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Navigating Mexico’s Energy Reform: The Natural Gas Market
Navigating Mexico’s Energy Reform: The Natural Gas Market
2 · Navigating Mexico’s Energy Reform
Natural gas has emerged as a key energy source given its low greenhouse gas emissions, greater efficiency and competitive prices. In order to increase the supply of natural gas, the Mexican government intends to implement a comprehensive regulatory and institutional framework in order to foster an efficient and competitive natural gas market. The Energy Secretariat (SENER), together with the National Natural Gas Control Center (CENAGAS), has drafted the regulations that will apply to the industry, following consultations with private players.
SENER is working on a five-year plan (2015-2019) to expand the transportation and storage infrastructure. A thorough assessment on the outlook of supply of natural gas fundamentals will inform future transportation infrastructure projects in the country and guide investment decision making by the private sector.
The five-year plan is based on two key imperatives: 1) to minimize the risk of supply disruptions and 2) to ensure that infrastructure capacity builds can meet demand peaks across the country. In this regard, the plan includes the construction of 5,159 kms of new pipelines, requiring investments of almost US$10 billion. As of today, the majority has been tendered, and several have already been built.
Source: https://www.gob.mx/sener/articulos/mapa-infraestructura-nacional-de-gas-natural-2016, accessed on July 18, 2016.
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The Natural Gas Market · 3
Energy Policy - Supply policy- Instruct the development of strategic
and social projects- Opinion on the distribution network
expansion
Independent System Operator- System management- Network operation- Bidding of strategic and social projects
Coordinated Regulatory Entity- Permits for pipeline transportation,
distribution, storage, liquefaction, regasification, compression, decompression, retail and integrated systems management.
- Service fees- Opinion on the biddingguidelines- Wholesale market regulation- Service terms and conditions
Safety, Energy and Enviroment Agency- Industrial and operational safety- Decommissioning and abandonment- Emissions and waste control
New Players in the Industry
Manages and regulates the oil industry
PEMEX/EPE – the former state-owned monopoly
Individuals or legal entities incorporated pursuant to the Mexican legislation
Federal Government
State Operators
Private Operators
Oil Industry
State Productive Enterprises- Guarantee demand- Will bid strategic projects instructed by Sener
until August 2016
Private Companies- Infrastructure development- Transportation and storage services- Natural gas commercialization
4 · Navigating Mexico’s Energy Reform
The model of operation of Pemex as a sole hydrocarbons producer in Mexico has been modified by a new competitive model.
Energy Reform in the Natural Gas Market
Pemex BeforeOld Model
Descentralized Public Entity
Resource Manager
Responsible for Supply
Permit regime for some activities
Pemex AfterNew Model
• State Productive Enterprise (Pemex), with two main subsidiaries (PEP & TRI) and several affiliated companies
► • Aimed at generating economic value.
• Becomes one among other market participants
• Under new regulations Pemex will compete in all activities of the value chain
Before and after the Energy Reform
Natural Gas
ProductionParticipation of various producers under permits
Commercial TradeOpen MarketRestructuring of affiliates and their functionsSubject to permit regime
Transportation And StorageCreation of CENAGASLimitation of PEMEX in participation in projects of social interestPemex becomes a user
Compression, Liquefaction, Decompression, RegasificationParticipation of different agents subject to permits regime
Fist Hand Sales (Vpm)Can be made by subsidiary companies on behalf of the StateSubject to the principle of asymmetric regulation
RetalConsidered added salePemex affiliates are allowed to sale subject to asymmetric regulationParticipation of different agents subject to permits
The Natural Gas Market · 5
Integrating the Value ChainThe Energy Reform intends to promote the participation of numerous market players in all segments of the value chain.
Raw Material Processing Imports Transport Storage Distribution Sales
Sources: Pemex, SENER, EY
Mexico: Key Oil Industry Indicators Natural Gas (1995 = 100)
1995 2000 2005 2010 2015
300 2,500
2,000
1,500
1,000
500
250
200
- -
100
50
150
Production Proven ReservesNet Imports (RHS)Demand
Mexico: Natural Gas Supply by Source
1995 2000 2005 2010 2015
12bf/d
10
8
-
4
2
6
Sources: Pemex, SENER, EY
Production Net Imports
Mexico: Natural Gas Demand by Sector
1995 2000 2005 2010 2015
12bf/d
10
8
-
4
2
6
Sources: Pemex, SENER, EY
Oil SectorPowerStock Chg. & Stat. Adj.
IndustrialRes./Serv./Transp.
Mexico: Natural Gas Imports by Typebf/d
Sources: Pemex, SENER, EY
Pipeline LNG
1995 2000 2005 2010 2015
3.5
3.0
2.5
2.0
-
1.0
0.5
1.5
6 · Navigating Mexico’s Energy Reform
The Natural Gas Market · 7
ContactsAlfredo ÁlvarezEnergy Sector Leader+ 52 55 1101 [email protected]
Rafael AguirreTAS Partner+52 55 5283 [email protected]
Gilberto LozanoAdvisory Partner+52 55 5283 [email protected]
Rodrigo OchoaTax Partner+52 55 5283 [email protected]
Gerardo FloresAssurance Partner+52 55 1101 [email protected]
Francisco ForastieriLegal Partner+52 55 1101 [email protected]
What to Expect?The opening of the natural gas market will provide a bridge between the oil and electricity sectors. According to the Mexican authorities, new guidelines should be issued by September 2016. Their purpose will be to promote the development of a competitive domestic natural gas market. Indeed, as the gas pipeline network is expanded, the number of arbitrage points will increase, with imported gas (by pipeline or vessel) competing with gas produced by Pemex.
These arbitrage points will help determine reference prices in their respective regions, based on the source of gas and transportation costs. Currently, the main arbitrage points, according to SENER, are located in northern Tamaulipas State, Encino (Chihuahua State), the Bajio region and Cactus (Chiapas State). Gas suppliers, including private companies, will be able to reserve transportation capacity in the Natural Gas Transportation and Storage System (Sistrangas).
As a result, the market will eventually move to prices determined by supply and demand, rather than being based on “First Hand Sales” prices (VPM for its Spanish acronym), which are essentially the maximum prices at which Pemex can sell natural gas. The transition, though, will be gradual. Liquidity will build up as private companies invest in the industry.
One of the biggest challenges is carrying out open seasons, through which transportation capacity is reserved. Open seasons, which are expected to start in September 2016, will be administered by CENAGAS, which is in charge of managing the national pipeline grid. CENAGAS will carry out a “Round Zero”, in order for Pemex and CFE to reserve capacity for their own needs, followed by two rounds for private distribution companies: “Round One” for those with so-called “acquired” or legacy rights and “Round Two” for other users.
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