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Mexico needs policy shifts to increase gas production: speakers



Commodities in Mexico: A Platts news and analysis feature

By Daniel Rodriguez

Published online 13 July 2017



Mexico must implement changes to incentivize domestic natural gas production, Mexican government officials and industry participants agreed July 6 at the Oil Gas Innovation Forum in Mexico City.


The growing reliance on American cheap fuel imports is a threat to Mexico's future energy security as market dynamics change, they said.


"Right now, we are the only country that can practically import large quantities of natural gas from the US," said Carlos Morales-Gil, president of private Mexican oil and gas operator Petrobal, at the forum.


The forum was hosted and broadcast online by Siemens and Mexico-City based newspaper El Financiero.


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As gas becomes a global commodity and US' LNG exports grow this will threaten Mexico, said Morales-Gil, a former general director of Pemex's E&P division.


"[Cheap American gas] is a benefit that will not last long," he added. "We need to prepare for this change and produce our natural gas."


Juan Carlos Zepeda, president commissioner of Mexico's National Hydrocarbon Commission (CNH), said the "biggest challenge" facing his nation's hydrocarbon industry is growing domestic gas production.


Mexico's gas consumption is 7.5 Tcf/d, Zepeda said. Excluding Pemex's own gas consumption, Mexico imports 70% of the gas it consumes from the US, he added.


Mexico's Energy Secretariat (SENER) data show over 57% of Mexico's power is generated with gas and this is expected to grow at a 3.5% annual rate, Zepeda said.


However, this forecast is short because it does not consider power demand growth from electric vehicles, which is entering an exponential curve, Zepeda said.


"We are a few years of radical changes," he said. "The future of passenger transportation will be electric. In five years all of us will use electric vehicles... I don't doubt it."


A global shift towards electric vehicles and the use of compressed gas for cargo transportation will increase gas prices and demand, Zepeda added.



GAS PRODUCTION HAS FALLEN


The Mexican government must realize gas is not a profitable commodity like oil, said Sergio Guaso, director partner of oil consultancy Guaso360.


Gas royalties from blocks auctioned in Round 1 of CNH's upstream oil and gas auction were 40%-45%, much higher than the US' average of 12%, he added.


"Competitive pricing, the right fiscal regime for production, and competitive transportation tariffs are needed to give a positive netback for natural gas production," Guaso said.


"The government should not look for the maximum offtake, but to attract companies willing to offer the most investment," said Javier Strada, PwC's oil and gas director in Mexico.


Aldo Flores, Mexico's hydrocarbon deputy secretary, acknowledged that a shift is needed and Mexico is working to improve its gas strategy.


Jose Antonio Escalera, Pemex's exploration director, agreed the country needs a special fiscal regime for gas. Without one, it will be hard for Pemex to develop its 60 billion boe of prospective gas resources, most of it in shale and deepwater reservoirs, he added.


Zepeda said CNH will release detailed information about the fiscal regime along with its draft rules for participation for Round 2.4 for unconventional and deepwater resources soon. In Round 2.4, Mexico will offer market significant shale gas and oil resources in its Burgos and Tampico-Misantla regions.


Pemex's gas production has averaged 4.39 Bcf/d this year from 6.5 Bcf/d in 2009, CNH data show. Mexico's private gas production this year has averaged 35 MMcf/d.


If the trend continues, CNH forecasts domestic gas production will fall to between 4.628 Bcf/d and 2.69 Bcf/d by 2030. How much output decreases will demand on how effective Pemex and new operators are at increasing production.


Over the last four years, Mexico lost half of its total gas reserves, leaving enough reserves to cover Mexico's demand for four years, CNH's data show. Earlier this year, CNH said the country's proven gas reserves fell 17.8% to reach 10.4 Tcf in 2016.


Next story: Pemex wins 59% of Mexico's natural gas open season



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