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.
Almost 10 years have passed since the formation of Cenagas, the operator of Mexico's Sistrangas natural gas pipeline network. The first open season in the network occurred seven years ago. Today, large- and medium-sized users of natural gas often lament their difficulties in accessing capacity and greater natural gas volumes. This situation is intriguing, given that a second open season has just concluded at Sistrangas amid record high imports from the United States.
Natural gas imports hit 6.9 Bcf/d last summer. In August 2014, the month Cenagas was created, Mexico imported 2.1 Bcf/d of pipeline gas from the United States. In that same year, national consumption was around 6.5 Bcf/d. Two-thirds of domestic demand was supplied by Petróleos Mexicanos, or Pemex, production. In August 2023, only 20% of consumption was supplied with gas produced in Mexico. This dramatic change in proportions is more due to the decline in national production than by the growth in consumption.
The gas pipeline development strategy of the last decade was a bet by previous governments to take advantage of the growing supply of affordable U.S. natural gas due to the shale revolution in North America. This abundance would help improve the country's energy security and productive efficiency. The first five-year pipeline expansion plan would have staggered growth of 0.5 Bcf/d each year. At the end of the five-year period, there would be 2.5 Bcf/d additional consumption. In 2020, gas demand in Mexico would have reached 9 Bcf/d. That year, winter consumption was 7.7 Bcf/d and the summer seasonal peak reached 8.4 Bcf/d. Last year, the monthly peak reached just 8.6 Bcf/d.
The original optimism did not take into account an economic slowdown in the first year of López Obrador's government, or a pandemic. But these are not the only reasons why demand is below projections.
This week, Texas had the lowest natural gas prices in years, although the price has been favorable to users for several years. This situation, in theory, should encourage an increase in consumption in Mexico, especially considering the advantageous position of the peso-dollar exchange rate.
But the explanation of reality lies in the details. One of the central causes of this disparity between demand and import capacity lies in the lack of interconnectivity between gas pipeline systems and the inherent difficulties in obtaining a connection.
The gas pipeline routes do not pass in front of each point of potential consumption, which requires the construction of connecting pipelines. But a clumsy regulatory decision, which occurred before December 2018, stated that any pipeline longer than 150 meters required an open access transportation permit from the Comision Reguladora de Energia (CRE). This unofficial barrier directly limits the ability of new consumers to access the natural gas market, despite the apparent availability of the resource.
Another crucial factor is the role of the state's production companies in the intermediation of international pipelines. By owning most of the available capacity, a direct effect is created on the prices observed at the border, as reported by the U.S. Department of Energy (DOE).
There is the general assumption that prices at the point of export are correlated with the Henry Hub index. But such correlation has changed over time. It is possible to distinguish between three periods.
For example, at the interconnection of the Sistrangas with Tennessee Gas Pipeline Co. LLC, before there were marketers on the Mexican side and with first-hand sales price regulation, the premium to Henry Hub averaged 10 cents/MMBtu. With the opening of the pipeline system to marketers, arbitration opportunities appeared for agents with pre-existing capacity. The difference to Henry Hub grew to around 28 cents. Since the beginning of 2019, these differentials have been around 38 cents, that is, four times more than when supply in the Mexican market was fully regulated.
This pattern can be observed at other interconnections. The differentials in admission through NetMex are interesting. With the migration to the capacity reservation regime, the differentials went from 26 to 58 cents. But after the Sur de Texas-Tuxpan pipeline went into operation, the differential decreased to 14 cents.
In daily transactions, the margins are very different from these values and tend to be volatile, but in long-observed periods, it is possible to identify certain trends. These values may be a reflection of different regulatory incentives and an energy policy that has allowed redundant intermediation in the routes that bring gas to Mexico.
Control by state companies over a scarce resource – such as transportation capacity – is favorable to the government's financial interests, but it can directly influence market dynamics. This price power expressed in the differentials on the Henry Hub index is absorbed by users and, therefore, distorts their consumption decisions.
Despite these obstacles, there is a palpable expectation of growth in industrial activity in Mexico, which would undoubtedly increase energy demand. In the development of cogeneration power projects, while natural gas is recognized as an ideal solution, investment decisions place dependence on imported gas as a relevant risk.
Groups of companies that resort to cogeneration in Mexico are increasingly paying more attention to biofuels and other types of solutions other than gas due to the perception of uncertainty and the few commercial options that provide them with agile and reliable solutions. Ultimately, they seek predictability in their cost projections and the regulatory uncertainty present in the last five years has prevented them from having access to marketers who serve that niche.
Pemex has never been known for guaranteeing long-term supply, and CFEnergía sees cogeneration as unfair competition to its parent company. Thus, historically low prices are not enough to increase the growth rate of non-electricity demand.
Structural economic barriers are more subtle than infrastructure constraints. The legal framework stipulated that the capacity of the import pipelines had to be managed by Cenagas so that access to these routes was free of commercial considerations. Cenagas’ incentive is not to earn a margin on each molecule exchanged, unlike the objectives of CFEnergía and MGI Supply, the marketing arm of Pemex in Texas.
Improved interconnectivity of gas pipelines, more transparent and equitable management of import capacity, and an energy policy that fosters a North American regional vision of collaboration are essential steps to unlock the country's energy potential.
The advantages of having an accessible, flexible and competitive natural gas market on the other side of the border constitute an unrepeatable opportunity, not only for economic growth, but also to redefine intermediation activities so that they are more inclusive, efficient and that profitability lies in selling more volumes to more customers.
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.
