by Bob Shively, Enerdynamics President and Lead Facilitator
In an August 2016 blog post we wrote “…it appears Mexico is poised to enter a common competitive gas market with the U.S. and Canada. And there is even talk in the future of expanding pipelines into Central America to create a true uniform North American gas market. But of course, ‘the proof will be in the pudding’ as they say, and we will eagerly watch to see how market developments play out.’
So a year later – how are these developments playing out? Overall, the industry reforms are moving forward and a competitive market is emerging. Let’s take a look at some of the key areas of progress.
Source: ICIS webinar – Mexico’s New Gas Market, October 5, 2017
PEMEX no longer controls pipelines
Centro Nacional de Control del Gas Natural (Cenegas) was created to manage unbiased open access to pipeline capacity allowing use by gas marketers and even large end users. Open seasons for PEMEX capacity on U.S. pipelines began in February. In May Cenegas held its first open season for capacity for the former PEMEX pipeline system, now called SISTRANGAS (Sistema de Transporte y Almacenamiento Nacional Integrado de Gas Natural). Active entities in addition to PEMEX (which needed to reacquire capacity rights to serve its ongoing customers) included Shell, BP, ENGIE, Macquaire, and a number of large Mexican industrial customers.
As of September, 24 companies held capacity on the SISTRANGAS system. Numerous new pipeline projects are underway with ownership including a variety of international parties including Transcanda, IENova (Sempra), ENGIE, and Kinder Morgan. Third-party pipelines are built based on contracts with entities willing to take out firm contracts. The majority of the current third-party capacity is held by the electric company CFE.
PEMEX no longer has a monopoly on gas sales
Under the Mexican reform law, PEMEX is required to give up 70% of its sales market over a four-year period. The new market launched in July, and in September PEMEX stated that more than 32% of the market is now being served by alternate suppliers.
Market prices are developing
Previously, gas pricing by PEMEX was capped under a formula set by the Mexican government called VPM. The price cap for northern Mexico was based on a basket of U.S. hub prices for northern Mexico and on the assumed cost of production in southern Mexico. As of July 1, the new formula used by PEMEX is based on market prices at the U.S. border and is currently set at the Henry Hub price plus $0.40/MMBtu.
Additionally, customers are charged a balancing fee set on the cost of LNG that ranges from $0.06 to $0.14/MMBtu (Mexico’s only source of gas storage is the storage at its three LNG import facilities). The Mexican government now publishes a monthly price index based on reporting by alternate suppliers. The index, called IPGN (Índice de Referencia Nacional de Precios de Gas Natural al Mayoreo), was first published in July.
Market hubs appear to be on the way
Mexico is now working to develop pricing and trading hubs in Mexico to reflect local price differentials and to give Mexican companies the opportunity to hedge price in pesos instead of U.S. dollars. A hub in the Yucatan may be especially important since it is not currently possible to push U.S. gas down into this region, which results in gas shortages. A new regional price mechanism could provide the transparency needed to encourage either new development of gas supply in the region or expansion of the pipeline grid to enable more gas to flow south.
Source: EIA Today in Energy, August 30, 2017
Is the market working?
Certainly we can conclude that the gas market evolution in Mexico is making significant progress in a short time. There are still barriers such as lack of available supply, which requires marketers to buy supply from PEMEX so that they can fulfill their sales obligations, and a lack of interest in some cross-border pipeline capacity auctions. But things are moving forward. Perhaps the biggest question now is the outcome of the 2018 presidential election. Leading candidate López Obrador has spoken out against some energy reforms, and what will happen post-election is uncertain.