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.
The recent publication of Mexico's "Prospectivas" report by the energy ministry Sener is a significant event for stakeholders in the natural gas industry, and comes in the final months of President Andrés Manuel López Obrador's (AMLO) administration. This timely update introduces expectations that contrast significantly with earlier versions, reflecting the current administration's unique energy policies and economic priorities.
The "Natural Gas Prospectiva" gauges expected economic growth and natural gas and electricity consumption through to 2037. For industry participants interested in developing new infrastructure or delivering energy, understanding these projections is relevant for expanding their operations in Mexico or finetuning their investment strategies.
The forecasting methodologies employed in the latest outlook for 2023-2037 offers a glimpse into the complex interplay of economic, technological, and policy-driven factors shaping Mexico's natural gas future. These methodologies were crafted by the Instituto Mexicano del Petróleos (IMP) using data sources such as Petróleos Mexicanos (Pemex), the Comisión Nacional de Hidrocarburos (CNH), and the Comisión Federal de Electricidad (CFE), among others. They integrate macroeconomic variables, sector-specific trends, and infrastructure developments into their models to provide a detailed projection of demand and supply scenarios.
The demand projections rely on various macroeconomic variables, including national, state, and industrial Gross Domestic Product (GDP) growth, international price benchmarks, and sectoral demand trends. Importantly, these projections also assume an increased availability of natural gas from the recent transportation expansion sponsored by CFE. This methodological approach suggests a firm reliance on infrastructural enhancements to predict incremental demand. This precondition may be optimistic given private shippers' difficulties getting firm capacity and local challenges in developing pipeline interconnections.
On the supply side, the base scenario for natural gas production involves Pemex and private sector initiatives. This forecast responds to strategic priorities such as focusing on onshore and shallow water activities, deferring deepwater exploration, and conditioning the development of unconventional resources on the availability of environmentally friendly technologies. Hydraulic fracturing does not seem like a politically feasible option. Additionally, the plan emphasizes satisfying the needs of the Mexican refining system and petrochemical complexes while aiming for an optimized and rational utilization of petroleum resources. Mexico's oil production will be scarcer each year without a visible radical change.
At first glance, the results of these exercises are puzzling. In 2037, the demand for natural gas would be 8.3 Bcf/d, which implies a slight decrease from the current situation.
Electricity generation through combined cycle and turbo gas technologies will see growing demand for gas. In the power sector, volumes will grow to 5.2 Bcf/d, and, therefore, power generation’s share of total demand will increase from 58.9% today to 62.4% of the total market for natural gas in 2037.
However, the demand projection considers certain detrimental and odd factors. One is AMLO's intention to use other sources. He wants to improve hydroelectric plant capacity factors despite persistent droughts in central Mexico and volatile rains in the southern regions. Mexico has minimal coal production, but the government is considering increasing its use by 14% during the prospective period. More conspicuous is the reluctance to ban the burning of heavy fuel oil in several plants. In 2037, CFE will burn a volume equivalent to 360 MMcf/d of natural gas in fuel oil. These points reveal a statist vision in which it is preferable to maintain obsolete plants rather than open the way to private investment.
The industrial sector will be the second largest potential consumer of natural gas in Mexico through 2037. Fuel demand in the industrial sector is estimated to grow at an average of 1.4%/year in thermal units. However, natural gas is not going to meet this increasing demand. All fuels except fuel oil will prevail and increase their use in several transformation activities. Here again, the projected consumption of specific energy sources shows the priorities of the current energy policy, which will continue if Claudia Sheinbaum becomes president.
AMLO's government proposes that petroleum coke will be industrial users' second most consumed energy. Sener intends to open a gateway to dispose of waste products from Pemex refineries.
Sener is basically saying it prefers refined product growth to promoting natural gas use. According to the official projections, LPG and Diesel will not only persist as industrial fuels, but their consumption will also increase over time. This pattern also appears in the residential, services, and transportation sectors. Natural gas will gradually increase consumption volumes as availability increases in each geographic distribution zone. But this dynamic will be tamed to avoid a much larger dependence on Texas gas.
Most analysis suggests much higher natural gas demand going forward. A more ambitious economic strategy, with nearshoring powering industrial policy, could see demand hit 10 Bcf/d easily.
The base scenario for natural gas production considered in the "Prospectiva" influences the demand forecast. The oil sector has an essential weight in gas consumption. Pemex's fuel requirement in its facilities and the use of gas volumes for reinjection into oil fields to increase pressure and keep production flowing will decrease as reserves are depleted.
There are many reasons to assume some divergence will occur. For example, the baseline scenario considers the totality of resources for exploration and subsequent development in exploratory areas, using an exchange rate of 20.6902 pesos/dollar and a crude oil price of $62.74/bbl. The portfolio of projects considered for the 15-year term is sensitive to these variables, and the investment decisions will rely upon a labyrinthine process involving the availability of public resources. Today, the pundits’ consensus is that Mexico's government budget will be in a dire condition in the following years because of population aging, the debt burden at the state firms, and political difficulties in stopping cash transfers to the unemployed and vulnerable social classes. There will be no money to explore and drill.
Promising prospects lie in unconventional exploration, but technological capabilities will be limited if the sector remains closed to private operators. The conditional approach to exploiting unconventional gas resources based on future technological advancements to mitigate environmental impacts reflects a prudent recognition of sustainability concerns. However, given the uncertainties in technological innovation, it also introduces uncertainty in supply forecasts.
The methodological approach adopted in the "Prospectivas" reflects a detailed and multifaceted attempt to forecast the future of natural gas in Mexico. However, the assumptions used, while strategic, embed significant uncertainties that stakeholders must navigate. Price analysis is relatively shallow and has no estimations of demand elasticities.
However, there are two significant biases in this document. There is an acute contrast between the official assumptions and global energy trends, with an accelerating shift towards renewable energy sources and a decrease in fossil fuel reliance. AMLO's approach and continued focus on hydrocarbon development, with Pemex as the leading agent, implies a significant risk of misestimation. The energy mix will probably deviate from the optimal diversification, and the likelihood of scarcity situations will be high.
The second bias is that the outlook implicitly denies Mexico's connection to the global energy landscape and its lack of market power to influence any outcome. Mexico's infrastructure and gas supply reliability will be affected by LNG markets. So, prices, and volumes, will follow market dynamics, and they are beyond the control of any econometric model.
The Prospectiva can be an excellent analytical assessment, but instead of pretending to be a roadmap, it could urge stakeholders to adopt a collaborative approach. Economic viability and environmental responsibility require transparency, assertive diagnostics, and reliable data. Sener should see its models not as a formal document to fulfill a bureaucratic obligation but to improve the quality of information provision. The "Prospectiva de Gas Natural" must be an instrument to achieve a superior goal: improve security, sustainability, and efficiency for the energy supplied to all Mexican consumers.
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.
