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Analysis

National Center of Natural Gas Control (CENAGAS)

Wed, 01/22/2014 - 16:32

The Energy Reform called for the creation of a decentralized public organism officially referred to as the National Center of Natural Gas Control (CENAGAS) in the twelve-month period following the passing of the Energy Reform, and its main responsibility will be the operation of the national pipeline transportation and storage system. CENAGAS will be an independent, state-owned entity with its own budget, and PEMEX has the obligation to transfer all responsibilities and operating capacities to this new public institution by no later than December 20, 2014. CENAGAS will also have the responsibility to support PEMEX during this transition period and allow it to continue its usage of the pipeline distribution system to provide continuity of service for up to twelve months after the creation of this new entity. The timeframe surrounding this evolution is specified in the 16th transitory article of the Energy Reform.

The section of the Energy Reform Decree stating the creation of this new organism begins by asserting that PEMEX’s degree and nature of involvement in the transportation and commercialization of natural gas puts it in a “complex scenario.” According to the Energy Reform, international best practices dictate that there must be a clear separation between the control of distribution infrastructure for natural gas and the activities surrounding its commercialization, which usually involve a combination of public and private entities in a free market environment. This competition can be easily compromised by PEMEX’s current position on both sides of this equation. This argument has already been supported by sources as diverse as the Federal Commission of Competition (CFC) and the Mexican Natural Gas Association (AMGN).

The creation of CENAGAS also responds to broader concerns and ambitions surrounding Mexico’s energy future. The rise in the planned construction of thermoelectric and combined cycle plants, and the increasing use of natural gas to generate electricity, is creating an incentive for the development of further synergies between the oil and gas industry and the energy sector. CENAGAS represents an important crossover of interests between PEMEX, CFE, SENER, and CRE as the development and modernization of the national natural gas pipeline system supports the objectives of these entities.

CENAGAS can also promote investment by confronting the security issues that pipeline constructors and operators are facing. This particular issue actually encompasses three different areas: the security involved in the physical integrity of the infrastructure, the social and crime-related risks for operators, and the security of the resources themselves given the preponderance and troubling sophistication of illegal taps. The risks associated with infrastructure integrity can be mitigated by CENAGAS through the centralization of information coming in from monitoring technology. The second and third areas of security concern can be addressed through the effective communication between CENAGAS and local and federal law enforcement agencies. Due to its nature as a government entity, CENAGAS and the entire national pipeline system are entitled to the direct protection by Mexico’s military forces. Through the constant surveillance and response capabilities that CENAGAS will be able to provide, military and civilian law enforcement agencies will be able to more effectively target their operations and significantly reduce illegal taps.

However, many questions remain regarding the exact responsibilities CENAGAS is to take on. Will its oversight only extend to natural gas pipelines or will this integrate all types of onshore pipelines currently under operation? Through what legal and logistical mechanisms will CENAGAS cross the jurisdictional boundaries it must go through in order to correctly serve its function? How will its staff be trained and to whom will they answer? What standards or practices will its response protocols be based on, given the unique situation of Mexico? Who will administer the initial CAPEX necessary for additional infrastructure? What public or private entities will the executive power rely on as advisors or even as contractors for the construction of this additional infrastructure? These sorts of projects are not exactly off-the-shelf affairs.

Overall, the central point behind the creation of CENAGAS is to detonate investment in the expansion of the national pipeline system. All of its institutional objectives should be geared towards making the system a low-risk and attractive opportunity for major global players in pipeline projects. The expansion of this system is of utmost priority. As experts in the Mexican Institute for Competitiveness (IMCO) have stated, the bottlenecks and flow obstructions currently present in the system are unsustainable and will continue to leave various areas without certainty of natural gas supply. This represents a brake on the entire Mexican industrial sector that must be removed in order to maximize economic growth.