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Inside Cenagas Part 2: Mexico Infrastructure Meeting Demand, Opening New Markets

Part two of a three-part series

Two years since the formation of Cenagas, Mexico’s natural gas pipeline system operator, Cenagas Director General David Madero sat down with political scientist and NGI correspondent Dwight Dyer to talk about what’s ahead for infrastructure as the country’s natural gas market evolution unfolds.

Part two of a three-part series

Some in the industry have questioned the wisdom of the recently announced South Texas-Tuxpan pipeline, a project to carry natural gas from the United States undersea to Mexico (see Daily GPI, June 13). It was thought that an overland route might be less costly. Centro Nacional de Control del Gas Natural (Cenagas) Director General David Madero disagrees.

Besides Texas-Tuxpan, an overland project from Ramones to Cempoala was also considered that would have accomplished the same purpose.

“When we first looked into it, the submarine pipeline’s cost was around US$3 billion, and the overland one’s was US$2 billion,”Madero told NGI. In the end, we decided to build the submarine pipeline for [reduced cost of] US$2 billion…[I]t was understood that building the submarine pipeline would be much quicker than the overland one, through Tamaulipas and Veracruz, given right-of-way issues, security problems and the orography.”

To see NGI’s full exclusive interview with Madero, download the Inside Cenagas Special Report.

An overland route would have allowed for a pipeline with greater capacity, but the quicker project won because Mexico wants to build its pipeline corridors as quickly as possible, Madero said.

“We are building a new transportation corridor from West Texas to Chihuahua, La Laguna (Coahuila state), Durango, Aguascalientes and Guadalajara, which complements what we have with the old 48-inch [diameter] one running from the Gulf of Mexico,” Madero said. “So we had to push one forward, and the decision was to build the submarine pipeline.”

Over the last three years, Mexico has moved to quickly expand its transportation capacity, with more than 1,200 km of new pipelines under construction and an additional 4,000 kilometers  having been tendered. Yet Cenagas’ own infrastructure is not slated to grow in the short term.

As Madero explains, “Cenagas has its own infrastructure and then also the one included in the national integrated system. The self-owned infrastructure is complemented with the Ramones pipelines (Ramones I, Ramones II North and Ramones II South), with the Tamaulipas pipeline, which is relatively short, but important, on account of the bypass it creates.[We also operate a couple of pipelines] in the center of the country, Aguascalientes and Zacatecas, where we have different degrees of integration.

“In Cenagas’ perspective, there is a decision for the national pipeline system and the Naco-Hermosillo system not to grow for the time being, that new investments be done by private parties.

“[I]t is important that everybody understands that the pipelines CFE [Comision Federal de Electricidad] tendered and the ones we will tender will not necessarily become part of the system. Not because Cenagas is tendering a project will it become part of the system 100%. That is a possibility if we receive instructions to that effect.”

Although there is room for the national integrated system to grow, it is up to private companies to make the first move. “According to Article 65 of the Hydrocarbons Act, the owners of the pipeline must explicitly declare their voluntary intention [to join the system]. For example, there is a TransCanada pipeline that begins and ends in our system, and it might be of interest in the future to incorporate this type of pipelines into the system. However, first of all, TransCanada in Calgary must make a decision and express its interest to become part of the system. Therefore, we do see possibilities for the system to grow.”

By around 2019-2020, the capacity of Mexico’s pipeline network will nearly double due to the “massive buildup” in infrastructure, Madero said. “It is growing by 80%, depending upon where you start measuring: in length, number of compression stations, etc.”

For an update on Mexico's rapidly evolving natural gas market, check out NGI's Special Report titled Mexico: A Whole New Natural Gas Market Opening Close to Home.

In particular, the country’s Bajío region is seen as a high-growth area for natural gas, as is the central region of the country. “Of course, Monterrey will continue to be an area of continued growth, and all of Chihuahua state will also experience strong growth,” Madero said. “As the technical operator, we want the system to cover the entire country, so we would like to see demand grow where there is no natural gas supply today.

“This implies infinite growth in percentage terms. However, in absolute terms the greatest demand is where industry is growing and where there is increasing demand for electric power. This is a corridor that stretches from the Mexico-U.S. border to the center-west of the country and that reaches areas in the central region, such as Puebla state. We have seen high demand in these areas, which are the ones where economic growth has concentrated. It is not necessarily the only areas where it must grow. We hope that by bringing natural gas to the southern reaches of the country, economic development will take off. That is our expectation.”

STORAGE AND LNG

While pipeline development is under way in Mexico in earnest, it will be a while longer before the future for natural gas storage can be determined.

“[W]e do not know where we need to have that storage capacity,” Madero said. “Cenagas is working with the Mexican Petroleum Institute (a public research facility) and international consultants to identify where we can store gas; where it makes sense, given porosity and permeability constraints and where it is economically rational.

“If it makes economic sense, perhaps there could be opportunities for private companies, but if private parties do not want to participate, the national system is designed to manage both transportation and storage. Therefore, as soon as we have identified these opportunities, we will confer with Sener [Mexico’s Energy Secretariat], perhaps toward the end of the year or early next year, and hopefully, by the next revision [of the five-year plan], in the first half of 2017, we might include a strategic storage project…”

Also, the strong emphasis on pipeline development raises questions about the country’s liquefied natural gas (LNG) facilities’ future. 

“In the last few years, we have made heavy use of LNG. In Manzanillo (Colima state), we are constantly importing 0.5 Bcf. Of these, 0.4 Bcf stay in Manzanillo for CFE’s use and the remaining 0.1 Bcf we import, following a standing contract with CFE. Every day, we import about 0.1 Bcf, which is not a large amount for Mexico, in percentage terms. The system can handle 5 Bcf, so 0.1 is not much, but it implies income for us.”

“In Altamira (Tamaulipas state), LNG has witnessed a drop, but has picked up in the last few months. We have experienced some operational problems there. In fact, we are involved in the purchase of a tanker in Altamira to import gas.”

“We anticipate that, with the Ramones pipeline coming online fully this year and the gradual start of operations of a number of ducts that are interconnecting with us, we will stop importing LNG entirely in a few years, in particular for balancing purposes.”

Yet, Madero believes LNG may have a small, but relevant, role to play as part of a bridge strategy for storage. “[A]s supplier of last resort, we may want to have LNG storage in both terminals to be able to regasify it on demand. Therefore, we are gradually entering into contract negotiations with regasification companies, with LNG vendors, so that Cenagas has capacity there (Manzanillo and Altamira), which can be used on demand.

“If you are the supplier of last resort, you cannot rely on imports. If there is a problem, most likely it will be because there is a problem at an importation point or because all importation points are saturated and there is a big problem with a national natural gas supply point. So we want to have storage capacity and one way, albeit expensive, to do it is to rely on LNG. Further ahead, we want to have gas-stage storage, i.e., underground storage in salt domes and in abandoned fields.”

Madero graduated from the Instituto Tecnológico Autónomo de México with a master's degree in economics and holds a doctorate in economics from the University of California, Los Angeles. He has more than 20 years of federal government experience and was appointed to his post at Cenagas in August 2014. While working at the Ministry of Energy, he oversaw oil/natural gas activities in the upstream, midstream and downstream sectors.

NGI correspondent Dwight Dyer holds a doctorate in political science from UC, Berkeley. He has worked for the Mexican government and currently is an independent consultant on political and security risks related to Mexico's energy sector reform.

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