COLUMN: Mexico’s energy sector takes center stage as prices soar

Editor’s Note: Mexico Gas Price Index from NGI, a leader in tracking natural gas market reform in Mexico, offers the following column by Eduardo Prud’homme as part of a regular series on understanding this process.

The energy sector is in the spotlight in Mexico perhaps like never before in recent history. Changing the sector’s legal framework is being discussed in Congress, and separately in the Supreme Court, with politicians on all sides. The Ministry of Finance is trying to control rising inflation and exercise greater control over the flow of hydrocarbons into the country. Meanwhile, the government is under fire from US officials over changes to the rules of the game. There are also Russia’s flirtations, with some receptivity in some circles of power, to being an alternative supplier of energy for Mexico. Let’s take a closer look at these developments, which come at a crucial time in this current administration.

In Congress, discussions began around a bill proposing a constitutional change that would give the Comisión Federal de Electricidad (CFE) a monopoly on the supply of electricity. Moreover, it would remove the main regulators of the sector, giving the CFE the role of authority to define the technical and commercial rules for participation in the electricity industry. CFE would consolidate its role as the dominant agent in the gas sector. The open gas and electricity market would become a mere 8-year parenthesis in Mexico’s long history of state monopolies.

On this front, the government’s chances of success are slim due to a lack of voice from the limited space for political negotiation. Despite consultative forums around the nature and potential effects of the constitutional amendment, technicalities were avoided. A good opportunity to perform long-term fundamental analysis to improve energy security and efficiency in the energy sector has been wasted. The initiative was put up for discussion without changing its original formulation dictated by high levels of government.

Without the constitutional change, influential sector regulators in the natural gas industry would remain in power. However, the Comisión Nacional de Hidrocarburos (CNH) and the Comisión Reguladora de Energía (CRE) will continue to be influenced by the government and will do little to promote private participation in the discovery and production of gas reserves. They will also do less to promote private participation in the transport and sale of natural gas.

In the Supreme Court, Justice Ortíz Ahlf is seeking to overturn an earlier ruling on a constitutional controversy stemming from López Obrador’s proposed changes to the Electricity Industry Law (LIE). Such a reversal would have direct effects on the demand for natural gas in Mexico given the change in the distribution of electricity. The LEL amendments favor CFE’s hydroelectric plants, followed by other types of plants owned by CFE such as nuclear, geothermal, combined cycle and thermoelectric plants. CFE’s electricity supply would be supplemented by private solar photovoltaic and wind power plants and, finally, by combined cycle power plants from private companies.

The amended LEI revokes self-supply permits, many of which are based on natural gas combustion technologies, and revised contracts with independent power producers, with natural gas as the primary fuel. Without any theoretical basis, the president’s initiatives have been presented as the only way to guarantee low energy prices. Official propaganda about how the energy sector works keeps slamming private investment as an abusive economic force that prevents fairer electricity tariffs from emerging.

On Thursday, the Supreme Court ruled the law was not unconstitutional, but a majority of justices voted against its core provisions, meaning companies still have the ability to appeal the changes in national courts.

All of this is an affront to the private sector. Mexico City Mayor Claudia Sheinbaum, who now appears as the obvious successor to López Obrador, blames foreign private investment in the energy sector for plundering the national wealth. It describes as abusive the long-term contracts between the CFE and the independent energy producers. Sheinbaum describes the gas purchase contracts acquired by the CFE under the previous government as unnecessary because they exceed demand. Neither segregation of activities nor free access are taken into account in its conclusions.

Also recently, after a series of meetings with the Mexican government, the US President’s special envoy for the climate, John Kerry, and the US Ambassador to Mexico, Ken Salazar, made their problems with the changes in the sector clear. They “reiterated the significant concerns that the United States has raised regarding changes to Mexico’s energy policy.” Lopez Obrador countered that if North American companies want to use Mexico as a shipping point for liquefied natural gas (LNG), they must invest in the south of the country, clearly alluding to the Trans-isthmus project that CFE has tried to put it out to tender with little success with investors.

Then comes the thorny question of the rising cost of energy in Mexico. Lopez Obrador campaigned promising that prices would not increase. The import of fuels, including natural gas, requires authorizations which are most often withdrawn or refused by the Ministry of Energy. These free market distortions have led to significant imbalances in the supply chain of petroleum products. The shortage and the appearance of price differentials conducive to arbitrage show the inefficiencies of a public policy that does not completely mitigate price increases and that involves a loss of tax collection that is highly incompatible with the stated objectives.

The severity of operating costs is a possible explanation for CFE’s low use of the storage capacity it has contracted at the Altamira LNG terminal. During the first week of April 2022, the inventory communicated to the electronic display board shows levels below 56,500 m3 of LNG and already close to the minimum operating temperature necessary to maintain a state of proper operation of the facilities.

Without an effective storage policy supporting the creation of a security inventory, the cost of which is attributable to all users, replenishment cycles remain the responsibility of CFE. It is more difficult in the context of the European crisis due to the conflict in Russia and Ukraine. High prices and limited supply are not the best conditions for rushing to the international market to acquire cargo that is used to keep the Altamira plant at the required temperatures.

This is how it turned out that PAO Novatek, the independent natural gas producer in Russia, made itself available to CFE as a possible alternative supplier to meet such a particular need. While it is true that in the past Mexico has considered being a customer of Gazprom in the purchase of LNG, and that company has carried out brand promotion activities for more than a decade, in the situation Currently, a Mexican state-owned company buying Russian LNG would be irrelevant. Still, that wouldn’t be strange for a government that has taken a hesitant stance against invading Ukraine. Energy sovereignty in this context becomes stranger and more difficult to understand. Overall, energy has never been more important to Mexican audiences and their news cycle.

Prud’homme played a central role in the development of Cenagas, the national gas pipeline operator, an entity created in 2015 as part of the energy reform process. He began his career at the national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), becoming Chief Economist and, from July 2015 to February, was General Manager ISO for Cenagas, where he oversaw the technical, commercial and economic management of the nascent integrated natural gas system (Sistrangas). Based in Mexico City, he heads the Mexican energy consultancy Gadex.