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The Birth of Sistrangas: Isolated Network to National Pipeline
System
Eduardo Prud'homme March 22, 2019
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Prud’homme was central to the development of
Cenagas, the nation’s natural gas pipeline operator, an US Day-Ahead Spot Prices (Selected)

entity formed in 2015 as part of the energy reform CRE IPGN Prices

process. He began his career at national oil company PEMEX VPM Prices
Petróleos Mexicanos (Pemex), worked for 14 years at US / Mexico Border Flow Tracker
the Energy Regulatory Commission (CRE), rising to be SISTRANGAS Flows
chief economist, and from July 2015 through February
EIA South-Central Storage Report
served as the ISO Chief Officer for Cenagas, where he
CENACE Nodal Power Prices
oversaw the technical, commercial and economic
Current Issue
management of the nascent Natural Gas Integrated
System (Sistrangas). Premium Content

NGI Mexico Gas Prices Datafeed

The opinions and positions expressed by Prud’homme
SISTRANGAS Flows Datafeed
do not necessarily reflect the views of NGI’s Mexico Gas
Price Index.

Mexico’s natural gas market makeover actually predates

the country’s 2013/2014 energy reform by about 20 Mexico’s IEnova, CFE to Work Toward Reopening
Guaymas-El Oro Pipeline
years. In 1995, transporting natural gas via pipeline
Natural Gas Futures Rebound on Weather,
opened to private participation in Mexico for the first time Storage Support; Spot Gas Mixed
under an economic framework designed by The State of Mexico’s Natural Gas Market Today

hydrocarbons regulator CRE. Natural gas sold by López Obrador Says Pemex to Be ‘Reborn’
Following $5.2-5.5B Financial Package
national operator Pemex would now see prices regulated
Natural Gas Futures Finish Week Higher as Next
by a netback formula. The basic idea was to promote Cold Blast Seen Lasting Week-Plus

investment in the gas network, and to open the market Mexico’s President Denies Political Motives Behind
Investigation of Hydrocarbons Regulator -- Bonus
so that Pemex production would have to compete with Coverage
imported gas to meet growing electric power demand. Combined-Cycle Power Plant In Mexico Gets
Green Light In Referendum
The development of private pipelines was aided by new Natural Gas Futures Surge as Weather Data
Trends Even Colder for Early March
distribution zones and long-term contracts with power
generators. But the pace of development was affected
by adverse market conditions and interventionist public
policy. The growth of the reference cost in the netback
formula, based on Houston Ship Channel prices, the
fixed price of liquified petroleum gas, which is the
principal fuel for homes in Mexico, and resistance on the
part of Pemex to be regulated, slowed the growth of the
new market.

Meanwhile, energy security was at risk because of falling

domestic production, and new infrastructure was needed
to provide balance to the system. The Gasoductos de
Tamaulipas (GDT) project, developed and operated by
Pemex in consortium with a private sector transportation
firm, was the solution to get Burgos Basin production to
distribution centers and improve Gulf of Mexico
connectivity.

However, GDT gave rise to regulatory and operative

dilemmas. It was a pipeline system that included a
partner company alongside Pemex, but which was run
as part of the National Gas Pipeline System (SNG)
owned by Pemex.

In theory, GDT rates and service conditions were

separate to those of the SNG, and they were obliged to
give open access to third parties. In practice, however,
with this pipeline, Pemex managed to consolidate its
vertically integrated stranglehold of the market.
Operational reliability served as an excuse to strengthen
a commercial monopoly.

GDT was more than just Burgos. The pipeline also

imported from the Reynosa zone, but in the hypothetical
case of a potential importer wanting access to capacity
on the GDT, this importer wouldn’t have any clarity on
the rates it should pay to compete with Pemex. GDT
essentially opened space for Pemex to have
differentiated prices on the same route. The CRE sought
to overcome this problem with a change in SNG rates.

The CRE developed a postal stamp scheme with five

different zones. The gas that transited in the Gulf of
Mexico area of the SNG paid the same rate, whether or
not it passed through GDT. This regulation didn’t mean
that a shipper didn’t have to pay the GDT tariff if it went
through its own pipeline system. Two systems meant two
tariffs. And thus, an agreement between Pemex and
GDT on fees was a barrier to competition.

In 2008, power was given to the CRE to integrate the

transport systems. The creation of the Sistema de
Transporte Nacional Integrado (STNI) opened the door
to aggregate costs on the SNG and GDT through a roll-
in mechanism, leading to one transport cost. With this,
the SNG now worked as a central pipeline network
regulator that determined how all the pipelines in the
country would work. Another pipeline system which was
previously autonomous, Gasoductos del Bajío (GDB),
joined the STNI network. Soon after, a downstream
system off the GDB that connected the cities of
Aguascalientes and Zacatecas also joined the STNI.

Despite the growth of the STNI, the number of marketers

stayed the same. Pemex never took steps toward open
access. Precarious operational conditions, including
critical supply alerts and falling national gas production,
meant energy security was the only discussion. And
Pemex was seen as the only company capable of
anchoring pipeline projects to improve import capacity
on the STNI to meet these challenges.

This is how the Ramones pipeline project was born.

Pemex basically repeated the GDT formula at Ramones,

forming partnerships to construct and operate the
pipelines. Pemex also anchored its capacity. Ramones
would be part of STNI, and the cost of the infrastructure
would be passed on to users of the system. In a world in
which the next best option was liquefied natural gas to
balance the system, this reasoning, and the associated
rise in costs, seemed reasonable.

