Column: Understanding the growing role of CFEs in the North American natural gas market

Editor’s Note: NGI’s Mexico Gas Price Index, a leader following the reform of Mexico’s natural gas market, offers the following column by Eduardo Prud’homme as part of a regular series on understanding this process .

CFE Internacional (CFEi), a company established in 2016 in Delaware, has long been among the 15 largest distributors of natural gas in North America. According to the latest NGI Top North American Natural Gas Marketers ranking, in the second quarter this American subsidiary of the Mexican state utility Comisión Federal de Electricidad (CFE) ranked at an impressive 12th with transactions that recorded an average of 3.8 Bcf / d in the period.

CFEi imports gas to Mexico. CFEnergia, meanwhile, is the Mexican company in charge of marketing the purchased natural gas. It receives its gas mainly through cross-border pipelines, but also some LNG shipments. The two branches of CFE are organized to work in coordination with each other. Although their fields of action are different, to understand their effect on the global natural gas market, it is necessary to review the contracts they manage together.

CFEi sells the gas acquired through both short and long term contracts. Some of these extend to 2034. A couple of contracts signed between 2016 and 2017 with WhiteWater Midstream LLC for an aggregate volume of 450 million cubic feet / day with increasing commitments throughout their tenure are now in the spotlight for allegations of corruption. Trafigura, Apache Corp, ARM Energy and Santa Fe are other companies with which CFEi has or has had long-term contracts for a total volume of approximately 2 Bcf / d.

As regards the procurement of transport services, the CFE subsidiaries manage reserved capacity in various gas pipelines through more than 70 contracts. About thirty contracts in the United States allow it to transfer purchased gas across the border. Once the gas has been imported, CFEnergia names the transport, LNG storage and compression services in about 40 contracts. Its counterparts are all private companies.

As a CFE assignee, CFEnergia manages contracts in Mexico whose maximum daily amounts amount to over 17 Bcf / d, although their systemic effect is much smaller, and more than 10 Bcf / g north of the border. CEnergía has the authority to use the capacity as it deems appropriate. Its main purpose is to provide the cheapest supply to CFE’s power generation facilities. It also has interests in the marketing of natural gas to third parties. This part is of the utmost importance for the energy markets.

The 2014 structural reform means that CFE must compete in an electricity market, in an economic dispatching system, with some constraints related to grid stability. CFE makes offers and the operator of the CENACE electricity system sends energy based on the company offering the lowest variable generation cost. This premise allows CFE to seek to optimize its value by minimizing the cost of supply.

CFE still the natural gas infrastructure and its subsidiaries optimize the value of the contracted capacity, both to give flexibility to CFE’s electricity production and to take advantage of the gas market. In principle, the idea does not seem contrary to the rationality of the markets. However, the dominant role of CFE in the gas network can lead to some fundamental contradictions.

[Mexico Matters: Cross-border energy trade between the U.S. and Mexico reached $42 billion last year. Understand this burgeoning trade flow — the projects, politics and natural gas prices — with NGI’s Mexico Gas Price Index. Know more.]

Although the 2015-2019 five-year natural gas pipeline expansion plan has been the trigger for much of Mexico’s recent natural gas transportation infrastructure, CFE’s history as a go-to user of private sector-developed projects is long. and fruitful. Systems such as Mayakan, Gasoducto Morelos, Naranjos-Tamazunchale and Energía Occidente de México have routes that extended the reach of the old national pipeline system, or SNG, operated by Petróleos Mexicanos (Pemex) until the end of 2015. This system has been expanded its pipeline capacity thanks to investment agreements sponsored by CFE which financed the construction of compressor stations in Soto La Marina, Altamira, Gloria a Dios and Bajío.

The list of strategic projects continued. The LNG terminals of Manzanillo and Altamira, whose original purpose was to meet the gas needs of specific generation plants without a supply guarantee from Pemex, have progressively become the infrastructure that has allowed the balancing of the system in moments of greatest precariousness of supply.

In its eagerness to convert generation plants that burned liquid fuels into combined cycle plants, CFE has begun bringing gas to unprecedented regions, where Pemex has never made a real effort to create a market for natural gas. The Sasabe-Guaymas, Guaymas-El Oro, El Oro-Mazatlán and El Encino-Topolobampo systems have opened up possibilities for development in the Mexican Pacific and today these pipelines could serve as a platform for logistic solutions with global impact, such as the export of liquefied natural gas. in Asia.

CFE also helped develop the marine oil pipeline and the Wahalajara system.

Thus, for more than two decades, project after project, CFE has been building a gas network configured on its needs. It is a system that does not depend on national production. Long-term contracts between CFEs and private carriers made this possible, along with the 2014 reform.

In the national Sistrangas pipeline network, CFEnergia has accumulated greater capacity year after year. As of July 2020, it had an aggregate maximum daily amount of 1.9 Bcf / d. Today this figure is almost 2.6 Bcf / g. This stance is clearly contrary to the government’s constant complaint that CFE remains with blocked capabilities due to past government decisions.

The official letter from the Minister of Energy Sener which conditioned the procurement of capacity in the Sistrangas to the acquisition of gas or transport services from CFE is contrary to the reality of the market.

CFEnergia’s weight in the supply of gas in the country is greater than that of any other marketing company and transcends the requirements of the electricity sector managed by the parent company. Therefore, CFEnergia supplies approximately 650 million cubic feet / day to customers other than CFE generation companies.

This group includes other generators, smaller vendors and Arcelor Mittal, the largest industrial user in the country. BP is around 185 MMcf / d, Macquarie 56 MMcf / d and Shell 100 MMcf / g in terms of reserve capacity on the Sistrangas.

Being a subsidiary of CFE, and being a state-owned manufacturing company with an explicit for-profit purpose, CFEnergia has all the incentives to charge high margins. At the same time, it must reduce costs for its preferred client, which is a related party, the generation companies owned by its parent company. A possible way out of this conflict is to discriminate between customers, charge them at differentiated prices and exercise their market power regarding the continuity of flows; a scenario that is not very favorable to competition from Mexico and the competitiveness of North America.

In this sense, that 12th place in the standings does not seem very encouraging for Mexican users, despite the public nature of the CFE brand.

Prud’homme has been instrumental in the development of Cenagas, the national pipeline operator, an entity established in 2015 as part of the energy reform process. He began his career at the national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), becoming chief economist, and from July 2015 to February he was ISO chief officer of Cenagas, where he he oversaw the technical, commercial and economic management of the nascent Integrated Natural Gas System (Sistrangas). Based in Mexico City, he is the head of the Mexican energy consultancy Gadex.

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