A New Era in the Regulation of Natural Gas in Mexico, by José María Lujambio


July 1, 2017 is an historic date for the natural gas sector in Mexico. On such date started the so-called “permanent regime” of capacity reservation in the National Integrated Transportation and Storage System. In addition, the terms and conditions for the first-hand sales of natural gas made by Pemex Industrial Transformation, and the natural gas trading contract model for the affiliate MGC México, entered into force.

The last time the Energy Regulatory Commission (“CRE”) had sought to launch the “permanent regime” was in September 2011. At that time, Pemex Gas and Basic Petrochemistry successfully challenged the resolution by such regulator. In fact, that was the last attempt by the CRE to demonstrate that the regulatory framework, institutional arrangement and industrial organization in place since 1995, while allowing the entry of new players into midstream activities, left untouched Pemex’s enormous market power, as the country’s largest transporter and seller of natural gas down to the point of delivery. The critical alerts in 2012 were clear evidence that a major reform was needed to reorder the Mexican natural gas sector.

The energy reform of 2013 and 2014 addressed these problems with the creation of the National Center for Natural Gas Control as operator and transporter, and the granting of extensive powers to the CRE to enforce the principle of open and not unduly discriminatory access to the grids. The energy reform also sought to impose an asymmetric regulation on Pemex, its subsidiaries and affiliates due to their market power as natural gas sellers, in an environment of open competition with other players.

Parallel to the new regime entering into force, and as a bold step, on June 16 the CRE published a resolution eliminating the maximum price of natural gas subject to first-hand sales, paving the way for such price to be set under free market conditions. Therefore, a strong contractual regulation is being implemented, while deregulating the fuel’s price.

The reasons offered by the CRE have to do with the fact that there are already 70 permits for natural gas trading companies capable of competing in the market, and the open season organized by the National Center for Natural Gas Control resulted in a satisfactory allocation of capacity in Mexico’s pipelines. In the case of the south-southeast region, the diversity of sources of supply will come mainly from private production resulting from the first tenders for exploration and production, but the CRE noted that price liberalization was necessary in that region too in order to stimulate Pemex’s own production projects. This is in a context where domestic gas production has fallen 37% nationwide from January 2015 to March 2017.

The bases are set for Mexico to have a vigorous natural gas market which, in coming years, will nourish the industry and, in particular, the electricity sector, under competitive conditions. In order for this to happen, the CRE must exercise effective supervision and assert its renewed institutional strength in every chance.