The Mexican gas tariff

Mexico's decision last month to eliminate a 4% tariff on imported natural gas is best seen as a welcome early step on a long road.

The move might untether pipeline projects needed to ensure supply in the industrial states along the border with the U.S. But it doesn't herald the sort of sweeping privatization that Mexico's energy industries need.

The tariff's end on July 1 will nevertheless advance an effort by the administration of President Ernesto Zedillo to open gas transportation to private investment. At the end of 1995, the administration said it would welcome private capital for gas pipelines-previously reserved to Pemex, the state oil company-and local distribution companies (LDCs). Its motivation: proper concern about meeting rapidly growing demand for natural gas in the northeastern states.

Privatization effort

In response to the 1995 overture, private investors applied to build new LDCs and bought formerly state-owned LDCs in several Mexican states. And Mexico's Energy Regulatory Commission moved to open access to transportation by requiring that pipelines operated by Pemex provide service for other gas owners. The commission further established hubs-at the Houston Ship Channel and a Pemex production facility in southeastern Mexico-to link Mexican and U.S. gas prices. Houston consultant George Baker reviewed these developments in an article in the January/February issue of Oil & Gas Journal Latinoamerica, an English version of which appears in the Latin America Forum of OGJ Online (www.ogjonline.com).

The opening of Mexican gas transportation should have triggered additions to pipeline capacity for gas from the U.S., a logical supplier to the northern states. That it has been slow to yield construction is the fault of the tariff, a product of the North American Free Trade Agreement. The agreement allowed Mexico to charge a gas tariff of 10% in 1993 and of a percentage point less each year until 2003.

The price advantage the tariff gives Pemex has until now discouraged construction of import pipelines by other companies. "The result," Baker says, "is that open access remains a feature of the regulatory framework but not a feature of a working natural gas market." The Mexican market thus has not, like its northern neighbor, benefited from development of third-party gas marketing, multiple marketing centers, electronic commerce in gas trading, or a secondary market in pipeline capacity. To the extent the tariff itself has been to blame, the duty's early demise should unlock much potential value.

As long as Pemex controls gas produced in Mexico, however, privatization remains far from complete. And the Pemex monopoly over ownership of Mexican oil and gas shows no sign of changing. The strong nationalism that motivates politics in this area remains firmly in place.

It is that nationalism, expressed through the oil workers' union, that has blocked the Zedillo administration's effort, also begun in 1995, to complete privatization of the Mexican petrochemical industry.

Cumbersome scheme

Political opposition killed the planned sale of the Pemex Cosoleacaque ammonia plant in 1996. Later efforts to attract private capital to the industry faltered, note Robert W. Gilmer and Joan E. Williams of the Federal Reserve Bank of Dallas-Houston Branch in a May report.

A recent appeal for private capital with which to modernize the Morelos petrochemical complex failed to attract formal bids, say Gilmer and Williams. Politically unable to sell the plant, the government offered a cumbersome participation scheme that left Pemex as the majority owner. Private investors weren't interested.

Strong nationalist feeling about oil and gas obviously remains a powerful force in Mexican politics. The government's growing if intermittent recognition of the need for privatization at least gives the self-defeating sentiment a wall against which, occasionally, to collide.