/
Analysis

Balancing Natural Gas Demand and Supply

Tue, 01/22/2013 - 10:55

Mexico’s natural gas production is not keeping up with the country’s demand, and the low price for imported gas due to the recent North American shale gas boom does not provide the required incentive to drive su·cient increase in investment for the exploration and production of domestic natural gas. The lack of supply has led to critical alerts, which mean the suspension of supplies to major consumers due to insu·cient natural gas pressure in the pipeline system. These alerts were repeatedly issued by Pemex in 2012, influencing production and bottom line for large industrial companies. José Luis Gutiérrez-Azpe and Claudio Rodríguez-Galán, partners at the law firm Capín, Calderón, Ramírez y Gutiérrez-Azpe S.C., believe that actions should be taken to avoid this situation in the years to come.

“CFE and Pemex are compelled by the Pemex Law to be e·cient and execute the most profitable projects,” Rodríguez-Galán explains. “So, if there are no incentives that make natural gas investment profitable, then they are not going to do it.” Even though both state-owned companies are the main consumers of gas in the country, Pemex has not been able to grow its production levels. When private companies had to reduce their natural gas consumption during critical alerts in 2012, concerns emerged that Pemex and CFE had preferential treatment. “In theory, CFE and Pemex are just like any other client,” details Rodríguez-Galán. “However, when supply issues arise, they probably have favorable considerations, since they are the main Mexican utility providers.” To solve the problem, e†orts are being made within the CRE to provide a new ruling on the issue. “One of the possible arrangements that could be made is to prioritize by consumption level,” Rodríguez-Galán describes. “By ranking natural gas consumers by the amount of gas they use, and how critical it is for their activities, the CRE could create hierarchies for gas distribution.”

Another solution that could be examined is the take-orpay contracting model that already exists in the power generation industry. “It could work for Pemex, but I don’t see it happening in the gas industry, since it would not benefit the CFE,” Rodríguez-Galán clarifies, while stating that it could even go the wrong way for the industry. “Sometimes, Pemex would not even be able to provide the level of gas forecasted at the beginning of the period.” To ensure that business can continue uninterrupted, the private sector lobbied for an agreement with CFE and Pemex to import more gas. With the Confederation of Industrial Chamber (Concamin) as intermediary in the discussions, the three parties came to a compromise on importing gas from Peru at US$2.50/MMBtu to ensure gas supply until 2015

Despite this, longer-term constraints need to be addressed, provided that the gas market stays the same. “Other countries use subsidies and other incentives to make natural gas extraction more profitable,” Rodríguez-Galán describes. “This is not the answer for Pemex,” GutiérrezAzpe clarifies. “Temporary solutions might be reached, but the government understands that the final solution will be to invest more in gas production and transportation infrastructure; it all starts with infrastructure.”

“First of all, additional infrastructure needs to be created at the border to increase natural gas import capacity” says Rodríguez-Galán. The main concerns with building the necessary infrastructure revolve around security issues in Mexico’s northern region. “The security problem cannot be ignored,” Gutiérrez-Azpe asserts. “Under Calderón’s Administration, the war on drugs has an extremely negative impact on the energy industry,” Rodríguez-Galán adds. “Several pipeline construction projects, as well as other infrastructure projects had to be stopped because of security issues and concerns. Some of our clients that work over there have also su†ered from these security and safety hurdles.”

Private investment plays, and will continue to play, a central role in ensuring the supply of natural gas meets Mexico’s energy needs. “The market is already open to private investment in distribution, transport, and storage, according to the Constitution,” Rodríguez-Galán explains. “Private companies can transport gas for Pemex and for private entities, as long as they build the necessary infrastructure to do so: maritime ports, storage facilities, and pipelines. The Manzanillo port infrastructure is a clear example of this. But Mexico needs to have more cases like this to accomplish the infrastructure challenge.”

Apart from the current e†orts that Pemex and the private sector are making to balance supply and demand in the natural gas market, additional e†orts have to be made. “We still have to work with the current regulations and continue creating new rules that allow more flexibility within the boundaries of the Constitution’s main principles,” Rodríguez-Galán adds.