Natural Gas, a Mexican PriorityBy Peter Appleby | Tue, 01/21/2020 - 16:36
Q: How would you characterize the relationship between Mexico’s natural gas production potential and demand?
A: Mexico’s relationship with natural gas is characterized by its location. The country has great natural gas resources and so the production of natural gas should be high, but we are in close proximity to the world’s cheapest natural gas market, the US, and can buy at very cheap prices. The availability of cheap natural gas, together with the existence of oil in Mexican territory, has offered little reason to invest in Mexico’s natural gas industry across the years. This underinvestment has led to underdevelopment. This made sense in purely economic terms: the profitability of oil is higher. But this situation also made Mexico dependent on the US, and as cheap gas means cheap electricity, this dependence will only grow. Mexico was originally importing 20 percent of its natural gas needs. Today, it imports 70 percent: the country depends more on US natural gas than Japan, a country with no natural gas reserves. While Japan has various providers, Mexico has only one.
Q: How does CNH view the role of natural gas within Mexico’s energy matrix?
A: CNH is concerned about the role of natural gas within the Mexican energy matrix. In 2018, the Commission published a book titled The Natural Gas Sector: Proposals for the Development of the National Industry to explain the country’s situation and to offer ideas on how we can produce more gas. However, CNH cannot set strategies, we can only advise. Therefore, we must try to convince SENER that thinking regarding the price of gas must not be based on the US price at the point of sale. While the initial price may be cheaper, the overall difference, once the gas has been transported into Mexico, may not be great when compared to the price of Mexican gas, which can be fed into the network immediately. There are also other factors to consider. Buying gas from a Mexican company generates profits that can be taxed, in addition to the salaries of the company’s employees and the revenues of its suppliers. Local production creates additional revenue that must be considered within the price comparison. This may require that we sell gas at slightly higher prices, but in this way, the money returns to the national economy and helps spawn new value chains to meet supply.
The petrochemical industry must also be considered. Mexico imports dry gas from the US but Veracruz produces gas containing components, including ethane, propane and butane, which can be used to supply the country’s petrochemical industry. Mexico’s petrochemical industry can only grow with the aid of the gas industry; it is a consequence of producing gas here. The financial benefits and long chain of the petrochemical industry, including job creation and tax generation, cannot be ignored. Carrying on the status quo of imports should be reassessed. We must consider the opportunity cost of not developing the petrochemical industry in Mexico.
To promote the growth of natural gas in Mexico, CNH is speaking to the Ministry of Energy and the Ministry of Economy, which are responsible for economic development, to communicate our ideas. We are also holding meetings with Congress and have just finished a natural gas training seminar for the country’s senators. Recently, PEMEX has begun prioritizing gas fields to support its overall production goal. Investment into Ixachi is one such example and shows a movement toward parity between fuel types.
Q: How can land use legislation be improved to help develop natural gas production?
A: Studies show that Mexican states with natural gas develop faster than those without, which means that states like Oaxaca and Chiapas will struggle to grow if the federal government cannot deliver natural gas to them. Mexico needs to update its legislation regarding land use. The Energy Reform entitled landowners to receive rent payments from oil and gas companies using their land. But in Mexico, these matters are complicated because there is no property census to adjudicate unquestioned land ownership. The US has a sound land ownership model with good records, even if land is owned by groups or communities rather than individuals.
We must also assess the equilibrium between indigenous rights in terms of the privileges granted to landowners by the Energy Reform. Mexico’s hydrocarbons industry says that it will respect indigenous traditions and their way of looking at property, but combining intention with the new legislation will take time. It is vital that communities in which oil and gas activity is taking place receive the benefits of those projects. The new administration is doing well in protecting the rights of communities. But in the past, sometimes promises were made to groups and never kept. This created a problem of credibility.
Q: How has the role of data acquisition expanded to benefit the Mexican gas market?
A: The acquisition of seismic data has been one of the most positive developments that the Energy Reform has brought to Mexico. More seismic data has been collected in Mexico over the last four years than had been collected in the previous 70. This is because the Energy Reform allowed private companies to start gathering information, which has delivered benefits to everybody. Companies are obliged to tell the industry that they have acquired data and are free to sell that data to companies interested in specific areas or fields. There is no exclusivity over the rights to collect data from one area and therefore multiple companies can do so. The data now available is therefore far more complete and those interested in an area’s data can view multiple sources. After eight years, this seismic data becomes public.
Q: How suitable to an expanded natural gas industry is Mexico’s gas infrastructure?
A: The infrastructure we have for the transport and processing of natural gas is already sufficient. This is because Mexico produced greater amounts in the past than it now does. The main problem we have is that the infrastructure can belong to PEMEX while the new gas belongs to private operators. Therefore, we must devise systems that allow for the use of previous infrastructure that have capacity. However, Mexico requires more natural gas storage. Under current SENER legislation, consumers are required to pay for storage. The logic is that companies construct storage capacity and then charge the consumer, not the producers, for that storage. CNH and CRE have been studying depleted fields to identify them for storage. CRE is then given responsibility for creating that storage business tendering depleted natural gas fields.
Q: How can the reintroduction of bidding rounds help Mexico achieve energy sovereignty?
A: Mexico has not seen a bidding round in 2019. We are hoping the government will decide to open other areas, especially in deepwater. Mexico has been exploring its onshore resources for over a century and deepwater is the big chance for Mexico. Now is the time. Each previous deepwater bidding round has been very successful and clearly, considering the companies involved, from France, the UK, the Netherlands and China, Mexico is an attractive option. CNH has everything prepared for future bidding rounds. All we need is the green light. Added to this is the fact that PEMEX has decided that deepwater is not a top priority despite having many areas available to develop. Agreements should therefore be made with private companies to explore these areas. There are many areas with potential in Mexico that could be put up for bidding, the west area of Yucatan being one example.
Q: What role should unconventional resources play in Mexico’s energy mix?
A: CNH will soon publish a book on unconventional resources to demonstrate the research we have done around the security and environmental issues of unconventional production. We are trying to convince the government that we must open unconventional resources to the industry. There are large parts of Mexico that have the potential to hold unconventional resources, including Tamaulipas, Nuevo Leon, and Coahuila.Despite being beside West Texas, the state of Chihuahua does not produce a single drop of oil or gas due to a lack of exploration. We must make exploration in Chihuahua, which is a massive area, an attractive opportunity for companies to investigate the possibility of unconventional resources there. The way the Permian and Eagle Ford Basins were managed should be an ideal example to Mexico, and our proximity to these areas should also be leveraged. Gas fields like McAllen, very close to Reynosa, suggest the presence of gas in Mexican territory and all the services required for developing unconventionals are there, just across the border. This makes the prospect of development simpler and therefore less expensive.
Héctor Moreira is serving a second term as CNH Commissioner. His previous experience includes stints as Deputy Minister for Strategic Planning and Technological Development at the Ministry of Energy and Deputy Minister of Hydrocarbons.