Encouraging Onshore Natural Gas Production

The liberalization of natural gas prices in Mexico will help develop the domestic production and eventually to more dynamism in the market, Marcelino Madrigal, Commissioner of CRE, told the 2017 Mexico Oil & Gas Summit on Tuesday at the Mexico City Hotel Sheraton María Isabel.

“Price liberalization will contribute to the local generation of natural gas. This will lead to the development of gas retailers other than PEMEX, which will lead to a more dynamic Mexican market,” said Madrigal during his presentation.

Liberalizing and incentivizing the generation of natural gas is an important part of CRE’s mandate, particularly considering that natural gas consumption has increased dramatically in the past few years. According to Madrigal, 51 percent of natural gas in Mexico is used for electric generation. However, more than 40 percent of the natural gas used in the country is imported. “Basically, all our natural gas-dependent electric generation relies on imported natural gas,” he said.

Although Madrigal accepts that the recent price liberalization of natural gas will not immediately shift these percentages, he said it is a first step in the right direction. “We need to ensure that the natural gas market develops alongside the needs of the electricity market.”

Madrigal added that CRE and other institutions are working to ensure development of a more competitive market that incentivizes production and commercialization of natural gas. For this to happen, the CRE Commissioner said that they had been working around three specific pillars: infrastructure, nondiscriminatory access to the national pipeline system and liberalizing the market. “As of today, we have US$12 billion committed for network expansion and we have commitments for the construction of around 7,500km of pipelines,” Madrigal said.

Infrastructure combined with access to the pipeline is key for the development of the market, Madrigal said. “The first bids for incoming pipelines from the US represents a landmark. For the first time in history, private companies can access this type of infrastructure.” More infrastructure and broader access to it will inevitably lead to more supply. “To increase our offering of natural gas we need to provide private companies more production possibilities,” he added.

After infrastructure and access, Madrigal said only one element was missing to boost the market: price liberalization. He acknowledged, however, that there was no perfect moment to liberalize the price of natural gas. “When analyzing international experience, particularly the cases of the US and Canada, they opted to first liberalize prices and then to provide access to infrastructure. However, we decided it would be best to first advance our infrastructure for gas transportation and afterward focus on price liberalization.”

Madrigal concluded with an estimate of the impact of the impact from the current licensing rounds on the production of natural gas, “Domestic production is expected to rise 18 percent increase in relation to current demand,” he said.