico Gas Price Index.
“I would advocate for greater integration between the markets, and more diversification of energy sources on both sides of the border. In an emergency situation where energy supplies are limited, it is always necessary to triage and send supplies to areas where they are most critical,” she said.
Patterson is a seasoned energy specialist with more than 25 years of experience in the energy sector, serving most recently as a director for TC Energy Corp. in both Canada and Mexico. She worked at TC Energy for 16 years, 12 of which were spent in Mexico developing the company’s industry and government relationships. While in Mexico, Patterson was the President of the Mexican Natural Gas Association, represented the country on the U.S-Mexico Energy Business Council from 2016-2018 and was a Board Member of the Canadian Chamber of Commerce in Mexico.
She holds a master’s degree in Business Administration from the University of Texas at Austin and a bachelor’s degree in development economics and international development from Dalhousie University.
NGI: A main topic of interest in the Mexican energy industry during the last few weeks has been the electricity law proposed by President López Obrador. What are your thoughts on the proposed law, and what signal does it send to the international energy industry about the state of the Mexican sector?
Patterson: The Electricity Industry Law (LIE) mandates that the Comisión Federal de Electricidad (CFE) dispatch its plants first, regardless of cost, and after it has exhausted production from its own facilities, it can source power produced by privately owned power producers. This law – which is facing several injunctions and has already been suspended by the judiciary – violates the contractual obligations that the CFE had entered into with private firms, which committed the CFE to purchasing less expensive power first, and then as those supplies became exhausted, source power from less efficient sources, such as CFE plants. Independent contracts that had been awarded under the previous administration had provided Mexico with some of the lowest cost renewable energy contracts in the world; this new law would significantly increase the cost of power and it sends a concerning signal to investors in all sectors.
Rule of law and implications for contracts aside, this initiative also makes it clear to the international energy industry that the Mexican government is not at all concerned with climate change. Both Prime Minister Justin Trudeau and U.S. President Joe Biden have made climate change a top priority of their administrations, largely in response to significant support from their constituents, so Mexico’s decision to favor older thermal technologies over cleaner renewable technologies will be a concern to both of them.
Mexico’s president took the unprecedented step of directly challenging the judge who ruled that the LIE was unconstitutional, and legislators are now exploring new laws to limit the judiciary’s powers going forward. These are both troubling signs.
Recently, the Morena party introduced another initiative to change the Hydrocarbons Law, which follows on the heels of the Electricity Industry Law. As proposed, the modifications to the Hydrocarbons Law carve out and reserve areas of the downstream industry for Pemex. Permit holders will have to prove they have sufficient capacity to carry out their activities of marketing, distribution and potentially other activities, or risk having their permits revoked. New permits would not be granted unless the applicant has already obtained sufficient storage for their planned activities. The bill also allows for the Comisión Reguladora de Energía (CRE) and Energy Ministry Sener to temporarily assume the operation of assets in order to “guarantee the interests of the nation,” in cases of imminent danger to national or energy security, or the national economy.
NGI: In recent months, there has been increased pressure from the U.S. government on members of the Mexican energy industry to adjust policy to be more investor friendly, as well as mentions of potential violations of the United-States-Mexico-Canada-Agreement, or the USMCA. Do you foresee more pressure from the U.S. government on Mexico’s energy sector as President López Obrador continues to try to modify existing policy?
Patterson: President López Obrador understands that it is important to avoid direct conflict with the United States. At the same time, he is tempted to push for less interference from outside influences because he believes that taking a strong stance against foreign governments is important to maintain the support of his constituents. Balancing between these two interests is tricky and friction is likely to continue.
The USMCA provides some leverage because if Mexico were to withdraw, it could have a devastating effect on the country as a whole, which could damage support for the president. He will likely tread carefully until the results of mid-term elections are in. That said, some of the provisions of the proposed modifications to the Hydrocarbons Law would appear to contravene the USMCA. Should the proposal become law, this might become an important avenue for affected investors.
The U.S. government will almost certainly continue to watch what is taking place in Mexico and is likely to continue to support American investors.
NGI: In February, power outages in Texas left millions of Mexicans without electricity. What do you think that says about the balance of the energy relationship between the two countries?
Patterson: I would advocate for greater integration between the markets, and more diversification of energy sources on both sides of the border.
In an emergency situation where energy supplies are limited, it is always necessary to triage and send supplies to areas where they are most critical. The highly unusual situation in Texas forced operators to make difficult decisions which impacted exports to Mexico, highlighting the country’s dependence on gas supplies from the United States. But it would be overly simplistic to decide that Mexico should limit future supplies from those basins, which by replacing fuel oil in power plants have allowed the country to reduce its greenhouse gas emissions and have encouraged investment in other industries due to increasing supplies of reliable energy. By the same token, Texas has benefited enormously from having such a large market on the other side of the border, where it can safely and inexpensively send nearly 6 Bcf/d.
