Gas supply done right

What has been Santa Fe Gas’ experience as a marketer in Mexico’s newly liberalised market?
Our experience so far has been good and solid. The reception we have received from the market has been positive. Customers are avid for alternatives and a good-quality supply that is reliable, firm and at a competitive price.
Santa Fe Gas is reliable in the sense that our supply is going to be there. It might seem mind-boggling, but this concept of firm and interruptible gas supply is fairly unknown in Mexico because in the past, Pemex had the right and obligation to supply the gas. As we have seen in some parts of the country, that gas did not go through and was not delivered. This is significant because some important industrial processes cannot be shut down. You have to have the gas no matter what, which is why reliability is important. Santa Fe is one of the most reliable sources for our customer’s natural gas needs.
The quality of the gas is also very important. Historically, the quality of natural gas in Mexico has not been the best, sometimes because it has a lot of liquids in it, such as nitrogen, which creates inefficiencies in the industrial processes of our customers. That makes them put more time, money and effort into maintaining equipment, which increases costs by 15-40%, simply because of the poor quality of gas. The gas that Santa Fe brings from Texas is of the highest quality and our customers are reacting to that as well.
The prices that we sell our gas at are based on market prices – indices such as the Waha Hub, El Paso Permian, Houston Ship Channel, or Henry Hub. Those indices are public and transparent and cannot be manipulated. Customers want that transparent pricing based on a market price, plus clearly delineated transportation costs and some other services. Customers want a market price rather than a formula that is set by a government agency and that is difficult to explain internally, account for or reconcile.

How competitive is Santa Fe Gas compared to other markets in the region?
Our recent experience is that we are competitive and customers value that. The northern and central states are where we can add value to our customers and where we are offering this competitive advantage in terms of pricing. We perform competitive analyses on a quarterly, and sometimes monthly, basis. Every month our prices are below our competitors by 5-10%, sometimes even 15-20%. On average, we are about 7-10% more competitive in the value we add to customers.

How has pipeline accessibility evolved in Mexico since the energy reform?
Cenagas [National Centre for Natural Gas Control], through Sistrangas [National Integrated Natural Gas Transportation and Storage System], opened the national grid system for the public in July 2017. The RFP [request for proposals] process and the open season process started in April, formal assignments were done in June and gas started flowing in July 2017, marking the market transition from a Pemex-owned and operated system to a government-owned but completely independent entity, which is now Cenagas.
We had our customers and everything else aligned, but we did not know what to expect when Cenagas took over the Sistrangas functions and day-to-day operations. It was a great success story and I give credit to Cenagas for such a smooth transition that was a critical component of the energy deregulation. We did not receive any critical alerts, our gas flowed well and the reports, nominations and scheduling were done on time.
We have a good relationship with Cenagas right now. Sometimes we use our own network and sometimes we use the Sistrangas network, but in the end, it is all about serving customers and customers having their gas.
In 2018, we would like for customers to be able to reserve transportation capacity within Sistrangas for three to five years, which is what the market appetite is. That is one of the things we have been working on with our customers, Cenagas and Sistrangas. Capacity reservations were initially allowed for one year as a test for everyone.
The second thing we are working with Cenagas is on interconnection plans for different points with private systems such as Fermaca’s. The more connected these systems are, the better it is for the customers and the more liquidity will be created in Mexico’s pipeline system. In this way, we will be able to serve the customer better and prices and transportation rates should be more efficient.

How has the natural gas industry been growing in different areas?
The south has been in a tough situation when it comes to gas procurement. We are moderately optimistic on the prospects for the south, which has historically faced two issues: lack of pipeline infrastructure and gas supply.
In the different bidding rounds that the CNH [National Hydrocarbons Commission] has conducted in the recent past, some allocations were made for producing gasfields in the south, whether for shallow-water, deepwater or continental production. As these projects develop in Tabasco, Campeche and in the Gulf of Mexico, we expect in the next couple of years that production of crude oil and natural gas will increase. In addition, some pipelines are being built and some expansions have been announced.
For example, the Sur de Texas-Tuxpan marine pipeline is being built to supply the south with gas. With that pipeline, you will be able to source gas not only from Tabasco and Campeche, but it will also open up the possibilities of getting gas from the South or East Texas regions. In that respect, we think that Santa Fe is going to be well-positioned to serve customers in the south, once the infrastructure is ready in the next couple of years.

Will natural gas overtake LPG in Mexico in the next few years?
It is going to happen, but it will take time. LPG will still be the preferred source, but we have ample history to support that natural gas will become one of the energy sources of the future in Mexico. We have that experience in countries such as Venezuela, Colombia or the US, which at some point all relied heavily on LPG.
Once you have the infrastructure, midstream assets, pipelines, storage facilities and production ready, it makes much more sense to burn natural gas than LPG because it is cheaper. In all, it makes much more sense from an efficiency, value-added and cost perspective to burn natural gas instead of LPG.
Natural gas is going to take a bit of the market share that LPG has in Mexico, but they will coexist in the future because the demand for LPG is also growing, particularly in some areas in which midstream assets or production do not or will not exist.

What are the main advantages of collaborating with Fermaca in the Mexican market?
Within the boundaries of what is allowed in the Mexican laws and the Mexican energy regulation market, one of the things that we offer to our customers is the concept of a one-stop shop, meaning that we tend to concentrate on large-distance pipelines with big developments, which is fine, but we are lacking in the last-mile service. By unbundling the services, you may make the customers’ lives much more difficult.
That interconnection between the gas trunk line and the customer’s facilities across the country is very much needed. We are short of those interconnections as a country. Through our parent company, Fermaca, we can offer gas supply to customers, with the last-mile interconnection and very efficient rates in the Fermaca network. That is what customers want.
Customers value this one-stop-shop concept. We can solve their gas needs. They will have gas that is competitive, reliable and high-quality, and we are going to build whatever infrastructure needs to be built. This separates us from competitors that are only marketers or asset developers, but that do not offer this one-stop-shop concept and service.

What is the natural gas market outlook for the next couple of years?
2017 has been a year in which everyone is learning from the market, how Cenagas is going to perform and how the customers are going to react. It has been very positive.
Customers had been hearing from the government for years that deregulation and reform were coming. People wondered whether or not it was real. When they saw that gas was flowing on July 1 and that it was of better quality from private sources, they started recognising that it was real. Santa Fe Gas acquired so many new customers in September and October because of that. It does not matter what administration is elected in 2018, we are invested in the market liberalisation process and there is no going back.
Santa Fe Gas’ goal of transporting 500 mcf-1 bcf [14.2 mcm-28.3 mcm] of gas per day is going to be reached within the next five years. We have a high degree of confidence, just by seeing the volumes that we are showing in 2017 and what we are going to be flowing in 2018.

How confident are you in the overall energy reform process?
We are optimistic of the future of the energy reforms in Mexico, not only on the gas side, but also for petroleum products, oil and power. We are very optimistic about what has been done by the government agencies, regulators and private entities on the Mexican energy reform. This process normally takes 10-20 years. We are just starting this process, but it is heading in the right direction. In the next three to five years, we will see a completely different Mexico when it comes to energy.

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