Baker Institute expert: Mexico must address decline in its natural gas production

David Ruth
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Jeff Falk
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Baker Institute expert: Mexico must address decline in its natural gas production
Duhalt: ‘Enormous inefficiencies in Mexico’s gas production and transportation sectors have accumulated’

HOUSTON – (Feb. 27, 2018) – Since 2010, Mexico’s demand for natural gas has been accompanied by a decline in domestic production, which had made imports of this resource increasingly vital, according to an expert at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

Private and state-owned companies — from producers to pipeline operators — and a solid governmental regulatory apparatus must now help guarantee the consistent supply of natural gas, said Adrian Duhalt, postdoctoral fellow in Mexico energy studies in the institute’s Mexico Center and Center for Energy Studies. He outlined his insights in a new issue brief, “Mexico Shifts Focus to Natural Gas.”

“Enormous inefficiencies in Mexico’s gas production and transportation sectors have accumulated over the past decades, resulting in the decline in Mexico’s natural gas production and a situation that will require considerable resources to be reversed,” Duhalt wrote. “The way forward is to halt state-generated distortions of the market, realize the value of the participation of firms — both private and state-owned — and recognize the necessity of their participation to make Mexico more competitive.”

The introduction of Mexico’s energy reforms in 2013-14 unleashed a profound transformation in the natural gas industry that boosted an already growing trend in the country’s gas market, Duhalt said. “Due to the new institutional scaffolding put in place by the reforms and the Mexican government’s ongoing strategy to encourage the generation of power from cleaner sources, Mexico’s demand for natural gas has increased sharply over the past few years,” Duhalt wrote. “As a result, natural gas is now regarded as the most important fuel in Mexico’s energy blend.” According to the country’s Secretariat of Energy (SENER), this shift is only expected to accelerate. In fact, domestic natural gas demand is set to continue its upward trajectory through 2031.

However, for almost a decade, the gap between Mexico’s demand for gas and its domestic production has been growing, making imports all the more important, Duhalt said. The National Hydrocarbons Commission estimates that from January to October 2017, imports of natural gas averaged 61 percent of the country’s overall consumption for power generation, industry, transport and household and commercial uses — a large jump from 32 percent in 2012.

“Mexico’s dependency on imports can be worrisome, particularly if a truly integrated North American gas market develops in the future,” Duhalt wrote. “Nevertheless, policymakers must bear in mind that implementing mechanisms to guarantee the supply of natural gas to domestic users such as power and manufacturing plants is, in fact, more important. And if demand must be met by imports for the time being, then so be it. Put simply, it is a matter of securing access to natural gas within the context of the widening gap between domestic demand and production. That is why if softening dependency on imports down the road is an overt policy goal, greater participation of firms in Mexico’s emerging natural gas market is an important avenue to pursue. For that to happen, investment in upstream activities and transport infrastructure, as well as the adoption of market-based practices, must be part of any policy that seeks to reduce import dependency.”

Duhalt said that for firms to be “incentivized to invest in and obtain greater efficiencies from gas market integration, SENER must continue making progress in building a more efficient market.”

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Follow the Baker Institute Mexico Center via Twitter @BakerMexicoCtr.

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Related materials:

Issue brief: www.bakerinstitute.org/research/mexico-shifts-focus-natural-gas.

Duhalt biography: www.bakerinstitute.org/experts/adrian-duhalt.

Baker Institute Mexico Center: www.bakerinstitute.org/mexico-center.

Founded in 1993, Rice University’s Baker Institute ranks among the top three university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.