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.
As Mexico prepares for its pivotal elections in June, energy policy has acquired a special place in public discourse. In the second debate held late last month, the three presidential candidates mentioned topics like energy transition, infrastructure, and the future of state oil firm Petróleos Mexicanos (Pemex) without clearly depicting the policy they intend to implement should they win. Despite an intense reliance on natural gas, no candidate mentioned the fuel.
President López Obrador’s government has focused investment on building a refinery, Dos Bocas. The bidding processes sponsored by the energy operator to anchor long-term renewable projects simply stopped. Some bulky generation plants owned by Comisión Federal de Electricidad or CFE are still burning heavy fuel oil. As time passes, Mexico's dependency on the United States for natural gas, liquid petroleum gas, gasoline, diesel, and jet fuel increases without any foreseeable sign of a change in the tendency. When López Obrador, or AMLO as he is often called, leaves office on October 1, Mexico will be less energetically secure, less efficient, and less sustainable than it used to be.
AMLO’s energy authorities were fortunate to receive a robust gas network. Starting under former President Peña Nieto, CFE tendered long-term transportation service agreements that anchored strategic projects. The offshore natural gas pipeline from Texas to Tuxpan and the pipeline sequence that forms the Wahalajara system added significant volumes to the importing capacity from Texas. More suppliers and various commercial solutions serving multiple users started to operate in the former Pemex system, now operated by Cenagas. The open access principle pushed Pemex and CFE to compete as incumbents but not as privileged firms in their industries. The curtailment risks for natural gas and power during the peak season in summer are under control thanks to this infrastructure.
However, energy markets are ever-evolving, and there is no room for a political impasse in which ideology shakes the certainties that institutions and the rule of law must provide. Today, extreme climate events, the unsteady global economy, and geopolitical disruptions impact importing countries like Mexico. Winter storm Uri, the Russian invasion of Ukraine, and logistics disruptions have affected Mexican energy consumers with unreliable supply, exorbitant prices, and have caused anxiety because of insufficient hedge mechanisms available to users.
Stakeholders take natural gas availability for granted. In the past, pessimistic expectations about Pemex's performance led to the development of LNG regasification terminals, new import pipelines, and the aspiration to diversify the energy matrix. But little has been done lately to improve energy security. Even in the case of the Dos Bocas refinery, there is no public plan to increase or guarantee enough gas and oil to feed this new facility.
Mexican authorities insist on considering the country as an oil and gas-rich territory. In their minds, once Pemex improves its financial situation, which is hardly guaranteed, this company will tap enough hydrocarbons to supply all national demand, and CFE will have enough fuel to power its plans. This mindset explains CFE's involvement, direct or implicit, in natural gas re-exporting projects. There is a notion of an oversupplied natural gas market.
However, while that may be true north of the border, oil and gas reserves have not improved recently in Mexico. And this will not likely change in the short nor long term. Exploration is expensive, and capital is becoming scarcer. Pemex has no money to go looking for oil and gas in the most promising areas in the Gulf of Mexico. Private companies have poor incentives to partner with the national oil company. Bidding rounds have stopped, and geological and regulatory risks are high.
Meanwhile, natural gas imports are hitting new highs. Daily, more than 50% of electricity is generated by gas coming from Texas. Nearly every year, a significant incident in Pemex offshore rigs severs a good chunk of oil production and its associated gas. A wise, responsible, and accountable policy would acknowledge that Mexico is more like Japan than Guyana.
The solution is to embark on long-term supply commitments, diversify the energy matric, and increase the number of import options. Bilateral agreements and diplomacy must support the strategy. In the last year, Japan and the United States reinforced their cooperation agreements in technology and assured contractual LNG deliveries. In these deals, partnership and cooperation are essential.
After the beginning of the war in Ukraine and the gas crisis in Europe in the 2022 winter, geopolitics is the most significant risk for energy security. A diligent and prudent diplomacy is desirable. Mexico is in a symbiotic relationship with its northern neighbor. Foreign firms have invested in essential combined cycle generation facilities and two of the existing LNG import terminals.
However, AMLO's rhetoric never has angered foreign firms. They see protectionist policies that favor Pemex and CFE. Mexico needs to be careful. For the past nine years, Texas has been the most reliable source of natural gas and fuels. So, voters, citizens, and consumers need to be aware of this dependency and understand it. They should also know that AMLO's nationalistic rhetoric is damaging and unsustainable. They must also recognize that it is still possible to improve the outlook with responsible and pragmatic measures.
The next government must consider the energy agenda as part of a broader international and strategic approach. The future president should strive for a renewed commitment to the United States-Mexico-Canada-Agreement (USMCA) provisions and an open dialogue to achieve common ground. North American countries must strive for a kind of Natural Gas Directive like the one in the European Union in which open access, international interconnections, methane capture, emissions reduction, and efficient tariffs are enforced or encouraged.
Given Mexico's substantial reliance on natural gas from Texas, the next government must overhaul and modernize transportation infrastructure. This plan must also develop storage facilities to manage supply fluctuations that affect international connections and enhance pipeline network flexibility, even to revert flows to help Texas in case of a local contingency. Both the Mexican and U.S. governments should prioritize investments in technology that monitors and maintains pipeline integrity, reducing leakage and operational risks as part of the global commitments to reduce greenhouse gas emissions.
An open, competitive market is vital for a healthy energy sector. Reverting regulatory and market reforms to restore Pemex monopolistic practices makes no sense when the company cannot supply fuel reliably. By enforcing existing laws, the next government could ensure the energy sector's long-term viability and resilience by diversifying and aligning interests between Texas suppliers and local consumers. The best policy to achieve energy affordability is to guarantee gas from the cheapest global producers and do it in the most transparent way.
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.
