Column: Mexican gas market braces for uncertain winter spell
Editor’s Note: The Mexican Gas Price Index from NGI, a leader following reform of the Mexican natural gas market, features the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
The opinions and positions expressed by Prud’homme do not necessarily reflect the opinions of NGI’s Mexican gas price index.
Recent increases in the price of natural gas have not gone unnoticed by Mexicans. The ghost of Winter Storm Uri looms large and makes the users of the gas system nervous. They fear a new situation of shortage combined with exorbitant bills for their natural gas consumption needs. The conclusion of a smooth summer was not reassuring. But the truth is that the way gas consumers can manage their operational and business risks is limited, to a large extent, by current energy policy.
The first concern, mainly of industrial users, for next winter concerns the continuity of supply. Economic activity in the second quarter of 2021 increased by 19.6% compared to the same period of the previous year. More than a few companies are reestablishing their productive supply chains which were interrupted in 2020 and the use of fuels is therefore extraordinary. The possibility of gas flow being limited by a winter event similar to February’s would be extremely inconvenient for business operations. However, there is little they can do to better cope with such a disruption.
In late February, many government voices said remedies for future shortages must include the development of storage projects in Mexico. In a very Latin American way of only dealing with an emergency when it is no longer urgent, it has arrived far too late. The storage policy published by the government before that of President López Obrador had so far been completely ignored. Despite the rhetoric, to date there are no storage facilities available to users, whether private or public. The only mechanism in the event of a sudden drop in injections is line jamming. Park and loan services are not yet planned.
The diversification of import points is a situation which contributes to energy security. The original basins, although most of the gas comes from Texas, are also varied. However, the lack of connectivity between systems on the Mexican side and the dominance of capacity ownership by the Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) mean few supply alternatives for the common user, even if the gas received is delivered by a private trader. The disproportion in the size of the capacity allocations is so large that a decision by CFE or Pemex to limit or make the best use of their firm contractual quantities may result in a reduction or displacement of other orders.
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The interconnections of the Fermaca system in Zapotlanejo, and TC Energía in Montegrande and Pedro Escobedo with the Sistrangas do not necessarily translate into benefits for users when their operation is conditioned by the way CFE names its orders upstream. The lack of transparency of intra-state pipelines in the United States and the trading branches of Mexican state-owned enterprises do not facilitate accountability in the event a shipper decides not to compete for scarce volumes or capacities. In the event of extreme weather conditions, the operation of the pipelines will remain framed in the business relationship between a few agents, very probably not very sensitive to the relevance of the activity for the well-being of many households and businesses. Attention to this issue is complex given the binationality of jurisdictions, and the economic integration of border areas merits discussion of a North American energy security strategy. But there can be no international vision when the domestic vision is not properly cared for.
Since February 2021, regulatory work has not addressed the issues of open access and transparency in the Mexican market. This limits the ability of the system to react to ensure continuity of flows. In addition, nothing has happened to diversify the global gas supply with improved domestic production. In the current energy policy, the reversal of the downward trend in gas production is considered to be quite achievable thanks to Pemex alone. The strategy of allocating blocks to private parties for exploration and production provided for in the 2014 reform has been abandoned. A scenario of rising prices seems ripe to encourage such activity, but there is little that Mexico can do to adequately respond to such an economic signal. Profitability or the search for profit opportunities are not the criteria that prevail in the face of a political vision with a strong ideological tendency.
So, for the coming winter, Pemex production will do very little to ensure energy security. The news of extremely high natural gas prices in Europe and Asia has yet to be fully understood by Mexican government entities. There is confidence based on proximity and connectivity to Texas which suggests that Mexico should not experience extreme price volatility. Even the most sophisticated buying zones are positioned on the observation of the behavior of future contracts and forward curves for the winter season which will begin in November. The consensus is that prices will be high compared to what they have been in recent years, but not soaring to sky-high levels. Concerns have to do with the right time to cover up. Some think they are on time, others regret not having acted sooner. The truth is that financial practices aimed at mitigating gas price risk are not widespread in Mexico. This is largely due to the scarcity of financial instruments and their sophistication. Users who have a relationship with private traders seek to have them tailor a deal for them. Few large agents dare to design and carry out their risk management alone. Most small industrial consumers see their gas bill as something over which they have no control. They are linked to a volume and to a reference price as was their experience.
Paradoxically, the smallest consumers, those corresponding to households, could benefit from certain elements of mitigation, or rather of risk transfer. The government has already capped liquefied petroleum gas prices with the creation of a new public fuel distribution company. If gas prices rise significantly in winter, the Mexican government will be tempted to intervene in the market and impose an expensive policy that can win votes in areas where it is less accepted, such as the cities of Monterrey or Juárez. Considering the size of the resources that López Obrador has allocated in next year’s budget to the energy sector, this possibility can be implemented and, therefore, is quite plausible.
It is clear that after February 2021, Mexico has made little progress in reducing energy insecurity. If in December or January we again see an extreme situation that takes prices above $ 10 / MMBtu and limits the volumes available in the Agua Dulce area, we should expect to see a repeat of what happened in terms of the authorities’ response. The common user has no better handling to mitigate the effects of an extreme winter situation in Texas or northern Mexico. He will take gas at the prices and quantities that are within his reach. However, this is good news for producers and traders in Texas. They have a captive client in Mexico. No matter how much the market tightens due to the global gas crunch, the amounts pledged to be delivered south of the Rio Grande will not be reduced and the value of those transactions will reflect the opportunity cost of doing business.
Prud’homme played a central role in the development of Cenagas, the national gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He started his career at the national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), becoming Chief Economist, and from July 2015 to February was ISO Director of Cenagas, where he oversaw the technical, commercial and economic management of the nascent integrated natural gas system (Sitrangas). Based in Mexico City, he heads the energy consulting firm in Mexico Gadex.