The natural gas industry is undergoing continuous growth on a global scale. One of the many factors reshaping the energy market is the potential represented by substantial reserves of shale gas in North America. Their effect on use and demand, in terms of lower prices and environmental advantages, is likely to drive ongoing expansion. Mexico has a significant share of these shale gas reserves, which are found throughout the states of Chihuahua, Coahuila, Nuevo Léon and Tamaulipas. They make Mexico the world's fourth-largest holder of such resources, increasing its reserves more than tenfold in comparison to its historical statistics for conventional gas. They have the potential to make Mexico self-sufficient in this form of fossil fuel, which continues to be imported by pipeline from the United States and through the liquefied natural gas regasification terminals that have been built over the past few years on the Gulf of Mexico and the Pacific coast.

Although industrial demand for gas has grown substantially in the Mexican market, transportation capabilities have not kept pace. Several pipelines have been built by private transportation companies - mostly funded by foreign investment - over the past 15 years, following the liberalisation of the natural gas midstream and downstream markets. In recent times this effort has received additional impetus from Mexico's power utility, the Federal Electricity Commission, through long-term transportation services agreements that guarantee the financing and construction of new pipelines. However, privately owned pipelines remain only a small part of the national system, most of which is controlled by Pemex-Gas y Petroquímica Básica. The system is reaching its operational capacity and is increasingly subject to peaks in demand, creating potential bottlenecks for industrial growth in areas of the country. In order to keep pace with development and achieve the necessary growth in the sector, the government has announced an ambitious investment programme, estimated to be worth $10.5 billion. This investment would translate into nearly 4,400 kilometres of new transportation pipelines. In some areas the pipelines will be linked to the development of combined-cycle gas-fired power plants, and in these cases the pipeline projects are likely to be anchored by the Federal Electricity Commission, as this structure has been very successful in the past. However, the plants will be developed under an independent power production scheme. In addition, the programme calls for the expansion of natural gas distribution areas where local distribution companies provide the utility service.

The programme is expected to increase transportation capacity in the overall system by 38%, with eight new gas pipelines (plus two loops and more compression projects) that will add capacity in problematic peak regions. Some of the pipelines will reach areas (mostly in the northwest) where gas is unavailable, such as Zacatecas and Sinaloa.

Coupled with the expansion of capacity in the pipeline system, Pemex and the natural gas industry regulator, the Energy Regulatory Commission, have been working towards the final implementation of the so-called 'permanent regime' for direct sales of domestic gas by Pemex. Several years ago the commission issued the terms and conditions for such first-hand sales, but it delayed their entry into force pending the approval of certain pricing and other operational conditions. A few weeks ago, the commission issued the final resolution for the entry into force of such rules, approving the catalogue of terms and tariffs that will regulate them.

The rules intend to foster the creation of separate gas supply and transportation markets, with third-party marketing companies playing an active role in the supply chain. Since the new regime seeks the development of these separate markets, it has called for the reservation of pipeline capacity on an unbundled basis and is trying to encourage users to conclude separate contracts for gas transportation services. The new direct sales rules will require users to sign a base agreement covering the identification and issuance of gas delivery requests, which is expected to result in reduced costs.

The commission is also seeking to maximise the available capacity in the national pipeline system by forcing parties to pay for reserved capacity and to reserve it on the basis of historical consumption profiles. In 2010 a commission resolution required Pemex to notify existing system users of what are termed 'vested transportation rights', based on a calculation of consumption in 2008 and 2009 and incorporating standard deviation. Based on the vested transportation rights, existing users will be able to reserve capacity in the already limited pipeline system in the upcoming weeks. Any spare capacity in a certain route that is not reserved in this way will be allocated through a period of open bidding. The commission's policy aims to enable use of the system to its full operational capacity while the pipeline bids are launched and additional capacity is built.

The upgrade of the transportation pipeline system, as announced by President Calderón, is likely to drive other regulatory changes of the past few years which have been waiting for a kick-start; a new set of Natural Gas Regulations may yet be issued before, or concurrently with, the launching of the bids for the upcoming pipeline projects.

For further information on this topic please contact Rogelio López-Velarde at López Velarde, Heftye y Soria by telephone (+52 55 3685 3334), fax (+52 55 3685 3399) or email ([email protected]).