By Sergio Beristain Souza
When you hear talk of natural gas in the media, they only speak partially on the topic; some speak only of distribution (consumption), or talk about multiple supply agreements (extraction) while others focus on liquid natural gas (LNG plants), transport of natural gas, or its cost, etc…, but this topic in particular needs to be looked at as a whole, from the time it is extracted from the subsoil until it is consumed in our homes or industries.
As a reference for the reader in general, natural gas is made up of a mixture of hydrocarbons, predominantly methane, and is found in underground deposits; hence its name. Mexico is a country rich in natural gas and we need to be more efficient in the way we extract, process and consume this resource given that it is one of the cleanest and most cost efficient sources of energy.
With the signing of the North American Free Trade Agreement, we hoped that the oil industry and its derivatives would evolve significantly in our country, partially reforming the respective legislation so that we might count on the investment necessary to promote production and development in the sector.
Prior to the Free Trade Agreement, hydrocarbons, which also cover natural gas, were regulated by way of the Regulatory Law of Article 27 of the Constitution in the Area of Petroleum, dating back to 1958. On the 11th of May 1995, a Decree that amended and added diverse provisions to the Regulatory Law of Article 27 of the Constitution in the Area of Petroleum was published in the Federal Official Gazette. Among these changes were those that provided for the participation of the social and private sectors in the distribution, storage and transport of natural gas, and to those who could construct, operate and own pipelines, installations and equipment according to the terms of technical and regulatory provisions and the corresponding regulations.
These legal reforms created an environment of optimism and hope in the industry, which, it was believed, would give impetus to foreign and national investment, bring about greater efficiency in the sector and gradually remove responsibility for these activities from PEMEX’s shoulders. However, almost 10 years have passed since the reforms and the luck of natural gas has not changed as anticipated for a number of different circumstances.
Despite the fact that the construction and laying of gas pipelines entails a declaration of Public Interest for public, social and even private lands according to the terms of paragraph six of article 10 of the “Regulatory Law of Article 27 of the Constitution in the Area of Petroleum”, article 107 of the “Natural Gas Regulations” and article 10 “Energy Regulatory Commission”, this labor has been far from easy. National and above all foreign companies that distribute or transport natural gas have encountered an infinite number of hurdles to carrying out their tasks such as denial of construction permits by Municipalities and Delegations; opposition on the part of “residents” to these works; false and biased information spread by certain media and other energy distribution companies; lack of support from authorities in promoting and making people aware of natural gas; manipulation by political parties; etcetera, all of which stemming from a lack of culture in the use of this energy resource, misleading information from the population, as well as a worrying lack of attention and coordination from Federal, State and Municipal authorities to guarantee viability in the development of this sector.
A climate of political uncertainty has led to increasingly heated discussions in the approval process for much needed reforms to the energy sector to promote exploration and extraction of petroleum and natural gas between the federal executive and diverse sectors of the legislature. The political environment has deteriorated to such a degree that the Supreme Court of the Nation has had to rule on Constitutional Disputes between these two powers; disputes that in reality stem from differences in the dogmatic posturing and inflexibility of the two powers. Just as an example, we know that as little as two years ago, the Court ruled by majority vote that the Regulations to the Federal Power Supply Law exceeded its powers by allowing private companies to sell any excess electricity they produce to the Federal Electricity Commission (a significant amount of which is generated by natural gas). As a result, some companies that had obtained permits to produce electricity prior to this dispute now found themselves on uncertain legal ground which made other companies in the sector think twice before participating in projects related to exploration, extraction, distribution and transport of natural gas in our country to such a degree that the Energy Regulatory Commission had to cancel an International Public Bid for the distribution of natural gas in the geographical zone of Veracruz. On the other hand and paradoxically, there has been a growing number of liquid natural gas plants in our country, which evidences a growth in the importation of this resource.
With respect to extraction, there are many and diverse zones yet to be explored; one of them is the immense Burgos basin in the north of the country, which we share geographically with our neighbor to the north. Recently, PEMEX Exploration has entered into public works contracts with recognized national and foreign companies (multiple supply agreements) with the purpose that they carry out search and exploration of natural gas for later extraction, so that PEMEX does not need to divert resources to these tasks. According to our criteria, this scheme is supported by our legislation and is an excellent legal instrument that can be perfected so that PEMEX, the CFE or similar authorities can legally get projects essential for the development of the nation off the ground, which, for reasons of political immaturity on the matter, have not been able to be solved by way of reforms to the law to provide legal and economic certainty to our country and to players whether national or foreign. However, a group of Senators and Representatives of the current legislature have questioned, and even disputed in court on rather adventitious grounds, the annulment of these agreements, and in this way discourage the motives of private investment and technological improvements in the sector. A closer look at this topic reveals that multiple supply agreements are instruments of great legal value conceived by a process of collaboration and maturation of legal forums intimately related to the sector, and what’s more, by a broad knowledge of the regulatory framework and that of the Public Works Law. As I have already indicated, while it can be perfected, we believe that this type of agreement is congruent with the law and behind political interests; we can only push for what is at this time the best way for PEMEX to be able to move forward in these tasks.
It is clear that the problem that presents itself is caught up in a vicious circle; the National Congress refuses to reform PEMEX’s tax regime, which denies this public-sector company the resources it needs to carry out exploration and extraction activities and obliges it to look for alternative solutions to generate additional resources in a world that is becoming more and more globalized and competitive. Entering into multiple service agreements is one way of achieving this, but by doing so it incurs the disapproval and disdain of members of the very same Congress who have even initiated legal proceedings against them, all of which generates a climate of hostility among our political class, and of uncertainty in the population and potential investors both national and foreign who think more and more carefully about investing in this sector.
In relation to liquid natural gas plants (or LNG plants), which incidentally are nothing more than re-gasification plants for the natural gas we import, an environment favorable to exploration and extraction of the natural gas reserves we possess in the heart of our soil is lacking. Projects for re-gasification plants have also suffered the misfortune of local and federal political interests, such as the projects in Baja California, or the project that is ready to go ahead in Lazaro Cardenas whose future is uncertain as a result of differences between PEMEX and the CFE. We hope that in this area development will be less complex; at least the CFE has announced an enthusiastic program for the growth of re-gasification plants, which would save millions of dollars for the electricity industry.
Storage of natural gas is another bottle neck in the industry; there are national and foreign companies with a number of projects that would alleviate and off set serious complications of lack of infrastructure and risk as a result of the absence of natural gas in the areas of transport and distribution. The Energy Regulatory Commission is not oblivious to this circumstance, but considering it lacks the budget to carry out even its essential regulatory duties, it can only observe anxiously the constant problem of storage. The main obstacle that the storage and transport of natural gas must face is financing given that few project turn out to be financially viable. However complex it might be, one solution may lie in integrating the national natural gas network in a system of contributions and support that are sustained amongst the diverse natural gas processes, such as extraction, processing, storage, transport, distribution and consumption.
We need to start accepting the idea that natural gas means progress and economic well-being for our country, which is rich in this resource. Until our federal and local politicians decide to combine their efforts into a single direction on this important topic, we will continue to work in an environment without any clear rules, importing natural gas from other countries and failing to use this natural resource to every Mexican’s advantage, because after all, there is no forgetting that the natural gas reserves in our country are extraordinary and proven.
EL MUNDO DEL PETROLEO | Año 2 Tomo 8 Febrero – Marzo 2005 | Pag. 72-73
