In June, the Ministry of Energy (SENER) issued an official letter that directs the National Center for Natural Gas Control (CENAGAS) and the Energy Regulatory Commission (CRE) to modify the terms and conditions applicable to the National Integrated System for Transport and Storage of Natural Gas (SISTRANGAS), forcing industrial and commercial consumers to buy gas exclusively from Mexican government-owned companies. Specifically, the rule change would require that any user of SISTRANGAS demonstrate that the gas has been supplied by either the Federal Electricity Commission (CFE) subsidiaries – namely CFEnergia and CFE Internacional – or by Pemex. If the rule were enacted, users would be given 60 days to comply. Additionally, according to the document signed by Energy Minister Rocio Nahle, if there is a choice between buying gas from CFE or Pemex, CFE should prevail.
According to SENER, CFE is losing $490mn annually due to underutilization. 59% of its import capacity and 32% of its domestic capacity remain idle. The proposed measure aim to correct the imbalance and reduce the costs associated with the underutilization of gas resources. However, the ministry’s underlying arguments are dubious and do not justify the rule change. Legal experts agree that follwing this strategy could be quickly challenged in the courts. The new rule would hinder competition in the wholesale gas market and limit users’ supply options. Notably, the Mexican Constitution and the Hydrocarbons Law stipulate that gas-related activities are subject to free competition; gas transportation infrastructure must not discriminate against potential users and allow for open access. Moreover, SENER’s strategy openly defies such international treaties as the United States- Mexico-Canada-Agreement (USMCA).
SENER’s rule change could also place daily operations and the continuation of transport services at higher risk. Proposing that CFE, with all its technical deficiencies, serves as an intermediary would subject service delivery to bureaucratic fiat and likely raise the cost of gas. Currently, CENAGAS holds the legal authority to implement SENER’s proposed change, but the CRE would be responsible for creating new regulations to implement the new rule.
In our view, CENAGAS must act as an independent administrator and treat industrial and commercial users, as well as Pemex and CFE, equally to ensure the continuity of gas service in Mexico. However, the agency, currently headed by Nahle’s close ally Abraham Alipi (see our Personality of the Week), will likely follow SENER’s instructions. According to Horizon contacts, transportation contract renewals with CENAGAS will be conditioned on compliance with SENER’s new directive. Consequently, CENAGAS has already requested information from users and set 13 August 2022 as a deadline for them to provide evidence issued by CFE to prove gas is supplied by a government-owned company. Our contacts also report that 71 contracts involving 206 users have already been identified by CENAGAS and will be affected by the changes.
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Furthermore, this is not the first time CENAGAS has exerted its coercive authority against private players. In December 2020, it unilaterally cut off gas transport service to Braskem-Idesa after President Andres Manuel Lopez Obrador (AMLO) deemed the company’s ethane supply contract with Pemex to be disadvantageous. Once Braskem reached an agreement with the NOC, its transportation contract was reinstated.
The Federal Economic Competition Commission (COFECE) could delay the proposed modifications to the gas market. Once the CRE issues new regulations, the COFECE could file a constitutional complaint against the regulator. However, whether the COFECE intervenes or not, changes are imminent. We expect two possible scenarios to unfold: users accept the new conditions, given the risk of seeing their gas supplies interrupted, or take legal action against SENER’s measures, triggering a steady stream of legal protections or “amparos.” Legal action is likely because the proposed changes constitute a clear and direct violation of the constitution. Moreover, several business groups have already expressed their concerns to the president. AMLO tried reassuring business leaders by promising negotiations, but talks have not started. In our assessment, the proposed changes are part of the government’s questionable strategy to meet AMLO’s policy goals and give the CFE expanded market power through administrative measures amid growing gas market volatility.
personality of the week
Abraham Alipi
Head of CENAGAS. A close ally of Energy Minister Rocio Nahle, Alipi is one of the leading candidates to succeed her. A specialist in foreign trade and customs, he has served as head of CENAGAS since February 2021. Alipi has extensive experience in the oil industry, especially in procurement, planning and market intelligence.
Alipi had worked at Pemex for 20 years, from 2001- 2021. His last position at the NOC was at its subsidiary, Pemex Exploration and Production (PEP), where he served as deputy director of Services Administration, managing contracts for engineering and construction services, equipment supply, logistics, drilling services and maintenance. At Pemex, he also served as a contracting manager for the Production, Marketing and Reliability unit and as a planning and programming specialist for maintenance procurement. Alipi was removed from Pemex by CEO Octavio Romero at the beginning of his term. Afterward, Nahle appointed him as head of CENAGAS, a post previously held by Elvira Daniel, a member of Romero’s inner circle.
Originally from Tabasco, Alipi is a close friend of AMLO’s son Jose Ramon Lopez Beltran, with whom he frequently joins for lunch along with Bernardo Bosch, a former advisor at PEP. Notably, Alipi was involved in a public relations scandal after traveling to the 2020 Super Bowl on a private plane with businessmen pursuing contracts at Pemex.
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