What Ramones again demonstrated, however, is the

difficulty in promoting competition and efficiency when
there is no formal separation between marketing and the
operation of pipelines.

There was no perfect solution to natural gas shortages,

but what was clear was that whoever took on the
challenge would do so with a personal interest in mind.
There is nothing wrong in this, but regulation was
needed. Although the CRE ensured a reasonable cost
for the provision of the service and the availability of
natural gas improved, the contractual scheme in place
that made Pemex owner of the entire capacity of the
pipeline once again showed the need to advance in
vertical disintegration.

The issue was to find a different economic agent with

sufficient capacity and reputation to anchor long-term
commitments on behalf of all existing and future users.
The solution of an integrated pipeline system was
inspired by the European experience of Enagas,
GRTGaz and Gasunie. Integrated pipeline systems all
have one thing in common: an independent operator that
manages capacity on the network and plans its
expansion. The operator’s independence means it is
removed from the business of marketing, and so the
pipeline operator acts as a facilitator to open the network
to third parties.

Given the existence of statist monopolies, a pipeline

operator is an acceptable hybrid that allows for an
important role of the state -- to ensure energy security –
while at the same time promoting a free market that
attracts new investment and maximizes efficiency.
Having a national system operator also provides trust in
the proper allocation of costs, reflected in transportation
rates.

Furthermore, public and private investment coexist in

ownership of pipeline assets, but operating margins and
expansion decisions are left to the manager. With an
independent pipeline operator, the opening of pipeline
capacity to third parties, the efficient allocation of
capacity and the promotion of competition in marketing
are separate from the ownership of the network.

With this, Cenagas was founded in August 2014 as the

operator of the STNI, which soon changed its name to
the Sistrangas. To be clear: Cenagas isn’t a marketer,
nor is it a consumer of gas. Its explicit goal is to ensure
the continuity of gas service in Mexico, to provide
financial viability to the system, and to open the gas
network to third parties.

Since early 2016, Cenagas has managed the

operational and contractual complexity involved in
moving natural gas across seven different pipeline
systems, simplifying the process into a single contract
between user and system operator. These contracts are
regulated under terms and conditions that force
Cenagas to treat industrial and commercial users, along
with Pemex and state power company CFE, equally.

This background is necessary to understand that the

formation of Sistrangas and its operator, Cenagas, is not
part of a specific “neo-liberal” ideology, but instead is the
result of practical decisions and gradual changes in
response to challenges that have arisen over the past 25
years.

The Mexican government acted in the interests of

energy security, balanced with market objectives, to
create Cenagas. And Cenagas is now an excellent tool
of public policy, helping to advance energy security, bring
down energy prices and increase prosperity for all,
objectives that are also at the heart of the goals of the
new administration in Mexico.

If the principles of efficiency, independence, open access

and separation of activities are maintained, the
Sistrangas pipeline network will keep moving toward
becoming a national system that alleviates the financial
burdens on the public sector, allowing state entities to
allocate resources to other priorities, such as the
strengthening of the refining and petrochemical sectors.

With the application of the roll-in mechanism to

aggregate pipeline development across the country as a
whole, “social pipelines” can be built to serve the
southern region of the country, and they cannot only
provide gas to this region, but they can also be
financially viable with Cenagas anchoring the projects.
Moreover, Cenagas can work in conjunction with the
electric power sector to improve its planning, and serve
as a platform for energy transition.

Recently, there has been speculation about the possible

integration of CFE-anchored pipes into the Sistrangas.
Although the legal framework is in place to carry out this
change, it would be important to question the motives
surrounding the measure. If the gas user is at the center
of these changes, then an increase in tariffs would be
manageable. End-users will not, however, accept higher
tariffs if they do not see substantive improvements to
operational and gas shortage problems. If the central
motive behind the decision is simply to lessen CFE’s
financial burden, the measure will be limited and could
have adverse side effects.

Finally, it is important to remember the purpose for a fully

integrated national Sistrangas and what it must achieve:

Operational flexibility that allows any user to move

gas from any point of injection to any consumer
center;
A robust operating philosophy that responds to
abrupt variations in gas demand given the
intermittency associated with, for example, the
proliferation of renewables;
Coverage that opens new routes to developing
markets;
An environment conducive to the diversification of
suppliers, with firm base capacity assigned through
open and competitive processes;
An empowerment of users so that they can choose
between multiple basins depending on price
differences; and
A collaborative industrial organization in which
carriers, shippers, end-users and the independent
manager coexist without operational crises, and with
economic certainty.

Copyright ©2019 Natural Gas Intelligence - All Rights Reserved.

ISSN © 2577-9877
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Special Contributor | Mexico City, MX

Eduardo is an independent energy consultant based in Mexico City with over 22 years of
experience in the Mexican energy sector and in regulatory affairs, with a focus on natural
gas, liquefied petroleum gas, refined products, electricity and utility projects. He began his
career at Pemex, in the refining division. He then worked for Mexico's Energy Regulatory
Commission (CRE) for 14 years, becoming the Tariffs General Director in 2010 and its
Chief Economist in 2014. From July 2015 to February 2019 he served as the ISO Chief
Officer for Mexico's pipeline operator Cenagas overseeing the technical, commercial and
economic management of the Natural Gas Integrated System (SISTRANGAS).
@eprudhomme

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