The continued development of Mexico’s natural gas market will be vital for U.S. suppliers over the coming years, according to NAmerico Energy Holdings LLC (NEH) President Jeff Welch.
Welch spoke on a virtual panel Tuesday at the LDC Natural Gas Forum 2020.
He noted that Mexico’s gas market is still in the nascent stages of development relative to the mature and highly liquid U.S. market, which began the deregulation process in the mid-1980s. In Mexico, by contrast, liberalization of the formerly state-dominated market didn’t start until after the 2013-2014 constitutional energy reform.
“I’m not going to pass judgment on where we are in Mexico with respect to maturity, but I would say that we’ve got some time to go,” said Welch, who served previously as the head of North American gas for EDF Trading North America LLC.
“And using a sports metaphor I’d say we’re probably in the first quarter of a four-quarter game with respect to developing that level of transparency and liquidity and connectivity,” he continued.
While Mexico has become increasingly dependent on gas imports from the United States, cross-border gas flows are equally important to producers north of the border in order to balance the market and take full advantage of technological advances in horizontal drilling and hydraulic fracturing, Welch said.
With a population of about 128 million, Mexico is currently the world’s No. 8 largest gas market, Welch said, noting that its gas demand has grown steadily while domestic supply has dropped.
Although Mexico has more than sufficient reserves to meet its needs, state oil company Petróleos Mexicanos (Pemex) has prioritized crude production instead.
As a result, “I don’t know that you’re going to necessarily see that capital allocated” to natural gas production in Mexico, Welch said.
He also noted that there are about 60,000 kilometers of natural gas pipelines in Mexico, versus some 200,000 kilometers in Texas alone, illustrating the difference in maturity between the U.S. and Mexican markets.
Welch stressed the importance of that metric, “given our desire to introduce liquidity” to the Mexican market.
While the United States has developed a “hub-and-spoke” natural gas pipeline system, Mexico remains more of a “point-to-point” system, Welch said, explaining that, “we simply need more connectivity” to allow similar natural hubs to develop in Mexico.
The United States also has the advantage of clear, stable regulations and certainty around the legal framework.
“Speaking for our private equity sponsors, there’s got to be a stable, very U.S. government-type of enterprise that’s leading that opportunity set in Mexico for serious consideration on investment in that area,” Welch said.
He cited concerns raised recently by a bipartisan group of U.S. legislators to President Trump about anti-competitive practices by the Mexican government with respect to the energy sector.
President Andrés Manuel López Obrador has said publicly that Pemex and state power utility Comisión Federal de Electricidad (CFE) must be given preferential treatment, raising concerns about an unfair disadvantage for non-state actors in the market.
While natural gas has been less impacted by these measures so far than the refined products, liquefied petroleum gas and electric power segments, a level playing field is “critical nonetheless” for companies looking to invest in Mexico’s gas market, Welch said.
Challenges aside, “I don’t think that Mexico really has a choice with respect to natural gas,” he said. He noted the massive buildout of cross-border pipelines from the U.S. to Mexico commissioned by state power utility Comisión Federal de Electricidad over the last decade or so.
“It is much needed and it is very much welcome from the U.S. side…one person’s high price is another person’s low price or vice-versa, and I think it’s a very important symbiotic relationship that will continue to grow through time…”
He added, “I believe the U.S. with respect to serving Mexico, has the ability to meet every need that Mexico has…through existing and planned infrastructure.”
Andrew Baker. (2020). Mexico to Remain Vital Outlet for U.S. Natural Gas, Veteran Trader Says. USA. NATURAL GAS INTELLIGENCE. Recuperado de https://www.naturalgasintel.com/mexico-to-remain-vital-outlet-for-u-s-natural-gas-veteran-trader-says/
