Mexico: The Role of the Regulator And Market Operator Within the Natural Gas Implementation Market

The Mexican Energy Sector history, has recently been imprinted by remarkable events. The Congress approval of the Energy Reform on December 2013 is one of the most noticeable in decades.

Its main purpose was to allow for the transition from a closed controlled economic sector into a competitive free market system. In order, to achieve it, Mexico had to undergo a gradual transitioning process that, on one hand extinguishes the former State monopoly held by Petróleos Mexicanos ("Pemex") on the hydrocarbons sector and the Federal Electricity Commission ("CFE" for its acronym in Spanish) over the electricity sector, and on the other hand, the Energy Reform is aimed to encourage the participation of the new competitors in the market.

In the natural gas sector, that transition into a free market with competitive conditions cannot be envisioned without the role of two key government entities, the Energy Regulatory Commission ("CRE" for its acronym in Spanish) and the National Centre for Natural Gas Control ("CENAGAS" for its acronym in Spanish).

The CRE is the regulatory entity that monitors the efficient development of the sector and ensures as well, the reliable supply of power and hydrocarbons, while the CENAGAS, is a decentralized entity of the federal government, assigned to the Energy Ministry ("SENER" for its acronym in Spanish) which acts as manager of the Integrated Natural Gas Transportation and Storage Systems  ("SISTRANGAS" for its acronym in Spanish.) and operates and maintains its own network of natural gas pipelines.

The main actions implemented so far by these entities aim to promote the natural gas market opening. These actions are based on the guidelines issued by the SENER contained in its "Public Policies for the Natural Gas Market" which have identified three key areas  for the development of the natural gas market:

  1. Essential Information: The market participants or stakeholders shall have the necessary information available that enables them to make the best decisions regarding the acquisition of natural gas. Users, should know the amount of natural gas available at the injection points. Therefore, Pemex must disclose the national offer.
  2. Open access to transport systems; It provides the users with the possibility of reserving available capacity from existing pipeline systems through a competitive process. CENAGAS as the independent system manager is conducting an open season, to implement the capacity reserve in the system.
  3. Increased Competence in Trading Activities; With the aim of reducing Pemex dominant position in the natural gas trading market.
  4. In order to achieve the main objectives both entities (CRE and CENAGAS) role is of the utmost importance.

Regarding the first key issue (essential information), two major instruments have been implemented:

  1. The Electronic Bulletin: the CRE through its General Administrative Provisions ("DACG" for its acronym in Spanish) has established the obligation for permit holders to implement an electronic bulletin digital platform. The purpose of this platform is to share with the users and general public information regarding the total capacity, available capacity, open seasons procedures and any other relevant information regarding the system, as well as to act as a communication channel between users or general public and the permit holder.
  2. Report on Commercial Transactions: the CRE has established the procedure through which the natural gas traders provide relevant information to the CRE regarding commercial transactions carried out in the sector.

The aim of these instruments is to provide the market operators with the means to identify relevant information regarding transportation, volumes and prices (which will be topped by the CRE), regarding the general market conditions along the different regions within the national territory.

The second objective set forth by the SENER is to enable users in the natural gas market to reserve capacity within the pipeline network. On this matter, the DACG regulate the open season and the rendering of gas pipeline transportation and storage services. The aforementioned provisions establish the procedures to have a competitive process for the capacity allocation regarding the referred activities.

In accordance with the above, two phases have been established to designate capacity within the SISTRANGAS pipeline network:

  1. In order to secure the national gas stock and supply, the CRE determined through Resolution 968/2016, the capacity that State-owned companies are entitled to reserve within the pipeline network, which accounts for roughly half of the current capacity.

The second phase establishes an open season called by the CENAGAS. Its main purpose is to place the remaining capacity in the market, which is the capacity that was not reserved to State-owned companies. It is worth mentioning that in this currently ongoing phase the service requests have already been made and the process which will take into account the points mentioned below, will allocate the remaining available capacity.

In addition to the previously mentioned it is important to note that;

  1. As an acknowledgment to the users rights acquired before the Energy Reform, provided that they had already been using the pipeline network on a regular basis, then they (the users) will have a certain ensured capacity, on the delivery point, but not necessarily in the entry point. The aforementioned capacity will be determined by the CRE. This acquired right has a priority over the other requests for capacity allocation.
  2. On the open season, the DACG include a modality called beta that consists in allowing for the buyers to pay an overprice, higher than the established maximum tariff, to determine which user will first have allocated capacity, used in case that there is not enough available capacity for every service request.
  3. The import pipelines through which natural gas enters into the country, namely on the United States, are designated as, "Ductos de Internación". These import pipelines had all of their capacity allocated to Mexican State-owned companies and in an effort to allocate that capacity to private companies, it was established that the State-owned companies had to allow for a certain amount of their capacity to be used by other parties. However, due to economic reasons this premise is still unfeasible.
  4. The DACG establish an open access obligation, which is that of the permit holder to ensure it renders its services under equal circumstances to equal users (provided there is available capacity).

To achieve an adequate implementation of the natural gas market the last measure deals with the increased opening and diversification of the market within the natural gas commercialization sector.

For this purposes, the CRE has established the procedures for Pemex having 70% of its marketing agreements transferred to private parties, through an Agreement Transferral Program (Programa de Cesión de Contratos or "PCC" for its acronym in Spanish) drafted by the CRE.

The PCC is structured as follows:

  1. Phase I, transfers 20% of the agreements;
  2. Phase II, transfers 20% of the agreements;
  3. Phase III, transfers 30% of the agreements.

The transferred agreements will be selected randomly, 30% of the agreements will remain as clients of Pemex, while the remaining 70% will be transferred in accordance with the previously described phases.

It is important to underline that this regulation contains two relevant points:

  1. Users that were selected to remain as clients of Pemex may terminate the contractual relation without penalty, after having properly notified Pemex with 30 days in advance.
  2. The transferred agreements do not contain any obligation for the user to cancel their commercial relationship with Pemex. In other words, since Pemex sole obligation lies in making the agreements available, it is possible to continue with a commercial relationship or collaboration between both parties.

The CRE approved Pemex amendments to the terms and conditions for the First-Hand Sale (venta de primera mano "VPM" for its acronym in Spanish) of natural gas, and approved the model of the marketing contract.

Both instruments will allow Pemex customers to choose to contract marketing services that include molecule and other services such as transportation, storage, among others, or only the sale of molecule at an injection point, to be able to contract transportation and other services with others or directly under firm bases capacity agreements.

First-Hand Sale means the first sale, in national territory performed by Pemex, its subsidiaries or divisions, and any other legal entity, on behalf of the State to a third party or among them. Such sale shall be performed at the outputs of processing plants, refineries, injection points of import pipelines ("ductos de internación") or injection points directly from production fields.  Pemex, might providing unbundled services at the first-hand selling price, also be subject to the asymmetric regulation in order to limit the dominant power of the company.

The objectives set forth by the SENER to implement the new model of the natural gas market are being fulfilled thanks to the work of the CRE and CENAGAS. Complying with predetermined deadlines both entities are working on the follow up.

Even though the natural gas market still needs more time to increase its competitiveness, the path taken seems to be showing its first results, which gives a positive forecast for the future development of the sector.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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