7 key points to understand the gas and electricity crisis in Mexico

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In Mexico, most of the electricity is generated with natural gas, 60% of it. Almost 80% of what is available is purchased from the United States, mainly from Texas.

Why does the president ask to save electricity at night? What does the cold in the United States have to do with Mexico having difficulties generating electricity? Is there no natural gas in Mexico?

During these days, if you have not suffered blackouts in the place where you live, at least you will have heard about the energy problem in the country. Phrases such as that the United States “closed the tap” of natural gas to Mexico, and that is why the crisis.

There are so much data and sayings that it is easy to stay in the dark’ on the subject. To help understand what is happening, we consult specialists and review data, documents, and interviews with officials. Here are some key points:

Why do frosts in the US leave Mexico without electricity?

When they mention it to you in the first instance, there seems to be no connection. Frosts in the United States cause millions in 26 states of Mexico to be without electricity for certain periods of time. 

Why? Well, first you should know that the electrical energy that reaches your home or industries can be generated in different ways. 

One of them is with the use of natural gas, which according to experts is one of the cheapest and least polluting sources than coal or fuel oil. 

Have you heard of “combined cycle plants”? They are called like this because in these plants the use of a gas turbine and a steam turbine are combined to generate electricity. Mechanical energy is converted into electrical energy.

In Mexico, most of the electricity is generated with natural gas in these combined cycle plants, 60% of it.

And where does Mexico get natural gas from?

Almost 80% of what is available is purchased from the United States, mainly from Texas, which is the leader in oil and gas production in that country.

The frosts – their lowest temperatures in 30 years – affected Texas’ natural gas production.

As such, its facilities and pipelines were frozen, millions were left without electricity in that state and the price of the little that was available soared to 5000%, according to the CFE. 

It is not that the United States arbitrarily closed the tap to Mexico, the weather situation intervened, affecting pipelines and raising prices.

Hence, Mexico saw its main supply of natural gas diminish, and here too there were blackouts.

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So what, in Mexico there is no gas?

It is the question that the president of Mexico, Andrés Manuel López Obrador, and surely many Mexicans asked.

And yes, in Mexico there is natural gas that could be extracted and that Pemex already extracts, although in recent years production has been declining. 

In 2009, according to Pemex figures, 7,031 million cubic feet of natural gas were produced per day; for 2015 there were 6,401 million, for 2018 the figure dropped to 4,847 million, in 2019 it was 4,894 and last year 4,852.  

It is a reduction in the national production of natural gas of 30%, compared to 2009 with 2020. 

This occurs although areas of great potential for extracting natural gas have been identified, such as Burgos, Sabinas-Burro-Picachos, and Tampico-Misantla.

The issue is who bears the costs of exploring and trying to extract it, and the trade-off between producing it here or buying it abroad if that is cheaper.

Different specialists explained that Pemex obtains more profits by producing barrels of oil than natural gas, which also under normal conditions – no frosts in between – Texas sells at the lowest price in the world.

Hence, for the oil company, with serious financial problems, the natural gas business is not so attractive.

“Resources are limited. There was always the dilemma of whether I have a dollar, where it is most profitable for me. It is more profitable for me to extract oil or extract gas. When a dollar came in, they said ‘put it into oil exploration, don’t put it into gas ‘, because in oil exploration there is much more performance, “says energy analyst Severo López Mestre.

Another issue that intervenes is whether they are willing to use fracking -a technique that the López Obrador government has said it will not use-, an extraction method criticized for its environmental impact, although it is used precisely in states like Texas to obtain gas. 

“A large part of the natural gas extraction potential in Mexico is in unconventional deposits that would require the use of fracking,” commented Paul Alejandro Sánchez, an expert on energy issues. 

The EPN government, a ‘breaking point’

Lourdes Melgar, who was undersecretary of Hydrocarbons in the government of Enrique Peña Nieto, explains that in that administration (2012-2018), given the demand from industries such as the maquiladora to have ‘better electricity’, cheaper and even less polluting, made the decision to build gas pipelines and as a short-term solution to import gas from the United States.

