Mexican judges halt decree forcing companies to buy natural gas from Pemex, CFE

Mexican judges have temporarily blocked a recent decree from local regulators that observers feared could effectively kill the incipient domestic natural gas market.

Observers and market participants consider the move by the judges positive as it shows the judicial system is still a reliable counterweight for the decisions of the executive branch, but they note the "judicialization" of the sector, which had been relatively untouched by the government so far, creates uncertainty and volatility.

Three specialized judges have granted protection against the authority's actions to a dozen companies that claimed the recent decision by Mexico's National Center for Natural Gas Control, or Cenagas, affects their interests, according to court documents.

Judges Juan Pablo Gomez Fierro, Ramon Lozano Bernal and Rodrigo De la Peza Lopez granted companies a type of legal protection called an amparo, under which affected parties can wait to follow the authority's orders until the case is resolved in full.

Among the companies granted the amparo are Fermaca, Deacero and local subsidiaries of Shell, Tractebel and GDF Suez, the documents show.

Eliminating competition

Cenagas, which is responsible for managing the natural gas transportation and storage network, known as Sistrangas, in June notified gas consumers that were importing from the US through a dozen entry points along the US border that they would have to buy their gas solely from state companies.

Cenagas said consumers had until Aug. 13 to present proof that they were buying their gas from state companies Pemex or CFE. This notification came after Energy Secretary Norma Rocio Nahle sent a letter to Cenagas head Abraham Alipi Mena asking him to modify the regulation to benefit Pemex and CFE.

The goal of the regulation, requested by CFE, would be to optimize the utilization of the national gas grid and to reduce CFE's financial losses, said the letter from the Energy Secretariat, or SENER, seen by S&P Global. The letter is not public.

But the role of Cenagas is to promote open access to the gas grid, observers noted.

Eduardo Prud'homme, a partner at Mexico-based consultancy Gadex and former head of Cenagas' technical management and planning unit, said on Twitter after the regulation was known that managing capacity was thought to be independent from marketing.

"The principle of separation of activities is a necessary condition to promote competition," he said.

Expected volatility, uncertainty

Market participants and observers told S&P Global that changes are already happening after Cenagas' notification.

Some clients with small gas needs and no interest in spending money on attorneys have already switched back to CFE as their supplier, two Mexico-based lawyers who represent clients in the sector said.

"Those clients who nominate small amounts of gas, or do it under an interruptible basis, do not see any benefit in fighting the measure and risk more by losing supply," said one of the lawyers, who declined to be identified.

CFE has a total import capacity in pipelines from the US of roughly 14 Bcf/d, while the country's peak demand during the year is a little under 8 Bcf/d, SENER data shows. According to the law, CFE should be making that excess capacity available to potential users using open seasons, but CFE canceled open seasons shortly after President Andres Manuel Lopez Obrador took office in late 2018.

'Judicializing the sector'

Observers said that despite the judicial system's work, the damage to the sector is done and still could worsen.

"Some companies might have managed to halt the regulation and will be able to continue operations, but this has come at the expense of judicializing the sector," said a senior executive of one of the companies who filed for an amparo.

The executive, who declined to be identified as his case is not public, said that by forcing market participants to seek legal protection, the government creates an uneven playing field as not all companies can afford top law firms.

The executive said his firm obtained a temporary suspension and added that he expected this to become permanent in a few weeks. This will leave Cenagas' order without effect until the judge makes a final decision on the amparo, which could take many months, he said.

However, the risk remains that authorities will force players to buy gas from the state companies, and that would force companies to cancel their supply contracts signed with US suppliers.

"That would translate into higher costs, no doubt about it," the executive said.