COFECE Warns of Risk Regarding Competitiveness in Gas Market

In its role to protect free competition in Mexico, the Commission for Economic Competition (COFECE) warns about the adverse effects that the strategy of the Ministry of Energy (SENER) will cause in the natural gas market. The government’s plans threaten to increase prices for end users, reduce the natural gas supply and jeopardize Mexico's energy security, according to COFECE.

On June 13, 2022, SENER sent an official letter to the pipeline operator CENAGAS and energy regulator CRE, urging the latter to modify the terms and conditions for the services provision of the National Natural Gas Transportation and Storage System (SISTRANGAS). SENER sought to ensure that users of the natural gas transportation service, among which are industries and power producers, purchase the fossil fuel from state-owned PEMEX or CFE. Through the newly proposed system, users must prove their supply comes from PEMEX or CFE to guarantee their access to the distribution system.

CENAGAS stated that those with a service contract must deliver documentary evidence that they comply with the requirements established in the strategy no later than Aug. 13, 2022.

The measure intended to strengthen the state-owned companies by generating a greater use of their underutilized and over-contracted natural gas transportation capacity. However, the measure would go against the free competition in the sector, since it would force users of the natural gas transportation service to purchase the fuel from CFE subsidiaries in charge of the commercialization and supply of gas: CFEnergía and CFE Internacional.

Three weeks later, COFECE issued its opinion on the federal government's new strategy, warning that it will discourage the arrival of new competitors in the market and will increase the fuel's cost. The watchdog warns that "following the strategy would seriously and irreparably affect the competition conditions in the natural gas and electricity markets."

Among its arguments, COFECE states the new strategy will prevent users, such as marketers and industrial users who decide not to sign with state-owned companies, from having equal access to SISTRANGAS’ capacity, artificially benefiting PEMEX and CFE. The capacity of SISTRANGAS is limited, and access to it is indispensable to compete in the natural gas market. This system includes the most important infrastructure for transportation and importation of natural gas and the lion’s share of the country’s gas infrastructure

Experts interviewed by El Economista assure that CFE and PEMEX lack the capacity to satisfy the national demand of almost 9MMcf/d. Therefore, the state-owned companies would have to purchase gas in the US through subsidiaries, only to sell the fuel back in Mexico.

Moreover, the Mexican Institute for Competitiveness (IMCO) highlights that "CFE's position as the only buyer of natural gas abroad and the only marketer in Mexico would harm the country's competitiveness and increase the company's operational risks, as it would become responsible for the full national natural gas supply." The concentration of market power that CFE and PEMEX would assume may threaten the uninterrupted availability of energy at affordable prices, said IMCO.

The centralization will likely discourage the entry of potential natural gas marketers and will nullify their ability to compete with current players. The strategy therefore prevents end users from contracting with the most efficient supplier and installs the state companies as a mandatory middle man.

Furthermore, the strategy will cause distortions for CFE's competitors in the electricity production market. If implemented, all users that use natural gas to produce electricity and require transportation services would be obliged to acquire this input through its competitor, CFE. Therefore, CFE could have incentives to increase the cost of natural gas for its competitors. These consequences could lead to an increase in natural gas prices, which would be passed on to consumers.