The natural gas pipeline network that currently feeds Mexico from Texas is reversible. Imagine how differently the situation could have been managed if Mexico produced more gas domestically and had a robust gas network including natural gas storage and strategically located liquefied natural gas (LNG) peaking facilities. Texas could have requested additional supplies from its neighbor to manage through the storm. Or if Mexico’s power grid were more integrated with Texas, additional power supplies could have been met from Mexico, averting the shock to the system. If the relationship is viewed through a lens of ensuring the energy security of the region as a whole, as opposed to dependence/dominance by one side or the other, the solutions to the current gaps might be different, and could provide for a better outcome on both sides of the border than if each region manages their systems completely independently of each other. This is unlikely to be possible due to current political challenges but is something to consider in the future.
NGI: Mexico currently imports some 70-80% of its natural gas needs from the United States. Do you think Mexico’s dependence on the U.S. for natural gas will continue to increase in the next few years?
Patterson: The current administration does not wish to continue its dependence on the U.S. for gas supply and is likely to try and reduce this through a number of measures, including reverting combined cycle plants back to fuel oil. The reality, however, is that Petróleos Mexicanos (Pemex) has never been a gas company, and the margins on gas are not sufficiently attractive that it will make sense for the national oil company to invest significantly in producing Mexico’s gas reserves.
I would anticipate that the current situation will continue. Whether or not its percentage of dependence will increase will depend on a number of factors. If Mexico’s economy does not grow it may not need to access higher volumes than it currently consumes.
NGI: What could Mexico do to become less reliant on the U.S. for its energy and natural gas needs?
Patterson: Mexico could increase domestic gas supply and build natural gas storage facilities that would provide the country with access to the fuel in the event of an interruption somewhere on its system. This would also help flatten the demand curves of the hot summer months when air conditioning demands are at their peak, and protect consumers from spikes in their power bills, because storage allows operators to purchase additional volumes during periods of lower demand, when gas is less expensive, and use it when gas prices are higher.
To increase natural gas production in Mexico, Pemex would have to stop flaring gas and incorporate those supplies into national production, as well as look at the potential of fracking in some regions of the country in order to produce additional supply cost effectively. It is difficult to envision that this will be possible without private investment from companies with experience in this type of production. Sourcing LNG from other countries is an option, but it is not cost effective, and available capacity is limited.
If the administration chose to embrace renewable energy as part of the power grid, it would be possible to reduce Mexico’s reliance on U.S. natural gas. Similarly, other countries are looking into transitioning to new fuels such as hydrogen; Mexico could, through proactive policy changes, encourage those kinds of investments. If the country depends entirely on Pemex and CFE for its energy and natural gas needs, ironically it will likely continue to depend on the U.S. for the foreseeable future for the bulk of its natural gas supplies.
NGI: In recent months, several international energy companies have announced plans to cease investment in Mexico or shutter operations entirely. Do you think more foreign companies could do the same if Mexico continues to favor the state-owned companies over private investment in the sector?
Patterson: Mexico’s preference for state-owned companies over private investment is very clear, and international energy companies are responding in accordance with their own internal risk tolerances. The current administration understands and accepts that this is a possible outcome of some of their policies. It is logical when risk has the potential to outweigh rewards that more companies may exit the market. The irony is that in terms of production, additional oil or gas that is produced under risk sharing contracts belongs to Mexico and the royalties it generates would help the administration cover the costs of its social programs, without having to pay for the upfront costs that Pemex must incur in order to produce those fields.
NGI: In your opinion, what is the biggest challenge facing the Mexico-U.S. energy relationship currently?
Patterson: I think the biggest challenge at the moment is that each leader has a very different vision for his country’s future.
Mexico’s vision is a state-controlled and highly managed energy industry, where the state prefers autonomy and control as opposed to market driven solutions. Because governments are not typically nimble or innovative, investors in controlled markets struggle to introduce new technologies or practices that are emerging in other markets. This became evident in March when the president took issue with private companies that produce their own power through renewable energy. Their monthly bills to CFE are lower because they pay a preferential wheeling charge. The president views this as a loss. He would prefer that those users consume 100% of their power from the state-owned power company. By extension, the modifications to the Hydrocarbons Law, would they pass, also limit competition to Pemex for downstream activities. The president clearly believes that the industry is a “zero sum” game and believes he must defend CFE and Pemex from competition, whether this is from renewable power or distribution and marketing of refined products through networks that are not owned by Pemex.
The Biden Administration is going to pursue measures that will most likely include carbon pricing and subsidies for emerging technologies to encourage an energy transition to cleaner fuels, such as hydrogen, as well as wind and solar, and has a vision for the future that relies heavily on a green transition to address climate change. Power generation through renewable energy sources, such as those that are used by Wal-Mart and Oxxo in Mexico, will be encouraged in order to allow consumers to move to less carbon intensive sources for their power. President Biden would likely prefer that Mexico adopt similar measures because climate change doesn’t stop at the border. It’s a global issue, and a competitive North America would encourage innovation throughout the region. Similarly, his administration is likely to take issue with Mexico changing the rules so soon after U.S. firms have invested in the country.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the above question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Patterson is the 53rd expert to participate in the series.
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