Diversification: Crucial Factor for Energy Security

As Mexico’s power matrix and industrial activity become increasingly dependent on natural gas, Mexico should diversify and consolidate its gas supply chain to meet the country’s ever-shifting demand, said Eduardo Prud’homme, Co-Partner, GADEX.

In the context of a conflict with one of the world’s biggest natural gas producers, Russia, the EU is looking toward the US, which is rapidly becoming the complementary source of natural gas.

The US produces around 88Bcf/d of natural gas and has a daily domestic demand of 80Bcf. The outlook on the quantity of liquefied natural gas (LNG), suited for long-distance transport outside of pipelines, that the US can export today is 30Bcf/d. Mexico remains the most attractive market for the US’s production surplus, said Prud’homme.

Mexico is not a big gas-producing country compared to other countries. This poses a challenge, because it is simultaneously one of the fossil fuel’s largest consumers. Mexico has been producing less and less natural gas throughout the past decade, and the drop has been more dramatic in the past five years. Nonetheless, production figures from the Ixachi and Quesqui fields are encouraging, as the projects are maintaining a standard of production but do not show a change in this trend of decline. This means that the efforts to increase production have not been sufficient. The reason for this is that most of the gas produced in Mexico is a byproduct of crude oil production that in the past years has also been deteriorating, mentioned Proud’homme. In that sense, Mexico has a major opportunity to enhance the exploitation of the existing reserves of natural gas. 

Furthermore, to cover the 8BCf/d domestic consumption, Mexico will have to turn toward greater imports. “Mexico produces 4Bcf/d, but only a small fraction of this reaches the market because PEMEX is always involved as the consumer of its own production,” added Prud’homme.

Prud’homme mentioned that most of Mexico’s natural gas is indeed produced by PEMEX for its consumption, which means that the market is subjected to the centralized decisions of the dominant NOC in the national market, this despite the fact that the regulatory framework of the 2014 Energy Reform was designed with a more open process in mind, featuring more players and options to source natural gas from. Prud’homme pointed out the need for a higher number of players active in the mid-stream segment so that more of what is produced reaches the market. “Energy security requires diversification in the use of natural gas pipelines, despite PEMEX and CFE's tendencies toward monopolization,” he added. Nevertheless, for the time being, Mexico will retain its current market structure, focused on imports.

Prud’homme explained that the biggest problem with the natural gas network in Mexico is that a logistical and structural change in the natural gas transportation system, called SISTRANGAS, is needed. Today, the main player in operative terms is state pipeline operator CENAGAS, which leads its private competition by far. Nevertheless, the largest private player, TC Energy, can look toward closing the gap with new infrastructure projects and is growing its market share. Other players like Sempra, Fermaca and Engie also hold a fair amount of the market share.

In the legal framework, all pipeline operators have open access to the national pipeline network, which means that offtakers can explore different options and the government can foster a more transparent security energy strategy. “To diversify the operability of the pipelines is imperative, but with the current policy we are observing a monopolization from national companies CFE and PEMEX,” expressed Eduardo Prud’homme. CFE still has the majority of these pipelines under its control.

“We have a very complex supply chain with logistical areas of opportunity. It is imperative to achieve more transparency and open access in the sector. Planning of infrastructure projects in Mexico must consider operative as well as commercial issues because distribution networks are key to gasifying the country,” concluded Prud’homme.