Mexico moves closer to an open energy market

Mexico’s senate this week approved key energy reform bills proposed by the government of Enrique Pena Nieto, a major step towards opening up the country’s energy sector to private investment.

The crucial hydrocarbons bill, which ends the monopoly of Mexico’s state oil and gas company Pemex over upstream and downstream activities, was part of a package of reforms passed between 19 July and 21 July.

The legislation will now go before Mexico’s chamber of deputies, with approval expected by late July or early August.

The reforms will allow private companies to participate in the exploration and production of hydrocarbons for the first time since 1938. While hydrocarbons will technically remain property of the state, energy producers will be able to own and operate licenses without forming a partnership with Pemex for the first time in 70 years.

The government hopes this will reverse upstream stagnation, which has seen oil output drop by 1m bbl/day between 2004 and 2013. Natural gas production has meanwhile dropped 10% since 2009 to average 5.7 billion cubic feet (bcf)/day- or 161 million cubic metres (mcm)/day – over the first five months of this year.

Under the reforms, control over Mexico’s natural gas transmission grid will be passed from Pemex to a new state-appointed operator Cenagas. This agency, which is expected to begin operating this December, will oversee auctions for new and idle pipeline capacity, creating the conditions for new companies to enter into the market.

The legislation also establishes rules for the separation of midstream and downstream companies. Cenagas is charged by the reforms to double the number of companies involved in transport and distribution activities over the course of the next five years.

CFE infrastructure tenders

In anticipation of the reforms, Mexico’s state-run power utility CFE officially launched a series of tenders for new energy infrastructure across northwestern Mexico.

Through the tenders, announced on 21 July, private contractors have been invited to bid for the construction of the 423km El Encino-La Laguna pipeline and the 23km San Isidro-Samalayuca pipeline in the Mexican state of Chihuahua.

The projects will connect to new pipeline capacity to be constructed on the US border, linking northern Mexico to the Waha natural gas hub in western Texas.

The pipelines will cost approximately $700m and are planned to enter into operation between mid-2016 and early 2017, CFE said on 21 July.

Two combined-cycle gas-fired thermoelectric plants totalling 1.6GW in capacity will also be offered through the CFE tender.

The energy reforms proposed by the Pena Nieto government will open up Mexico’s power sector, creating competition for CFE which, until now, has held a monopoly on the market. The reforms will also give CFE the right to sell natural gas to domestic consumers for the first time.

CFE is currently Mexico’s main LNG consumer, receiving contractual volumes supplied by Anglo-Dutch major Shell and France’s Total at the Altamira terminal on the country’s Atlantic coast. Shell also delivers cargoes to the Manzanillo terminal on Mexico’s Pacific coastline from the Peru LNG facility at Pampa Melchorita.

CFE tendered for 29 cargoes last year for delivery between mid-2013 and end of 2014 in order to solve gas shortages in the southwest region of the country. The cargoes were seen as a stopgap measure, designed to maintain supply for CFE and Pemex before key cross-border pipeline infrastructure is developed.

A total of six new pipelines are under construction or proposed between the US and northern Mexico. Mexico’s import capacity is set to rise from 3bcf/day at present to nearly 9bcf/day by the end of this decade. James Fowler