The Commision Regulatoria de Energia was created to provide the Mexican energy sector with transparency and efficiency. This week’s interview of the week is with President Commissioner of CRE, Guillermo Garcia. H has over 10 years experience in the energy industry and was directly involved in the drafting of the Energy Reform.
Q: What were CRE’s milestones in 2017 regarding the evolution of competitive midstream and downstream sectors in Mexico?
A: We had a landmark year in 2017 thanks to the implementation of further changes in the industry. The government liberalized fuel prices in general and regions were given the opportunity to set their own prices gradually, and within a year, price liberalization became a reality nationwide. Unified prices used to be the norm in the country and now they are differentiated by region and set by the players involved, injecting competitiveness into the market. We have 42 new fuel retail brands that started operations in Mexico from April 2017 onward.
Another milestone was the abolishment of first-hand sales prices for natural gas in conjunction with the open season for the transport system capacity. A free price opened the door for marketers to take a larger share of the volume sold in Mexico, which has climbed above 30 percent. We are trying to implement the same liberalization of prices in LPG, although this poses a bigger challenge as more infrastructure is required and further regulatory adjustments are needed beforehand.
A final milestone is the acknowledgement of the need to transport LPG to remote areas that require fuel. We discovered that around 15 percent of underprivileged families still use wood as a source for heating. We partnered with commercial and governmental-aid grocery stores, such as Diconsa, in these areas to deliver LPG and we will encourage more projects in this vein, especially through partnerships with the private sector.
Q: What are the critical success factors in the liberalization of the wholesale and retail fuel markets and what is the projected impact on prices?
A: People are getting used to prices changing on a daily basis. There is more knowledge about how prices are defined, how international oil prices evolve, logistics, taxes and so on, creating a more robust discussion. This also highlights the shortcomings we face in terms of infrastructure and more active competition. For instance, LPG from Sinaloa has to be shipped through the Panama Canal and come back to storage terminals in the Gulf of Mexico, due to the lack of a pipeline, costing US$1 million to pass it from one side of the country to the other. Market liberalization has changed the mindsets of society in general, with people now understanding that these types of procedures make no economic sense. Companies also know that if they can do things at lower prices, obtain the necessary permits and operate efficiently, they will obtain a market advantage.
The entire process has been quite transparent with this new breed of regulation emerging from the reform, following the strict communication rules set by the government. Ultimately, we are getting people to trust the system and the regulation.
Q: What role do daily and regional fuel price indexes, natural gas and LPG play in the consolidation of competitive markets?
A: They play a crucial role. We started to publish the natural gas daily price last year through an index we created. We perceive regional differences in prices in natural gas and that is pushing people to try and find connections with different regions, even in the US. That pricing is present in every fuel market and the idea is to have savvy investors developing these information processes and establishing investment plans for the future.
We have worked on Gasoapp, our own app that provides daily and real-time fuel market prices for customers. Most people in Mexico have a cellphone, so this app opens the door for them to find better prices. Eighty percent of Mexican families use LPG, which is why we are about to launch a second app called AmigasLp, which shows the different prices from providers. This is designed to empower the consumer to analyze LPG prices nationwide.
Q: How has the liberalized market opened up opportunities for infrastructure development?
A: We have seen many liquid storage projects being developed throughout the year as a lot of international refineries have made an effort to establish storage facilities in the country. Mexico has limited fuel security, sufficient for only three days of consumption with the existing facilities. In contrast, that storage ranges from 40-70 days in other countries. There are significant efforts on the public policy side to establish a mandatory storage target so more companies will participate in this market. The 42 new fuel retail brands have made a huge effort to have more backup storage in the market due to the extensive underinvestment in infrastructure. We see incentives to build more infrastructure, railroads and pipelines and to spread the gains to create economies of scale that could become the basis for our future development.
Q: What bottlenecks do you identify in permits for infrastructure building in the industry?
A: We see two main constraints on this side: local regulations and social interaction. Most local authorities have a regulatory framework designed under the model we had prior to the changes in the industry. For instance, most local regulations state that there cannot be two gas stations within a certain radius but this represents a hindrance for competition and sets barriers for economic development. So far, the states of Morelos and Sinaloa have already changed these rules and pushed for more effective regulation, and we expect things to flow in that direction.
Social interaction is another important part of the equation since communities should be aware of the spillover of gains and benefits from these commercial activities. There is a long tradition of energy projects improving quality of life in the communities where they are working but this relationship was not too structured in the past, which is something that should be rectified with the new tools provided by the Energy Reform.
Q: How is CRE working to turn these hindrances into opportunities?
A: Even though we do not have a mandate to impact these types of social aspects, we try to set up close relationships with local authorities. We have visited all the states and I have held meetings with nearly 20 governors to establish communication channels, discuss what kind of projects they need to be developed and we are working to make the projects a reality.
Q: How will regulations enable the country to achieve competitive midstream and downstream markets?
A: We should do everything we can to deploy investment at the fastest pace possible. The speed so far has been good, if we take into consideration that prices were only liberalized last February and they have quickly become a reality. If we identify the barriers that exist as a result of the previous model and we work to bring those barriers down, regulations should move quickly and investments will flow in greater numbers to the benefit of the industry.
Don’t miss out on your chance to rub shoulders with the industry’s leaders at the launch of the new edition of Mexico Oil and Gas Review at Mexico Oil and Gas Summit 2019, at the Sheraton Maria Isabel hotel in Mexico City this February 20! Register here!