The figures show that just during the Peña Nieto administration, local production began to decline, while natural gas imports rose. In 2012, 791 million cubic feet were imported per day, and in 2018 the figure was 1,317.

This Sener document refers to the fact that in 2014 the Tucson-Sásabe and Agua Dulce-Camargo pipelines came into operation, thus doubling the country’s gas import capacity. Starting in 2016, Mexico became a “net importer” of natural gas, the same document notes.

As Melgar mentioned, the idea was for Pemex to also increase its own gas production, for which additional resources were injected. 

However, this did not happen, there was no such increase on the part of Pemex, quite the contrary.

Although the real bet of that government, which to date has repercussions, was the so-called Energy Reform of 2013. 

With it, the door was opened to private participation, with which Pemex and the CFE would no longer be the only ‘players’ in the energy market.  

In the so-called “oil rounds”, private parties or even public, private, or foreign companies were invited to participate in bids to take the risk of exploring areas and searching and eventually extracting and selling energy.

So was there a plan?

Contrary to what President López Obrador said in the morning conference on February 16, according to specialists consulted, there was a plan to extract natural gas in Mexico, that of the energy reform with the participation of private parties, auctions and tenders.

It is the 2015-2019 five-year plan that the Coahuila Cluster referred to in recent days – an association that brings together different companies, authorities, and research centers – claiming that the recent blackouts could have been avoided, if the López Obrador government had not The tenders focused on the exploration or search for natural gas, those of Round Three, were canceled in 2018.

But why did the López Obrador government not allow these tenders? The president has repeatedly said that the Energy Reform, in his opinion, was a hoax and even a vehicle for corruption, with cases such as the Odebrecht bribery.

He has said that the private companies that obtained 110 contracts with said reform do not actually produce the energy promised by the previous government, so there would be no more rounds or contracts of that type until those companies gave results. 

In the meantime, as he has referred, he will bet on strengthening and defending Pemex and the CFE, although there is criticism from experts that the state energy monopoly is not a good idea. 

Faced with the allegations about private contracts, last year the Mexican Association of Hydrocarbons Companies responded that, four years after the signing of the first oil contracts with the energy reform, at least 22 private industry companies contributed 49 thousand barrels of oil per day.

They also mentioned that 70% of the contracts signed by the companies as partners of the Mexican State were exploratory and that the periods to reach extraction are 8 years on average. 

In other words, it was too early to ask private companies to have better results.  

And what is the response to what is happening in Texas?

The López Obrador government, faced with the lack of natural gas, is now turning to other fuels to produce electricity and avoid further blackouts, although people are being asked to reduce their energy consumption, in support of this crisis and the possibility that the bad weather conditions of the winter season continue, affecting Texas. 

The administration reported on the acquisition of liquefied natural gas (LNG) through the purchase of tankers, in addition to the use of fuel oil, diesel, and coal.

Faced with questions that these are more polluting than natural gas, the Secretary of Energy, Rocío Nahle, responded to a news program on the La Octava channel :

“Right now we have to produce electricity with what we have, this is done by all countries, right now the United States is producing with coal, it brings a high percentage of electricity production with coal.”

Nahle also mentioned that, so far, Mexico is one of the countries that produces electricity with the least amount of coal.

As indicated in 2018 by the director of the CFE, Jaime Francisco Hernández Martínez, natural gas is up to 68% less polluting and around 80% less expensive than fuel oil and diesel.

However, in the face of the emergency, the Electricity Commission has had to resort to these energy sources. 

“We cannot depend on a single fuel for the generation of electrical energy, they have to be used all,” said the president, insisting on “strengthening the state companies”, Pemex and CFE, and highlighting the “exceptional” role of the technicians from these companies, to restore power after blackouts due to lack of natural gas. 

This in regards to households, however, industrialists have persisted in their claims for the request to reduce their consumption of natural gas for electricity. At least 10 automotive plants, according to this report from El Financiero, will have to make technical stoppages in the coming days.

