Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
The Comisión Reguladora de Energía (CRE) has given Cenagas authorization for a new list of rates for Mexico’s national pipeline system known as Sistrangas. The configuration of this list of rates reflects the way in which the gas market has been consolidated in recent years and the realistic prospects for its future operation. This new rate structure is intrinsically linked to the effects of the strategic decisions taken in the last decade which made imports the basis for Mexico’s gas supply.
Like the rate list in force in 2023, there will be more routes from import points, direct or indirect, to almost all extraction points in the integrated system. Even the area around Cactus, home to the largest gas processing center in southeastern Mexico run by Petróleos Mexicanos (Pemex), will now be able to receive, on an interruptible basis, gas imported from tariff zone 3, which is adjacent to southern Texas. Paradoxically, the inclusion of this extensive connectivity of regions implies an improvement in energy security. In a scenario of greater decline in national production, users in the areas surrounding the processing points will theoretically have the option of contracting routes to bring in gas from Texas.
The most notable feature is the inclusion of the rates to deliver imported gas to zone 8 originating from the Montegrande and Zapotlanejo interconnections. On the one hand, it will ensure greater availability of gas for the southeastern region, which would be needed in the event that Pemex extracts less associated gas from its operations and if its self-consumption grows with the start of operation at the Dos Bocas refinery. The possibility of nominating a route from Ramones to Cuxtal means that commercially Yucatán could have better price conditions for the gas it receives.
The commercial confluence of imported natural gas can also improve the wellhead price of private producers operating in the area. The opportunity cost will be evident and will include the additive effect of the entire journey from the border. Overall, these adjustments mean a step towards an energy market with more trading options.
Based on a methodology that combines cost recovery with gas balancing activities, the new rates involve a complex calculation that considers a cost allocation method based on the capacity and distance involved in the entire transportation operation. Historically, the zone 3 rate had been the one with the highest value given the gas transit from Net Mexico to the Ramones system and the aggregate supply from Tennessee, Tetco, Kinder Morgan Border, Energy Transfer and Burgos.
Although these import points continue to be the busiest, their difference with respect to gas reception at other interconnections has been reduced. For example, the entry of gas into Montegrande and through Transportadora de Gas Natural de la Huasteca, near Querétaro, has caused an increase in the weighted value of zone 5. On the other hand, the fact that less gas enters through Altamira causes the zone 4 weighting to have declined.
In contrast, Zapotlanejo's injection of gas from Waha causes a greater allocation of costs to zone 6. The same occurs with zone 7 due to the Playuela supply caused by the Ixachi field. That is the reason why the zone 3 rate has grown less in relative terms than the zone 5 and 6 charges. However, the new rate list introduces changes that are not mere numerical adjustments. They reflect the evolution of the operational reality in which Pemex's efforts to increase its supply have failed to reverse trends and in which new gas pipeline interconnections have changed pressure and flow conditions.
The fuel charge has also been significantly modified from 1.236% to 1.159% of the total volume of gas transported. The fuel charge compensates operators for the natural gas used by compressors installed in pipelines to push gas through the network. Its calculation includes the performance of the equipment and its effective use. In the case of Sistrangas, the new parameter in theory is a more precise representation of the fuel consumption by the compressors of the different gas pipelines that make up the integrated system. Compressor stations such as Altamira and Soto La Marina have been inactive for longer due to new flows coming from the interconnections in El Castillo and Zapotlanejo in the west, Montegrande in the Gulf region and Pedro Escobedo in central Mexico.
Deliveries from the Esentia pipelines (known as the Wahalajara system) and the Sur de Texas-Tuxpan pipeline have increased pressure conditions across the Sistrangas. This benefit to the networks sponsored by the Comisión Federal de Electricidad (CFE) is a formidable externality for shippers and, ultimately, for end consumers given that Cenagas has not managed to add any relevant infrastructure during the last seven years.
Cenagas, as an independent operator, does not own all of the transportation and compressor assets. It must pay approximately $865 million to the private owners of six gas pipelines in exchange for the right to use their full capacity. These amounts will cover operating costs, infrastructure maintenance, and a fair return on investment for each pipeline owner. This ensures that the current system remains financially sustainable and reliable in operation. The lack of new projects means stability in the general levels of the different rates.
Although the charges for some routes have changed in value relative to other routes, these variations are due to cost allocation criteria. As the weights are calculated based on distances and capacities, the variations observed today have to do with changes in contracted capacities. As has already been explained in this column, these changes are due to aspects exogenous to Cenagas.
Some users have freed up capacity or migrated to other systems. The lack of national gas or the appearance of new routes explain this behavior. One element worth noting is that the configuration of flows, contracted capacity and nominated transactions have led Cenagas to provide more interruptible services.
The economic regulation dictated by the CRE forces operators to return to users, through generalized discounts, a fraction of the income obtained from said service.
The interrelationship between rates as an economic signal to motivate the use of infrastructure, and the use of infrastructure as a critical aspect for cost recovery and allocation, will have long-term effects that deserve to be understood despite their complexity. The adjustments in Sistrangas rates are not only more stable over time because its infrastructure has not grown. There is also a differentiating contractual aspect related to the formation of CFE's investment decisions. With the design of its bidding processes, CFE faces payment obligations that will increase in the long term. Rate renegotiations motivated by pressure from the government against private transporters have exacerbated this effect.
The CFE is going to gradually pay more dollars for the same space reserved in the gas pipelines. At some point, this gap may imply serious distortions in the logistics cost for similar origin-destination combinations. Its correction will involve an energy policy in which more flexible rates are allowed.
The recently approved Sistrangas fee schedule is more than a series of numbers. It is a reflection of the current state of the market and a plan for its development. Looking to the future, regulatory reviews of the Sistrangas rate structure will merit broader considerations than the extrapolation of a numerical methodology applied since 2017.
As new actors enter the natural gas market, CRE and Cenagas will have to evaluate the effectiveness of their current rate methodology to promote the efficient use not only of the integrated system but of the entire gas network in the country. Perhaps it is time for Cenagas to begin offering negotiated rates with a term longer than one year and to promote the creation of a secondary capacity market, in which regulated rates are only a reference point. Let the market be responsible for giving a more accurate assessment of transport costs.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
