Delfin Moy
Director, Oil & Gas
Artha Capital
Expert Contributor

Virtuous Circle: Thinking for the Long-Term

By Delfín Moy | Tue, 10/26/2021 - 09:12

While Mexico’s administration is discussing its long-term energy sovereignty, Mexican companies (industrial, power generation and transportation) are suffering real problems related to pricing and the availability of molecules, affecting the entire value chain, margins and cash flows in the short-term.

While other important countries are discussing how to transition their energy matrix from oil derivatives to something more ecological – or “green” – to combat climate change, such as solar or wind power, hydrogen, or even natural gas, we’re burning “combustóleo” for power generation and focusing on increasing levels of refined products from liquid fuels in the domestic market.

Mexico is a country with incredible opportunities in terms of green energies.

We have the best solar radiation on the continent, providing huge leverage in terms of solar power generation, but it is not being exploited as such (I will not offer a more detailed opinion on this in this article because it’s a whole topic by itself).

Also, we’re geographically located over one of the most relevant shale gas plays in the world and listed among the Top 10 countries with the biggest shale gas reserves worldwide.

Natural gas is the cleanest, lowest-carbon and non-toxic hydrocarbon ever produced. It is used to provide electricity (fueling power stations), fuel industrial processes and transportation units and is used in the residential segment, among others.

Natural gas has tangible benefits from day one:

  • Ecological: reduces toxic gas emissions (carbon dioxide, nitrous oxides, among others) and almost all particulate matter, which, in particular, would benefit Mexico’s big – and polluted – cities, such as Monterrey, Tijuana and Mexico City
  • Economical: significant reduction in energy cost compared to diesel or gas LP (GLP)
  • Secure: lighter than air, it dissipates and does not create an explosive atmosphere as do liquid fuels

Mexico has incredible opportunities regarding its natural gas reserves and would be able to meet domestic demand easily (with intense investment, of course). However, historic trends of both domestic gas demand and production are alarming.

Since 2010, domestic natural gas demand has increased 34 percent, mainly due to industrial growth and electricity demand (power generation). However, domestic production has decreased almost 50 percent, mainly due to the lack of investment in the O&G sector. The gap between these is getting bigger every year. How do we bridge this gap? With imports, which have increased over 300 percent in the last 10 years.

Units: million cubic feet per day (MMCFD)

Mexico’s natural gas dependence is getting stronger and stronger as demand grows every year.  As a country, we should be thinking about and planning how to reduce our dependence on imports, with a focus on increasing domestic production.

To succeed, the current administration needs to align all players in the value chain, providing clarity and certainty for local and international investors (in all upstream, midstream and downstream sectors) through a transparent and understandable ecosystem. Hard work has to be done in terms of the federal regulatory framework, state and country permitting, pricing schemes, tax incentives and so on, to increase – and get back – investors’ appetite in the energy sector.

I strongly believe that setting clear rules is the starting point to attract investment, which is the starting point to fatten project pipelines, which is the starting point to increasing economic activity, which is the starting point to attracting more investment, achieving a “virtuous circle,” resulting in nothing but upside, which is key for energy sovereignty.

Domestic and cheap natural gas production is crucial for Mexico’s development. Accomplishing this is a process that will take time and effort; it won’t be done from one day to another. It has to be well-thought-out, structured and discussed between both public and private enablers.

What should we do in the meantime? Take advantage of our next-door neighbor, the US. For the last 15 years, the US has been developing its shale plays in south Texas, drilling tens of thousands of wells at Eagle Ford and in the Permian Basin. Production rates rose amazingly in this period, resulting in overproduction of natural gas for its domestic market, which Mexico has taken advantage of by purchasing part of the surplus.

The decline in Mexico’s production and the increase in Texan gas availability has led to more imports and significant investments in Mexican pipeline infrastructure. Gas distribution capacity has grown 300 percent in the last 10 years, with an increase of 60 percent in pipeline infrastructure mileage built. There are 21 import-export points between Mexico and the US, forecasting a total import capacity of 13,000 MMCFD by early 2022. June 2021 imports from the US hit a historic record of 6,800 MMCFD.

Trends talk, and we should listen to them. Mexico has huge opportunities in terms of energy. We just need to be smart, anticipate, create a safe and trusty framework for investors, think for the long term, capture value and generate wealth to finally achieve the aforementioned “virtuous circle,” which is crucial for Mexico’s growth and development.

Photo by:   Delfín Moy