A future solution?

When the president himself asked the director of the National Energy Control Center, Carlos Meléndez Román, on Thursday, February 18, what would happen “if we finally run out of gas,” the official again spoke of the other sources that Mexico has and said : 

“We would have to go little by little informing to see also, evaluate the situation moment by moment”.

Analysts consulted question that, when opposing that there be more rounds or tenders for private participation and talking about self-sufficiency or the “I can alone” policy, it is not observed that the government has a clear alternative plan to increase its own gas production, for half of Pemex, and thus avoid dependence on Texas.

And in the future, more climate crises may arise, when the extraordinary situation in that US entity is overcome and prices are normalized. 

“If the entire electrical system is not modernized, if you don’t invest in transmission lines, in smart grids, these situations are going to repeat themselves, because the problem of climate change is real,” said Melgar.

Severo López Mestre, an energy sector analyst, mentioned that the government supports “with pins” the level of production in Pemex, and it no longer has the capacity to borrow or more risk, so, by canceling private investment, the options are exhausted, although In the future, the reality could lead to a more “aggressive” opening towards individuals.

In its 2020-2024 five-year plan, the Ministry of Energy already anticipated the risk of the interruption of gas imports.

“Currently, between 70% and 80% of the total national consumption of natural gas is supplied with imported gas. Faced with this situation, any interruption in the flow of said imports puts the country’s energy security at risk both in the short and long term ”.

In the country, he pointed out, there are three storage terminals for Liquefied Natural Gas (LNG), the LNG16 Terminal of Altamira (TLA), the KMS Terminal and Energía Costa Azul (ECA), however, they also “operate as a supply of natural gas to certain users in particular ”.

For this reason, he continued, “it is necessary to have options that allow maintaining continuity in the supply of natural gas in the gas pipeline network. In particular, SISTRANGAS requires having operating inventories that allow it to balance the system in the event of eventualities and thus guarantee the continuity of its transport services ”.

Given this, it planned the construction of an underground natural gas storage system in the saline caverns located in the municipality of Ixhuatlán del Sureste, Veracruz, although in an estimated development time of two years.

Impacts and the gas factor in economic growth

German automakers Volkswagen and Audi began technical strikes in Mexico on Thursday to comply with a decrease in natural gas consumption requested by the government, after the blackout that affected some five million users, according to the AFP agency.

Audi, meanwhile, said it would adjust its production in Mexico “based on the current gas supply situation, a resource that is essential for the production of the Audi Q5.”

With four days without gas or without electricity, “practically any industrial manufacturing production process stops,” warned the business organization that represents the Industriales de Nuevo León, Caintra. 

“With this, at the moment there are accumulated more than 13 thousand 984 million pesos in production losses for the manufacturing of Nuevo León. If immediate action is not taken, this figure will continue to grow in the coming days, with its consequences for the income and jobs of the general population ”. 

They demanded “a clear, accurate, robust, reliable energy policy for investment and joint work between a private and public initiative to increase the capacity of the current infrastructure in the energy sector in Mexico.”

According to the analysis of the current Ministry of Energy, in its five-year plan, the states of the country that use more natural gas to produce electricity, with more competitive prices for the purchase of energy, have higher GDP or economic growth.

“The states of Nuevo León, Querétaro, Coahuila, Sonora, Chihuahua, and Colima, which have access to natural gas and report higher consumption of this energy, remain within the 15 states with the highest productivity and social development, according to the indicator of GDP per capita.

While those states that do not have a natural gas supply (mainly Guerrero, Chiapas, and Oaxaca) see their economic and social development limited, remaining in the queue as the states with the lowest productivity and the highest percentage of poverty ”. 

The debate on the energy future will continue in the coming days, and as the storm passes and gas distribution returns, the Mexican government asks people to use less light in the afternoon, to avoid more blackouts. “Support a little, turn off a light ” say the secretariats in tweets. 

Source: animalpolitico.com

Mexico Daily Post

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