Private-sector participation sought in Mexican downstream

Greater private sector participation is needed for Mexico’s downstream natural gas market to become more competitive and benefit different segments of the economy, speakers told the Mid-Stream Construction Summit in Mexico City in December.

Natural gas experts converged on Mexico City in December (Image credit: Osmany Torres Martín)

The Mexican government is implementing reforms aimed at opening the energy sector to private investment, with a promise to reduce tariffs and improve infrastructure.

But many small and mid-sized companies are not aware they can participate in the natural gas market as end-users, or that they can potentially reduce costs by using natural gas to generate electricity and heat for production processes, said Jorge Machuca, Director of Project Business in Cummins Power Generation’s Latin America division.

Moreover, natural gas pipelines do not reach all potential end-users in the country, limiting the number of new consumers that can enter the market, noted Stanislav Palacios, a senior official at Tracsa, an energy-solutions provider and Cat equipment distributor in western Mexico.

“As more users receive natural gas, we will have greater competitiveness, prices will go down and we can have better efficiency,” Palacios said.

Adding users to the natural gas market could help create a “network effect”, Palacios said, in which the value and importance of a product or service increases as the number of users grows.

Small consumers, including those in the residential and services segments, should also have access to natural gas and a role in developing demand in this market, he argued.

“The market must be guided not only by volume, but also by the amount of users in it,” Palacios said.

Slow progress

Of the 6.95 billion cubic feet per day (Bcf/d) of natural gas consumed in 2013, the electricity sector accounted for 42%, petroleum company Pemex for 33%, the industrial sector 18%, and private power generation 6%. The residential, services and transportation sectors used a little more than 1% between them.

Demand for natural gas will increase to 11.6 Bcf/d by the year 2028, with domestic production to expand at an average annual rate of 3.7% to 7.7 Bcf/d, and imports to grow at 4.1% annually to 4.6 Bcf/d, according to the Ministry of Energy (Sener). State-owned companies Pemex and the Federal Electricity Commission (CFE) will see their combined share fall from 51% to 32%, with the independent electricity firms to grow from 24% to 38%, and the industrial sector to climb five percentage points to 23%. Negligible growth is expected for the three smallest sectors.

Most Mexican demand for natural gas comes from the Gulf Coast states (Image credit: Mexican Ministry of Energy)

The Mexican peso depreciated 15% against the US dollar in 2015. Exchange rate volatility may dampen the enthusiasm of private companies for Mexican natural gas projects, Palacios said, noting that contracts with distribution companies are often closed in dollars.

Financing has become “a challenge”, and the fluctuation of the dollar has caused some investments to be delayed, added Machuca.

Another cause for doubt among investors is the discrepancy between natural gas tariffs in different regions in Mexico, Palacios pointed out. The rate for an industrial end-user can vary from $0.22 to $5.01 per million British thermal units, with similar discrepancies found in the services and residential sectors.

Waiting for the pipeline

Mexico had 2.2 million natural gas consumers in 2013, according to Sener, with a disproportionately high amount of that demand coming from the Gulf Coast states of Tamaulipas, Veracruz and Tabasco.

The Mexican government wants to nearly double the size of the country’s natural gas transportation network by 2018-19, but many potential end-users are still unsure if the fuel is going to be available at competitive prices near their sites in order for them to benefit, explained Jesus Gonzalez, a business unit director at Emerson Network Power in Mexico.

Major pipeline infrastructure is still being developed, but it will take “three to four years” until the benefits reach the end-users, Gonzalez said.

According to Machuca, many small companies with a co-generation potential of 1-2 megawatts do not even know they can generate their own energy, and they need government and industry to provide them with more information. Others are preparing to co-generate energy using natural gas as the pipeline network approaches their locations.

Beginning in January 2016, companies with power-generation capacity will be able to sell surplus electricity directly to other consumers, in competition with the CFE. This new electricity market will create one more opportunity for private companies to monetize natural gas.

“Companies are already waiting because they want to generate power, industrial parks want to generate their own electricity and I believe this will create a healthy competition with CFE,” said Machuca.

By Anna Flávia Rochas