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By Javier Ordaz (Associate) and David Enríquez (Partner), Goodrich, Riquelme y Asociados

One of the main purposes of Mexico’s Energy Reform is the creation of competitive markets for the energy sector. The natural gas industry in not out of this scope, hence the eagerness of the federal government to implement actions that will prompt the liberalization of this market.

The Reform aims to introduce freedom of choice to engage in the business and trade of energy. For this purpose, the government has implemented a public policy for the creation of natural gas markets looking to eliminate legal and commercial obstacles and to promote a commercial environment. So far the Reform has eliminated exclusive rights for the National Oil Company (NOC), PEMEX, the implementation of regulations to foster a business environment in the natural gas sector and the creation of asymmetric regulations to open competition into the market.

As for the elimination of exclusive rights, the major change is seen in the amendments to article 27 of the Mexican Constitution, in which all monopoly rights concerning the production and transport of hydrocarbons were relinquished from PEMEX. Particularly, in the case of natural gas, the Hydrocarbons Law expressly establishes that any party may obtain transport and storage permits from the Regulatory Energy Commission (CRE).

The second action pursuing the creation of a domestic market of natural gas is the issuance of third-party access provisions. Due to the natural-monopoly character of the transportations systems such as pipelines, there is a need to create a balance between pipeline operators and the system’s users. The Mexican government has acted accordingly through the regulations published by CRE last year, setting out the framework to grant users equal and nondiscriminatory access to pipelines and storage facilities.

Because PEMEX is effectively a monopolistic player in the natural gas market, the third step consists in certain unbundling actions and asymmetric regulations. This has been done in two actions: first with the assignment of PEMEX’s natural gas transport systems to CENAGAS, Mexico’s natural gas transport network operator, and second with the assignment of 70 percent of natural gas sales contracts held by PEMEX.

Furthermore, price controls for natural gas sales continue to play a role in the nascent Mexican markets. First-hand sales prices (Ventas de Primera Mano) establish the maximum prices natural gas is to be sold at within the territory. The latest methodologies have pegged their reference prices to those of the south of Texas. Another element for the implementation of the natural gas market is the active oversight from the authority to ensure the enforcement of the aforementioned measures. Mexico has created CENAGAS, the state-backed pipeline network operator that administers and operates Mexico’s natural gas pipelines and storage systems, replacing the role PEMEX Gas and Petroquímica Básica had played for many years. Additionally, the Reform gave new powers to this entity to ensure the continuity and security of supply of natural gas in Mexico. The natural gas pipeline network comprises roughly 10,000km, transporting 6.3 million m3 of natural gas.

Finally, Mexico’s Ministry of Energy has also issued a policy for expansion and development of Mexico’s pipeline network for 2015-2019. It highlights the need for natural gas transport and storage infrastructure in Mexico to increase access to this commodity in new regions and markets. This policy has a fundamental effect in the creation of more efficient natural gas markets because the expansion of the network facilitates flexibility in the market, the presence of more players and more transport and interconnection between the centers of production and consumption. A recent report by the IEA pointed out that the country’s transport infrastructure is insufficient to ensure the implementation of efficient markets and that storage systems are almost nonexistent. Given that consumption of natural gas in Mexico in the following years will increase its share of energy output by almost 70 percent of the energy mix, the implementation of these infrastructure policies is of the utmost importance for the country.

It is important to mention that Mexico’s measures for the liberalization of the natural gas market are following the experience of some European countries during the 1990s and 2000s. Similar reasons are behind the two: the need to meet expected future energy demand, competitive and affordable energy prices, reduction of transport and storage costs and environmental concerns, among others. Nevertheless, the evolution into mature markets of natural gas has brought new challenges and in some instances the expected goals are contested.

First, there is the fact that measures to curb the presence of a predominant market player do not always have the expected result. This was the experience of Spain’s Gas Natural, which was subject to a gas release program of 25 percent of its sales contracts and the spin-off of 65 percent of its shares in Enagas, the gas transport system operator. Despite these measures and the introduction of new market players, Gas Natural still holds a significant market share and natural gas prices have not fallen much.

Another challenge to be taken into account concerns the security of supply from natural gas importing countries. Diversification of markets has been considered an element to ensure security of supply from this perspective, in the sense that having various suppliers from different regions or places will ensure the absence of significant disruptions. Similar to the European case with Russia, Mexico’s proximity to one of the largest natural gas markets and the fact that its own domestic production cannot meet the demand, forces the country to depend on the US.

Unfortunately, the current natural gas policy assumes that the liberalization of the gas market on its own will ensure security of supply, disregarding the dependence from a sole external supplier. It is not expected that in the foreseeable time Mexico will become a self-sufficient consumer of natural gas and for this reason it will be necessary to address the security of supply more effectively, such as a proactive policy for diversification of suppliers, incentives for domestic production or storage obligations for emergency situations.

 

 
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