Regulatory Framework Required for Secondary Natural Gas Market

While Mexico has made significant strides in developing its natural gas market in recent years, there is still room for growth in the development of a secondary market. As consumption ramps up and the re-exporting of gas gains momentum, a more robust regulatory framework is needed. According to Norberto Catalán, Trading and Natural Gas Origination Director, Énestas, the development of a secondary market will require more regulation.

Recently, CFE announced that it plans to launch auctions in the US and Mexico to sell excess natural gas capacity and develop a secondary market. The company aims to find private offtakers in both countries to offer natural gas at a discounted rate. CFE has signed many long-term contracts, resulting in more natural gas than needed for its power and fertilizer plants and other clients. The announcement was welcomed by the natural gas industry, whose insiders believed auctions would prove beneficial for both CFE and the winners of the bids.

Catalán told Natural Gas Intelligence that to have an open natural gas market, Mexico cannot solely focus on selling the excess gas, rather it must develop a secondary market for transportation capacity to generate competitiveness. According to regulator CRE, users have the right to market capacity but Mexico’s market conditions do not allow for this kind of trading.

“The problem is that, in Mexico, there are no adequate conditions for it, because a secondary transport market does not exist. If you want to sell capacity from one month to the next, you have to request a permit from CENAGAS, which takes 30 days, even though the electronic platform was designed to speed up secondary market transactions in the short term. So, once you have the authorization, the opportunity is lost. The idea of a daily market under these conditions would at this point be a fantasy. There is not currently any development of a secondary market,” he said.

CENAGAS’ portal for such transactions is the Electronic Bulletin Board (EBB). Nevertheless, Catalán said the challenge is that regulators have not further developed these solutions. “The development of a secondary market for transport capacity will require that regulatory agencies comply with what they have already said they were going to do,” he explained.

Moreover, the trading expert said that CFE also must figure out how to provide access to the transportation system and clarify its priority for the entrance of gas. “The thing about this though is that the gas that CFE has is not gas that consumers use… CFE wouldn’t only have to auction the gas and transport in the systems where it has access, but also have to guarantee how it will enter SISTRANGAS and, if CENAGAS will give it priority, to make it attractive to trading shops.”

Experts furthermore believe the country needs to continue investing in natural gas infrastructure such as pipelines and storage facilities, to ensure that the physical delivery of natural gas is reliable and efficient.

Moreover, Mexico also needs to attract more market participants, including producers, consumers and speculators, to promote liquidity and grow the market. Additionally, Mexico would need to establish reliable pricing mechanisms for natural gas, such as indexes or benchmarks, to facilitate the trading of natural gas contracts on the secondary market.

Competition would be an important driver of the secondary market but as the government has emphasized, Mexico’s state-owned energy companies should benefit from any industry developments. To this end, the administration has proposed a private participation cap.