Senator Proposes Altered Tax Regime for Natural Gas Extraction

Armando Guadiana, President of the Senate’s Energy Commission, proposed an altered tax regime to make production of natural gas more profitable. As Mexico increasingly bets on imported natural gas for power production, MBN contributors believe the country could benefit from amplifying its own production.

Under PEMEX’s current tax regime, the Shared Utility Right (DUC) does not distinguish between gas associated with oil fields and gas that is not found within crude oil fields. Under this circumstance and considering the current market prices, the exploitation of natural gas fields is not profitable. For this reason, Senator Guadiana proposes changes to various articles within the Hydrocarbon Revenue Law, reported El Financiero. Guadiana added that Mexico’s dependence on natural gas coming from abroad, which exceeds 90 percent of the total supply, is worrying.

Earlier this year, Jaguar E&P CEO Warren Levy outlined the challenges regarding Mexico’s natural gas in an interview with MOGR. “Jaguar is the only operator in Mexico focused on natural gas and we feel we can be a fundamental part of shifting the energy balance conversation in Mexico with respect to natural gas. Ultimately, the benefits of natural gas are felt in the same way wherever it is used. It is a transition fuel, a way to reduce a country’s carbon footprint and a method for improving power generation efficiency. From the Mexican perspective, there is solid infrastructure from the north down to Mexico City, so there is no reason why over 90 percent of Mexico’s northern energy consumption should not be natural gas. It is widely available,” he said. Levy thinks that there would be plenty of benefits associated to producing and buying natural gas within Mexico’s borders. “Cost competitivity is key. Clearly, the US provides cheap gas but for Mexico it makes much more sense to buy within the country. When importing, only 25 percent of the value will stay in Mexico. Buying in Mexico allows for 85 percent of that value to stay in the country. Employment, taxes, royalties and even payments that go to service land owners are all delivered to the country. This helps communities massively and also supports the national economy.”

Levy hints that the US might not be able to rely on gas coming from unconventional developments forever, jeopardizing Mexico’s cheap access to imported natural gas. “Long-term, we believe that access to very inexpensive associated gas from unconventional liquids developments in the US is likely to decline as activity lowers and we expect the gas market to recover accordingly,” he said, adding that Mexico needs natural gas for its energy matrix in the long term.

A change in US fracking, which is keeping prices down, could come much sooner than expected if Joe Biden decides to ban the practice. His position on the matter is still somewhat uncertain. Mitsui Power Americas CEO Ramón Moreno believes fracking will continue to be supported by the newly elected president, however. “I am sure Joe Biden will keep supporting fracking, which is bringing low gas prices not only to North America but worldwide thanks to LNG exports, facilitating the substitution of oil and coal in the energy matrix,” he said in a comment. However, ATCO Energía´s CEO Ramon Basanta thinks the US will decline its natural gas production in general toward the future. “It is very likely that the US will move away from natural gas. It causes a lot of methane to leak, which is three times as harmful as CO2 as a greenhouse gas,” he told MBN.