Guillermo García Alcocer
Chairman
CRE
/
Insight

Cutting the Market's Chains

Wed, 02/22/2017 - 12:24

One of the major components of the Energy Reform is the opening of Mexico’s natural gas market, a milestone that will be partially reached in the first quarter of 2017 as prices in the north are finally liberalized. Promoting a competitive market in the segment will attract the combined-cycle and cogeneration developments that are crucial for the country’s power supply, says Guillermo García, Chairman of CRE.

“Once the market is robust enough, we will eradicate the first-hand sales condition on PEMEX, by which the regulator sets a maximum price for the state-owned company’s services,” says García. “We used a point of arbitrage to define natural gas prices, located at the point where international gas meets with PEMEX’s supply from the southeastern region. The price will be liberalized in 2017 in the region located north of the arbitrage point while it will continue being regulated in the south because PEMEX has no direct competition there.”

First-hand sales were defined as the first sale of natural gas produced in Mexico and sold by PEMEX to a third party for delivery in the national territory, according to PEMEX’s website. Two reference points were used: Reynosa in the north and Ciudad Pemex in the south. The tariff imposed on first-hand sales impacted directly on the natural gas price to the public because it represented the first component of the formula used to calculate the end-user price. Now the maximum price of the molecule will no longer be set by CRE but will respond to open market dynamics with different players being able to introduce natural gas to the Mexican market, at least in northern states. To eliminate first-hand sales in the north, CRE has been working on five pillars to define its natural gas strategy: improving the national transportation infrastructure, issuing open access and capacity reserve regulations, unbundling PEMEX’s services, implementing asymmetric regulation to force PEMEX to give up 70 percent of its contracts to other gas marketers and maintaining transparency.

“The asymmetric regulation takes into account PEMEX’s need to maintain its own supply. The company uses a significant amount of gas in its different subsidiaries, which is not included in the percentage of contracts it has to give up. We want to promote competitiveness in the natural gas market involving private companies, so it will only affect PEMEX’s contracts with third parties,” says García. “The 70 percent threshold will be calculated over PEMEX’s historical records and will only be applied in the market’s ‘year zero.’ PEMEX might recover the transferred contracts afterward but it will depend on its capacity to compete with the new market players.” The asymmetric regulation came into force in 2016 and is expected to be completed over a four-year period.

Having a free market is expected to lower natural gas prices in the medium to long term by increasing competition and the possibility to import gas from the US, the world’s largest producer of the molecule, without being tied to a fixed price once it enters the national territory. But free markets also come with some risks and after 78 years of having a regulated marketplace some Mexican companies might have trouble adapting to the new dynamics. “Mexican companies are not used to the price volatility that comes with liberalized markets. They were used to having the same price per unit of natural gas and electricity in all the regions they operated for long periods. But this was not a reflection of the market’s dynamism,” García says. “We need to make a great effort in our communication strategy to teach private consumers the reality of the new market. Price fluctuations will be present as in any other market but it will not be related to the government."