Mexico to Eliminate 4% Tariff on Natural Gas

In a move to hasten the availability of natural gas in a country facing power shortages and worsening pollution, Mexico said Friday that it will eliminate a 4% tariff on all natural gas imported from the United States and Canada starting July 1.

Mexico had been expected to gradually abolish the 4% import duty in a three-to-four-year period as part of an effort to introduce more competition in the natural-gas industry and make it a more economic alternative to oil.

The move is good news for U.S. and Canadian natural-gas suppliers, notably Sempra Energy International, the San Diego-based utility holding company with extensive Mexican operations.

“It’s really positive. This makes U.S. gas more competitive with Pemex gas,” said George Liparidis, senior vice president at Sempra.

Sempra has won concessions to distribute gas in Mexicali, Chihuahua and Torreon, Mexico, and broke ground Thursday on a 23-mile, $35-million gas pipeline from San Diego to Baja California’s largest power plant in Rosarito.

With Mexico’s electricity demand growing 6% per year, the country is under enormous pressure to add to its electric power capacity or face brownouts in the next five years, officials have said. At the same time, the industry is under a legislative mandate to reduce pollution by converting its mainly fuel-oil-burning power plants to gas.

Those two factors argue for more natural gas, and Mexico’s government had set a lofty goal of doubling gas consumption in the next eight years. But Mexico’s gas delivery infrastructure remains woefully inadequate, partly because the predominance of state-owned oil giant Pemex and the 4% tariff have worked to slow foreign investment in gas.

Meanwhile, Mexico has been slow to develop its own extensive natural-gas reserves, both because oil is readily available and it doesn’t have the capital to develop pipeline and refining networks.

“It’s a chicken-and-egg situation of how do you create demand for cleaner-burning gas when the prices are not competitive and there is no infrastructure?” said Dan Pickering, research managing director at Simmons & Co. investment bankers in Houston.

So the government has decided to move up its timetable in hopes of stepping up foreign investment, which will be attracted by the elimination of tariffs, Energy Secretary Luis Tellez told reporters Friday.

With energy shortages on the horizon, President Ernesto Zedillo in February proposed a constitutional amendment that would open the door to a restructuring of the electricity market, currently one of Mexico’s most closed and inefficient economic sectors.

Tellez said this week that he is “60% sure” that the Mexican Congress will approve the amendment and an electricity measure that would pave the way for about $25 billion in foreign and domestic investment over six years. Much of that would be spent in natural-gas infrastructure and the construction of gas-burning power plants.

With few exceptions, foreign investment in Mexican power is now limited to generation plants and to natural-gas distribution networks in certain cities. Foreign gas companies can sell gas in Mexico but must transport it over Pemex pipelines. The new law would open pipeline investment to foreign companies.