Mexican gas LDCs seen booming under privatization program

Mexico's gas distribution industry is booming as a result of government privatization efforts, says the chairman of the Mexican Natural Gas Association.

Angelica Fuentes made the comments at a recent meeting of the Washington Natural Gas Roundtable in Washington, D.C.

Fuentes, also CEO of Mexican firm Grupo Imperial, said that 2 years ago, the Mexican gas industry was almost entirely Pemex, because Mexico's constitution had reserved the industry as a state monopoly.

She noted that the private sector could own gas distribution firms, but profits were strictly controlled and insufficient to attract much investment.

"The Pemex natural gas transmission system was fairly well-developed and maintained country-wide, although it was-and remains-underutilized in relation to its system capacity, and its market focus was principally large industrial and power generation, as well as Pemex's own petrochemical and refining operations."

Privatization progress

In 1995, the gas industry was opened to private ownership and investment. Since then the Comisi?n Reguladora de Energ!a (CRE) has established gas regulations, pricing, and rate orders. It has issued distribution and transportation permits and set franchise areas.

"Individual and consortia of Mexican and foreign gas companies have acquired gas distribution properties and permits in Chihuahua, Hermosillo, Mexicali, Toluca, and Río Pánuco.

"They have expressed formal interest in distribution in Mexico City and many other areas, and acquired long line and short line transportation permits."

She said CRE has opened new grassroots distribution zones, or franchise areas, in bidding sessions about every 6-8 weeks.

"Existing Mexican distribution companies are growing, and many foreign companies are actively negotiating joint-venture arrangements with Mexican partners to pursue a wide variety of gas projects.

"From a standing start a little more than 2 years ago, the Mexican natural gas industry has gone from essentially the sole province of the state to a very promising and fast growing private sector industry.

"The role of Pemex certainly remains substantial, but Pemex has also shown every indication of adapting to the new rules of the game and the new institutional structure in a way that is compatible with and supportive of the growing importance of private investment and ownership in the industry.

"The recent political developments and the positive movement of fundamental economic indicators for Mexico further strengthen the country and the market climate for investment in infrastructure industries like natural gas."

She said that LPG and fuel oil are the dominant fuels for 90 million Mexican consumers and noted that less than 1% of residential and commercial consumers use natural gas. Market shares of existing gas distributors are growing 10%/year.

Policy hurdles

Fuentes contends that CRE faces two key policy issues in the next few months.

CRE will consider the terms under which Pemex, now a nondiscriminatory and unbundled transporter of gas, makes sales. And it will set open access and nondiscriminatory transportation rules for Pemex, which moves almost all gas in Mexico.

"Both of these initiatives are expected to confirm and enhance competitive opportunities and gas market development. Transparent and market responsive pricing in the sale of gas as a commodity, and in the rates for its movement, are essential to the maturation of the Mexican gas industry, and we fully expect that these elements will be present in the very near term on the Pemex gas system."

And she said the Mexican Natural Gas Association supports early removal of the 6% Mexican tariff on gas imports. The North American Free Trade Agreement requires the tariff to phase out at 1%/year.