July 16, 2007

Policy Implications of Mexican Pipeline Blasts

By George Baker

The natural gas pipeline explosions in Mexico, of July 3-10, 2007, have been attributed to acts of sabotage by a long-dormant peasant movement that is based in the states of Guerrero and Oaxaca. In Guanajuato, these acts of sabotage have had a cascade effect: the cut-off of natural gas has forced manufacturing plants to suspend operations, at the daily cost of hundreds of thousands of dollars, not only to the plants but to laid-off employees, the export account of the country, and even the exchange rate of the Mexican peso.

Pemex — for lack of gas storage — had to scramble to export its gas to Texas markets, doubtless at a discount.

The disruption of natural gas flows from Mexican fields to industrial customers adds to the concerns among Monterrey industrial companies of the fragile energy security of northern Mexico. Concerns about energy security in the region revolve around multiple issues, which include pricing distortions and the lack of investment by Pemex or private investors in natural gas storage.

Price distortions affecting natural gas are caused principally by the government’s netback pricing scheme, which artificially equalizes the Houston and Mexican markets by reference to the Houston market price. Where some price relief had been initially expected from LNG supplies to Altamira, in the end the Mexico’s Federal Electricity Commission (CFE) agreed to pay investors a price that is typically higher than that of Houston (Henry Hub plus 18 cents/MM BTU).

By Mexican law, private investment in natural gas storage has been possible since 1996, but for multiple reasons no project has ever been completed, in large measure owing to the lack of support by either Monterrey industry or Pemex Gas. Over the past decade there have been several proposals for facilities for natural gas storage. The Energy Regulatory Commission (CRE) has authority over permits regarding natural gas storage; in an ad hoc determination of what constitutes gas storage, it has already issued permits under this category for several LNG projects, including Altamira, Tamaulipas and Ensenada, Baja California.

The policy bottleneck regarding natural gas storage, both for the government, industry and regulators, is this: where Pemex Gas would seek a closed system with rights to 100 percent of capacity, private industry would want an open-access system, in which each customer would have their own storage account.

Industry has said that it wants the flexibility offered by an open-access system: Pemex’s having 100 percent control over a storage facility defeats the market purpose of gas storage. Mexico’s ever-timid private sector, mindful of the power Pemex has over its day-to-day operations, to date has never wanted to act against the wishes of Pemex Gas.

The lesson to be learned from this these bizarre acts of sabotage goes beyond adding military forces to guard energy facilities. It would be a positive outcome if an open-access natural gas storage facility were at last funded by private industry commitments.

—  George Baker

     Mexico Energy Intelligence

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George Baker, a MexiData.info guest columnist, is the director of Energia.com, a publishing and consulting firm based in Houston.  He can be reached via e-mail at g.baker@energia.com.