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Analysis

Natural Gas a Competitive Alternative in Energy Mix

Wed, 02/22/2017 - 12:17

In response to the country’s increasing electricity demand, the government unveiled a five-year  plan in late 2015 to expand the country’s natural gas pipeline network that key industry players welcomed for the opportunities presented. These include transportation, commercialization and storage of the molecule as well as opportunities to develop the infrastructure required to comply with the plan.

In 2016, the market saw concrete action on the plan as money was invested, commercialization permits were awarded and CENAGAS made its presence known. Around US$1.6 billion is being invested in Mexico to double the size of the pipeline network, creating new prospects all along the project development chain. Beyond the pipeline expansion, existing infrastructure needs to be modernized to ensure homogeneity between the previous and developing pipelines.

“The legacy infrastructure will have to be upgraded, revamped and improved,” says Vernon Murray, Vice President of Emerson, a leading engineering and technology solutions provider. “Thanks to the Energy Reform, CFE and PEMEX can form private-public partnerships that will benefit both parties because their existing infrastructure has the competitive advantage of location.”

CRE has been instrumental in the evolution of the natural gas sector. The regulatory body issued the Gas Release Program at the beginning of 2016, establishing a natural gas commercialization market. Additionally, along with the newly created CENAGAS, the commission presented a strategy for the natural gas market that included the start of a permanent open-access system for natural gas transport. Alongside the natural gas market, CRE has now awarded over 20 permits to commercialize the fuel in Mexico, incentivizing competition and ensuring the correct operation of the market.

CENAGAS RAMPS UP

CENAGAS was created in 2014 to oversee the country’s natural gas pipeline system but 2016 saw the center ramp up to full speed. In January, PEMEX’s natural gas storage and transportation infrastructure was transferred to CENAGAS. It also took on new responsibilities and capacities as it adapted to its role as SISTRANGAS’ manager, technical manager and transportation company. In October, CENAGAS launched the first open-season for the national integrated system capacity in which private companies could request pipeline capacity for their operations at market-regulated prices.

The landscape will change further in early 2017 as the sector embarks on a liberalization process. “Our goal is to perform a gradual liberalization for the natural gas market,” says Jesús Serrano, Commissioner of CRE.

“We expect to begin in the northern part of the country since we believe that is the region with the most competitive potential. Afterward we will expand to the rest of the country. Initially, there will be price regulation but as we go along and infrastructure develops, we will experience price liberalization. The driver of the energy reform is market openness, competition and empowering users.”

A COMPETITIVE ALTERNATIVE

The success of natural gas will be largely dependent on Mexico’s northern neighbor. Mexico has benefited greatly from US natural gas reserves. It is connected to the world’s most cost-competitive molecule production in Waha, Texas. But the current political context in the US, where energy policies under President Donald Trump are yet to be defined, has raised concerns and allowed uncertainty to penetrate the market. On the one hand, Trump seems to be favoring the development of hydrocarbons, including natural gas. On the other, his harsh perspective on bilateral trade and joint operations between companies from both countries have raised some questions regarding the feasibility of Mexico’s collaboration with the US.

Even though prices are expected to fluctuate, the general industry expectation is for this commodity to remain a competitive alternative for the Mexican energy mix. Some companies already have mechanisms in place to protect themselves from future price volatility. “We control uncertainty through hedges, futures and other control mechanisms addressed to settle costs and define a sales price,” says Kevin Piccolo, Energy and Cogeneration Director of IGSA, a leading company in the construction of power generation plants. The introduction of the Internet of Things (IoT) to this sector will also help optimize production, enhance safety and reduce operational costs, thus making natural gas an exciting investment opportunity for companies in the mid to long term.