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News Article

Natural Gas Is Redefining Global Energy Security

By María José Goytia | Tue, 09/06/2022 - 15:42

Marked as the key fossil fuel to materialize the energy transition, natural gas took on a prominent role in the global economy. However, several geopolitical events such as the pandemic and the Russian invasion of Ukraine transformed the environment and changed the outlook on the worldwide energy transition. These abrupt changes in the natural gas market are threatening the energy security of many countries, Mexico included.

Due to the war in Ukraine, several countries imposed sanctions on Russia, which in turn lowered the natural gas supply it sells on international markets. This then led to skyrocketing prices. Gas shortages are mainly threatening the EU’s energy security, as imports through Nord Stream 1 remain well below the normal levels, forcing European countries to look for new sources of supply even despite the rising costs.

"Today, a country's political position is irrelevant when dealing with such a sensitive issue as gas shortages," said Rajan Vig, Founder, Indimex, as he explained how France, Italy and Germany are willing to find new business deals with countries outside of their usual trade partners.

Tensions in the international gas market have split opinions on the future of the energy transition. On the one hand, some reaffirm the need to double efforts to abandon the dependency on fossil fuels and bet on renewables to democratize energy. This view highlights the geopolitical power of natural gas-producing countries that, like Russia, can strongly influence global stability through unilateral political decisions.

On the other hand, others argue that the biggest lesson learned from the war in Ukraine is that the global economy cannot function without fossil fuels. This debate has governments and societies positioned at a crossroads.

"With the globalization of natural gas, what happens on the other side of the world now affects us and increases market volatility," explained Pedro Elio, VP of Business Development, BP Energy. Despite the increase in gas prices, Mexico has some advantages: "Because its domestic market has become more competitive and mature, Mexico is in a more favorable position to adapt to changes in the gas market than other countries," Elio noted.

Contemplating the relevance of natural gas, people usually visualize power production. However, natural gas goes far beyond energy production, as the fuel is key for various industrial and petrochemical processes where there is no substitute for its use. "In electricity production, we can decrease our dependency on gas, but the substitution is unviable for manufacturing and other industrial processes," explained Miriam Grunstein, Senior Partner, US Mexico Center of the James Baker Institute.

Mexico is no stranger to the negative impacts of recent geopolitical shifts. The country is extremely vulnerable to fluctuations in the gas market, as 58 percent of its primary energy sources come from natural gas whereas the global average is 24 percent. Few countries have such a high dependence on gas.

Aside from its dependency being a vulnerability, Mexico also faces a major challenge due to its missing gas storage infrastructure. "Storage is a reality in other countries that gains them greater reliability in the gas supply. However, in Mexico, storage has not materialized," said Francisco Salazar, Founding Partner, Enix and Gadex. Nevertheless, developing more storage infrastructure is key to combating Mexico's energy vulnerabilities.

Underground natural gas storage has been an option for Mexico, but its development has not taken off. "The lack of clarity in the current regulatory framework has been the main cause of highly productive gas storage projects falling apart," said Grunstein. If Mexico wants to start developing this kind of crucial infrastructure crucial, it must first modify its regulatory framework to allow the development of these projects.

Moreover, market conditions must favor private investment in storage infrastructure development. "In Mexico, there is a belief that the obligation to develop gas storage infrastructure is PEMEX's," commented Salazar, but "the government does not have the resources to make these investments. Also, it is not optimal for a state-owned company to take on risky investments. Instead, the private sector should assume those risks."

Increased tensions between the US and China are driving nearshoring within North America, giving Mexico a unique opportunity to increase its industrial activity thanks to its competitive advantages coming from its integration into the value chains of the US and Canada. "In these efforts to strengthen the North American region, natural gas will be necessary to boost national and regional competitiveness," said Alejandra Leon, Director for Latin America Upstream, IHS Markit.

To take advantage of this opportunity and reduce its vulnerabilities in the short, medium and long term, Mexico must change its energy policy and redirect it toward a strategy that protects its energy security and fosters an attractive market dynamic for the energy industry to reactivate. Currently, Mexico was called for consultations under the USMCA by the US and Canada because of the preferential conditions that Mexico's energy policy has created for its state-owned companies, PEMEX and CFE, harming the potential to compete for private players. But as long as regulatory uncertainty remains, it will be much more complicated for Mexico to adapt to the current geopolitical conditions and strengthen its areas of opportunity in energy matters.

Photo by:   MBN
María José Goytia María José Goytia Journalist and Industry Analyst