[NGW Magazine] Mexico Liberalises the Gas Market

This article is featured in NGW Magazine Volume 2, Issue 17

By Sophie Davies

Mexico has begun publishing a price index based on done deals for gas, allowing shafts of light into the otherwise murky market and giving buyers and sellers some guidance as pipeline and LNG imports rise.

Mexico's energy regulator has begun gas price reporting as energy reforms accelerate. The regulatory commission (CRE) has begun producing a monthly natural gas price report, as reform of the country’s energy sector gathers pace. It released its first monthly report in mid-August.

The so-called Indice de Referencia Nacional de Precios de Gas Natural al Mayoreo (IPGN) is based on the average of all eligible trades done and reported by traders and it will be published once a month on its website, within 15 days of the end of the previous month, the CRE said.

The pricing index includes day-ahead gas spot sales. Companies have to report volume, price per gigajoule, storage and transportation costs, as well as several other variables, to the CRE which then compiles it, perhaps after a verification process. 

Mexican marketers sold natural gas at an average price of $4.10/mn Btu in July 2017, according to the report. Price reports and greater transparency in Mexico “will be instrumental in establishing regional price indices at market hubs,” the US Energy Information Administration (EIA) said in a research note published on its website.

The new index forms part of an “ongoing series of energy reforms that reduce government market controls,” the EIA added.

Mexico’s pipeline system operator Cenagas has also recently launched a gas capacity reservation system, consisting of electronic bulletin boards for posting natural gas flows, it added. That also aims to make market data more transparent, the agency added.

There are four major pricing hubs in Mexico where most trading is likely to occur, according to Mexico’s energy ministry. They are Bajio, near Mexico City; Los Ramones near Monterrey in the northeast; Encino, in the north, and Cactus, in the south.

In June, the CRE also took a further step in boosting price transparency and liberalising the market by removing the price cap that the former monopoly Pemex could charge for gas.

The price cap was previously based on a combination of US Henry Hub gas futures prices, distribution plant prices at the US-Mexico border city of Reynosa and transportation costs.

The change allows companies other than Pemex to offer supply options and sell gas in Mexico “on a competitive-market basis” and has already led to higher gas production in Mexico, according to the CRE.

Demand for gas has also reportedly risen by around a fifth since the start of the decade, partly because of greater need for the fuel for power plants, after many of the country’s operators switched to gas from fuel oil.

The country has limited options to import gas, apart from cheap pipeline gas from the US. However its relationship with its neighbour has become more strained since the election of President Donald Trump last year, putting future imports at risk.

In addition, there are concerns in Mexico that US imports will become more expensive in the longer-term, as gas becomes more of a global commodity and demand for US LNG exports grows.

Over the longer-term the Mexican government is keen to develop its own gas resources so as to rely less on the US and increase its domestic energy security.

Although Mexico has considerable natural gas resources, development of the domestic market has been slow in recent decades, relative to other North American countries. Mexico had 15.3 trillion ft³ of proved natural gas reserves at the end of 2015.

The Latin American country’s gas sector first opened to private investors in 1995 when state energy firm Pemex lost its monopoly on the transport, storage and distribution of gas.

However it was not until 2013 – when Mexico embarked on major energy market reforms – that the market saw real change.

The government began to shake up the sector in an effort to end decades-long monopolies and boost domestic industry, in a country that has long relied on imported energy. The reforms have already attracted new players to the country’s energy industry. Three rounds of upstream auction took place in June and July of this year, in which the government sold nearly 80% of available auction blocks.

However experts say that work still needs to be done to improve infrastructure in Mexico’s upstream sector. Gas pipelines and storage are two areas that still require greater investment, the International Energy Agency recommended earlier this year.

The government also needs to ensure third-party access to key gas infrastructure, and clarify the costs for expanding infrastructure to both existing and new customers, the agency added.

Northern Mexico is considered particularly lacking in infrastructure, whereas the south has existing networks that can be used. In terms of further improvements that could be made, there needs to be an emphasis on promoting competition in the sector to ensure long-term growth, the IEA also cautioned.

Meanwhile offshore gas production in Mexico faces a number of issues including potential water issues, lack of infrastructure and security issues, analysts say.

The Latin American country is planning two more licensing rounds in 2018, which is also an election year in Mexico. However upcoming political changes may serve to speed up energy reform, not slow it down – as the government will want to reduce uncertainties surrounding energy policies so as not to deter investors, Grant Sunderland, an analyst at risk consultancy firm Verisk Maplecroft, told NGW.

If the progress of the last few years is anything to go by, next year will also see important changes for Mexico’s gas market – but with North American gas and LNG dynamics still shifting, its future is not entirely certain.

Sophie Davies