Economic View

What steps can be taken to reduce Mexico’s dependence on natural gas imports from the US? 

CALVILLO: In the last three years the country has invested over $16bn in energy projects. The last time Mexico was building 48-inch pipelines was in the 1970s, which demonstrates the significance of the current construction. The ultimate aim is to position the country within an international network of pipelines to transport oil and gas, and for companies operating in the sector to have access to ultra-modern technology. This should finally class Mexico as one of the most important locations for midstream hydrocarbons infrastructures in the world. Given today’s low market prices, the quantity of natural gas available in the US, and Mexico’s lack of technology and therefore competitiveness in the field, the country’s dependency on US imports will continue. Mexico needs natural gas, but does not need to become a natural gas producer. Today the US is self-sufficient in natural gas; it is thus convenient for the country to export part of its excess natural gas to its southern neighbour. In Mexico the natural gas production business yields a negative profit. While Petróleos Mexicanos is competitive in producing oil and in extracting natural gas, at current prices national gas production in Mexico is unprofitable. The country should concentrate its focus on producing crude oil.   

How could the timing for the renegotiation of the North America Free Trade Agreement (NAFTA) be of relevance to structural reform in Mexico’s energy sector? What important aspects of the country’s regulatory framework can be improved? 

CALVILLO: This will be one of the big topics of discussion during the renegotiation of NAFTA. The bilateral discussions will help to bring more investment into the country: Mexico lacks drilling capacity and its significant untapped reserves are the perfect territory for large, experienced American corporations. Energy will be the easiest thing to discuss during the renegotiation of NAFTA in light of the recent opening of the sector, since in the original agreement the energy sector was only represented by the government. 

Mexico’s natural gas regulatory framework is advanced, given the fact the governing institutions have been around for many years. The country has regulatory certainty since the law is robust and well respected. The issue, however, is the regulatory delay compared to international regulations, especially in terms of oil, storage and pipelines. Mexico is years behind due to the lack of infrastructure to store and transport oil, as well as the security concerns around gas robberies. This makes certain parts of the production chain unattractive for international investors, since the risk of having a leakage can have international implications. 

In what way does the construction of landmark midstream infrastructure projects in Mexico act as a catalyst in accelerating the country’s energy reform? 

CALVILLO: Following the opening of the energy sector to private investment, infrastructure projects in oil and gas are extremely lucrative. However, neither Mexican banks nor Retirement Funds Administrators are financing these kinds of projects. There has not been a big boom of projects at the national level to make companies look for financing. The Ministry of Finance is finalising preparations for master limited partnerships that will create public and private partnerships to invest in energy projects. Unfortunately, Mexican business culture has a short-term mindset and goals, and given the variety of financing instruments available both globally and nationally, the country is lagging behind financially. 

Despite challenges involving the right-of-way when constructing pipelines, there have been noticeable improvements on the coordination front. There is now a single point of contact in the government that can intervene on issues concerning the purchase of land. When it comes to areas most affected by the pipeline’s construction, companies have a social responsibility to offer the fairest compensation to existing landowners. This will make it easier to build the projects, while also facilitating collaboration and building partnerships over potentially decades of operation.