Héctor Moreira
Comissioner of CNH
View from the Top

Natural Gas a Priority for Mexico

By Pedro Alcalá | Thu, 01/02/2020 - 09:00

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 etane, 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 is 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. This means that states like Oaxaca and Chiapas will struggle to grow economically if the federal government cannot deliver natural gas to them. This means there is a lot of pressure. 

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, damages should any problems occur, and a certain percent of the profits that the use of land provided. 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 and has 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, but sometimes promises were made to groups and never kept. This created a problem of credibility. 

Pedro Alcalá Pedro Alcalá Senior Journalist & Industry Analyst