Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.
This 36th Q&A in the series is with Daniel Salomón Sotomayor, an associate with the Mexico City-based legal firm Gonzalez Calvillo. Salomón has been involved for seven years in the Mexican energy industry and specializes in oil & gas, development of infrastructure projects, government procurement, joint ventures and strategic alliances.
Salomón, who has been with Gonzalez Calvillo since 2019, worked previously at Mexico’s Energy Regulatory Commission (CRE) as legal director of hydrocarbons regulation from 2017-2019. While in the position, he participated in the issuance, modification and termination of permits, the design of new regulation, the development of procedures for the approval of tariffs, and the monitoring of the hydrocarbon markets.
Prior to his time at CRE, Salomón worked at the Mexican Finance Ministry from 2015-2016, where he served as the head of the legal consulting department and designed E&P Contracts tendered by the National Hydrocarbons Commission (CNH) in its Round 1 bidding auctions. He also participated in the design of state oil company Petróleos Mexicanos’ (Pemex) first joint operating agreement for Trion, a deepwater field being developed by BHP Billiton and Pemex.
Salomón holds a degree in law from the Centro de Investigación y Docencia Económicas (CIDE).
NGI: In the first year and a half of the current administration, we have seen many changes in Mexico's regulatory agencies, including significant employee/staff reductions in CRE and CNH. What signal do the changes at the regulatory agencies send to the market?
Salomón: It is common for agencies to experience changes, especially when there are new directors. Both CRE and CNH have new head commissioners that have made changes within the structure of these agencies. However, the latest changes in CRE have generated particular attention. Part of these changes imply a decrease in the number of governing body sessions, a considerable increase in the time of procedures, and significant cuts in personnel.
These latest changes raise concerns for industry participants. Their operations may be limited or delayed by the regulator's responsiveness. For example, we must consider that a gas pipeline cannot start operations if it does not have General Terms and Conditions and rates approved by CRE. As a result, delays in these procedures may impede the start of commercial operations for these projects.
Another important consideration is from the perspective of financing. These types of changes within the regulatory bodies could be worrisome for investors as they could increase the risk outlook for existing projects, and delay the closing of financing transactions. It is normally a requirement to have the relevant authorizations for signing the financing agreements.
As for the CNH, it is important to note that the CRE and CNH are very different entities and in the first year and a half of the administration, the CNH has not been as impacted by political decisions as the CRE. The CNH has changed its lead commissioner, though has stayed on the sidelines in terms of some of the politically charged decisions that have resulted in significant changes within other energy agencies, such as the CRE.
NGI: What do you think the role of the Mexican energy regulatory bodies will look like in a few years?
Salomón: I think regulators have a huge challenge in this scenario. They have fewer resources and the same obligations. In this sense, the role of regulatory agencies should be reevaluated. If the objective of this administration is the reduction of bureaucratic structure, the current regulatory approach must be reconsidered.
NGI: In your opinion, what is the biggest challenge in the Mexican energy sector currently?
Salomón: The biggest challenge is to guarantee the rule of law. Regulatory practice must maintain fairness and legality, while commercial activities conducted by state-owned enterprises must follow industry rules and economic competition laws.
Before talking about any technical or economic challenge, we must guarantee the strength and impartiality of our legal framework. This will allow Mexico to regain the confidence of national and multinational investors. Relying on a model that favors the participation of multiple agents can support economic and industrial development, job growth, poverty reduction and even the strengthening of state-owned companies.
NGI: What is the biggest opportunity in the Mexican energy industry?
Salomón: We have access to the cheapest natural gas in the world. We must use the new supply routes to import natural gas at low prices. This strategy must be developed from a comprehensive perspective that promotes energy transition and improved industrial development.
Part of this strategy could include the import of natural gas, its liquefaction and later its export to Asian markets. Additionally, it would be a boost to the petrochemical industry, domestic supply and electricity generation.
NGI: What are the implications of the many litigation procedures in the energy industry?
Salomón: This current government policy has important implications for the entire energy sector. At the moment, the best-known cases are within the electricity sector, where we are facing a new paradigm on how sector decisions are made.
Because of recent changes to sector rules, energy policy and regulatory decisions will ultimately be decided by federal courts. We will also see a lot more from competition watchdog Cofece.
Although there is currently no case within the natural gas market, participants could resort to litigation to pressure the granting of permits, rates or other pending authorizations. They could also look for alternatives if they consider the treatment to be different between private companies and state companies.
NGI: The CFE has announced that it is going to generate more electricity with fuel oil. What are the implications of that strategy?
Salomón: In addition to the environmental and economic consequences, I would like to discuss important legal considerations.
It is necessary to remember that the development strategy for natural gas transportation infrastructure was designed so that the CFE would consume that gas at its generation plants. In accordance with that, CFE, through CFEnergía, acquired multiple take-or-pay obligations for capacity on various natural gas pipelines. Therefore, if CFE reduces the consumption of natural gas, it would expose CFEnergía forcing them to pay for unused capacities.
To cover this risk, CFEnergía will need to expand its client list and incorporate best business practices such as entering into NAESB contracts with competitive rates. Likewise, CFE can assist the secondary market by assigning capacity to new participants.
NGI: Why do you think that Mexico should allow for the development of natural gas export projects at a time the country has insufficient national production of the fuel?
Salomón: Liquefied natural gas (LNG) export projects involve multi-million dollar investments in our country that have direct economic benefits. In addition to direct investment, long term they will help trigger additional infrastructure projects such as capacity expansions and new infrastructure in transportation systems. This will help provide natural gas to states like Sonora and Sinaloa, or spark natural gas distribution projects through tanker trucks to areas without access to this fuel.
The main argument of the detractors of this type of project is that it favors the export of a product that in certain areas of the country we lack. But the LNG that is intended to be exported is previously imported from the United States, so there is no impact on the domestic product itself. Proper regulation by the Energy Ministry would allow the export of LNG while promoting domestic market growth.
NGI: What are the upcoming challenges for Cenagas in the administration of the national pipeline system Sistrangas?
Salomón: First, Cenagas must approve the five-year plan for 2020-2024. To do this, Cenagas has received two technical opinions from the CRE regarding integrated systems that need to be addressed.
Another challenge is the obligation to offer natural gas storage alternatives. In recent months, Cenagas has made some attempts to integrate or use capacity of the Altamira LNG Terminal, however, CRE has rejected various proposals. Therefore, Cenagas, as independent system operator, must continue the strategic storage project in the Jaf oil field that already has a favorable technical opinion from CRE (Resolution No. A/029/2018).
Another pending challenge is the decrease in imbalances in Sistrangas. Through various legal and commercial actions, Cenagas has achieved new rules to charge penalties and to acquire gas in imbalance cases. However, these procedures do not yet have measurement mechanisms that directly identify those responsible for generating the imbalances so that Cenagas can prevent such behavior. Likewise, Cenagas has refused to publicly announce the winners of its natural gas suppliers’ auctions, which were held to contract suppliers to cover system imbalances.
In this sense, the immediate challenges of Cenagas are 1) to conclude with the approval of the Five-Year Plan 2020-2024; 2) promote the strategic storage of natural gas; and 3) improve measurement mechanisms to identify those responsible for imbalances in the system. On the CRE's side, it is essential to issue the administrative provision regarding integrated systems to offer clarity on the obligations and processes of the independent system operator’s activities.
