Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
On Sunday (June 2) election results confirmed what polls had long suggested: a decisive victory for Claudia Sheinbaum. The overwhelming support for Sheinbaum has secured her presidency and significantly weakened the opposition in congress to the point where it can no longer block constitutional reforms. On Sept. 1, the ruling political party would hold a substantial majority in both chambers of congress. Sheinbaum's Morena party and allies are expected to control most governorships. Over the next three years, there will be little to no counterbalance to her administration.
Andrés Manuel López Obrador (AMLO) would now have leverage in his outgoing months to approve the sweeping reforms he has long championed. These reforms aim to alter the energy sector and perhaps even reverse the 2014 energy reform.
In theory, this political scenario places no limits on the potential redesign of the energy industry. AMLO's declared intentions would be to return the Comision Federal de Electricidad (CFE) to the status of a strategic public company. AMLO has also sought to dissolve the Comisión Reguladora de Energía (CRE), the Comisión Nacional de Hidrocarburos (CNH), and competition watchdog Cofece. He also would seek to change the way in which Supreme Court judges are appointed, tipping the balance in his favor.
All of this triggered a rally against the peso and the worst fall in the Mexican stock exchange since the 2008 crisis.
Considering that natural gas demand would not vanish overnight, and that the physical infrastructure would remain in place, stakeholders in the natural gas market can adequately assess the risks of the new political setup in Mexico.
The new energy sector configuration could rely on the distance between AMLO and Sheinbaum's core values and visions. The transitional period would be critical. The outcome would reveal whether Sheinbaum chooses to adhere to an ideological course or adopts a more flexible and pragmatic approach to address the nation's challenges.
In a worse case scenario, the strengthening of state enterprises CFE and Petroleos Mexicanos, or Pemex, would limit the operational scope of private enterprises. Without CRE granting permits, entry to the industry is expected to be limited, and subject to policy criteria compatible with control pricing mechanisms.
The commitment to maintaining low prices for domestic gas and electricity would also help Pemex and CFE as intermediaries in the supply chain. Implementing price controls with multiple participants is a bureaucratic nightmare. Private companies delivering gas or energy to final users would finance the difference between the opportunity cost and the price cap. Recovering this funding could imply complicated surveillance, collateral costs under the risk of not being fully compensated and working capital management.
Since the government would enhance CFE and Pemex's financial health and operational capabilities to serve national interests effectively but charge less to the users, someone must face the burden of the costs. In most cases, private companies would not be delivering gas to final users, but are providing services to national companies, and they need to know that they are dealing with stingy clients.
Marketers would need to stay agile in a peculiar way, adapting to policy changes instead of dealing with market volatility. Their commercial solutions to maintain their market positions would require being on good terms with authorities and Pemex and CFE managers.
The silver lining for natural gas marketers is that the policy of regulating the maximum prices of liquid petroleum gas, or LPG, is expected to continue. The impact on profitability for private LPG marketers can encourage the switching to natural gas since its relative price tends to be most favorable at protecting consumer interests.
Natural gas producers already operating in the country may face tighter regulations. New block allocations seem unlikely. Pemex is expected to explicitly prioritize choosing the most promising basins. Given the limited investment resources available today, Pemex would likely intend to finance new developments with associations with private parties. The operation agreements would be the most convenient to the national company, in a clear trade-off with higher returns for the private investors.
Price controls at the end of the supply chain could diminish the attractiveness of monetizing gas reserves. Lowering consumer prices could squeeze margins for private players, unless they find a way to export. However, production levels are insufficient to meet national demand and create surpluses. Producers aligned with the government's interests may still find opportunities for growth.
The use of hydraulic fracturing (fracking) for natural gas extraction is expected to be banned. This technical constraint would significantly impact the development of natural gas reserves. Without a technical regulator like CNH, there would be few incentives for innovation in conventional fields. So, growth in production and improving Mexico's self-sufficiency seem unfeasible.
Pipeline developers might see opportunities in projects aimed at enhancing connectivity. The link between Dos Bocas and Cuxtal is missing, and the CFE has already announced its intention to connect the pipelines serving Sonora to the consumption points in Baja California. The existing logistic limitation and the promise of improving reliability will be decisive factors in keeping the government interested in sponsoring pipelines with CFE as an off-taker. It is very likely that CFE would ask to have the assets transferred to it once the service contract ends. On the other hand, there may be increased scrutiny and policy requirements for new projects, potentially slowing down development timelines. Given that the Supreme Court's independence has been compromised, the transportation service agreements would highlight the necessity of including international arbitration clauses.
The focus on energy sovereignty and stabilizing domestic supply could lead to policies that favor domestic LNG production to meet consumption in regions without coverage. Virtual pipelines can be a good idea for industrial and commercial projects because, typically, price controls aim to help residential users. This form of supply might be an excellent opportunity to enhance internal consumption.
Liquefied natural gas projects for re-exporting gas from Texas do not appear to be under any threat of being banned. However, developers would need to engage closely with the government in both the Energy and Foreign Affairs ministries to ensure alignment with national priorities. They would not be considered a simple regulated activity, but a strategic project that deserves special attention in geopolitical terms.
Losing CRE would be dramatic. The CRE has been operating for three decades with certain degrees of technical independence and stability in rules. Without it, a department inside the Energy Ministry would be responsible for granting permits and setting rates. A new administration would bring new procedures, criteria, and priorities every six years. The regulatory framework will tilt towards more stringent oversight to ensure alignment with national energy security and specific policy targets in the function of the president's will.
But in October, all these circumstances are going to be subject to Claudia Sheinbaum's will. Not AMLO's.
It is still reasonable to think that she would adopt a more pragmatic and open approach to re-engineer the energy policy. She can continue the policies of reinforcing state control over the energy sector via minor changes in the existing legal framework. She also may have realized that there are already some articles that address her concerns about fairness and household protection.
During her campaign, she repeated that her priority was to push for a rapid transition to renewable energy sources. If she puts aside for a while the ideology inherited from AMLO, she is trained to understand that her intention to clean the energy matrix requires a solid natural gas market. This condition can be achieved even when state enterprises play a dominant role, when regulatory scrutiny is high for stakeholders, and when social objectives are high.
In the following weeks, Sheinbaum's own particular vision would become more evident. She will show the world the way she makes decisions, as a pragmatic head of state with a scientific education, or as an activist leader loyal to the dogmas of her political movement.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
