So far the light is green for Tidelands Oil & Gas' pipeline, storage and liquefied natural gas (LNG) project across the Texas border in Tamaulipas, Mexico, but the risks of investment in the country's energy industry have always been high.
Tidelands CEO Michael Ward said the company is keeping a wary eye on state-owned oil monopoly Petroleos Mexicanos (Pemex), but he is confident the company's multipronged infrastructure project around Renosa in Tamaulipas and Monterrey, Nuevo Leon will be operational in three years, providing the country with its first storage field, gas market hub and its first offshore liquefied natural gas (LNG) terminal in the Gulf of Mexico.
Tidelands filed an application two weeks ago with the Comision Reguladora de Energia (CRE) for a permit to build the 1 Bcf/d Terranova Oriente pipeline system, a 160-mile bidirectional pipeline that will form the backbone of the Tidelands project. The company also intends to file soon for permits to construct three other parts to the project: the Terranova Occidente pipeline, which will extend from a connection with the Terranova Oriente system to the city of Monterrey; the 50 Bcf Brazil gas storage field in Rio Bravo, Tamaulipas; and the $150 million Dorado HiLoad regasification terminal 35 miles offshore.
Experts say the ambitious project would be a significant step in the development of Mexico's northeastern gas market. "Mexico needs a northern gas hub (it also needs a western gas hub)," said Michelle Michot Foss, executive director for the Institute for Energy, Law & Enterprise at the University of Houston Law Center. "I filed comments to the CRE a few years ago urging development of a hub.
"Gas storage is, as you know, a lagging development; the 1995 natural gas restructuring in Mexico created opportunities for private investment but to date there have been no takers," she noted.
"A concern has been that if a hub gets established, Pemex will control it. This is a possibility," said Foss. "Therefore, this whole concept hinges on how CRE reviews the application and comes down on these issues."
Ward said he expects the CRE to be eager to push the project forward. "The CRE has been after a gas storage project for a long time," he said. "They see it answering a lot of the problems here.
"Our project is really a secretary of energy-type project; that's who's going to be pushing the deal. Politics shouldn't impact it at all." However, Tidelands will be watching Pemex's moves closely.
"We're talking to them," said Ward. "We have a memorandum of understanding signed with [one Pemex subsidiary], and we have a confidentiality agreement to swap information with [Pemex Exploration and Production]. We have done all of that and met all their requirements.
"The memorandum gives us the right to develop a storage project. I'm not interested in tying particularly into Pemex's pipeline system. That's something that we [would rather not do]. If you are at their mercy, you are at their mercy," he said, indicating that interconnections to the Pemex pipeline system could expose Tidelands to potential loss of operational control.
Foss said Tamaulipas has been very friendly to energy sector investment, and has been trying to make the case to foreign direct investors for some time. She also said the project would gain some political support if the state's governor runs for president. "Governor Tomas Yarrington is widely expected to make a run at the presidency," she said.
"If he pulls out or chooses otherwise, he is well placed as a power broker. He is one of the young PRI governors, more progressive, and therefore at odds with the 'dinosaurs' who continue to call the shots. To build his base, Yarrington has reached out to his gubernatorial colleagues and has built a strong network, especially across the northeastern tier. By the way, he has a Ph.D. in economics from the University of Texas. I'm sure he will throw his support behind this project, and it looks to be solid."
She also said the project will gain momentum on support from large industrials in Monterrey and elsewhere. "The industrial users have been particularly vocal about natural gas prices, wanting on the one hand guaranteed floors (anticompetitive) and on the other hand more private investment upstream," said Foss.
Ward also said the project would bolster the local economy. "You will see a much more stable price for industrials and even the CFE [Mexico's state run power company], compared to having to buy gas on the [U.S.] spot market to meet swing demands. Spot market gas prices in South Texas are brutal."
He said the Tidelands infrastructure would support, rather than compete with, Shell's LNG terminal under construction in Altamira, south of the Tidelands infrastructure. "Our storage facility will help them, They can bring gas up the San Fernando line if they need to and put excess gas in our storage facility.
"Our LNG project will serve the northeastern portion of Mexico. Whereas the Altamira LNG facility concentrates on the central part of Mexico. We are really not in competition with Altamira," he added. "We're looking at [serving] the CFE's Rio Bravo power grid and the Monterrey industrials.
"Just in our area we're looking at through 2013 almost 1 Bcf/d of incremental gas demand just through power generation; that has nothing to do with the industrials, residentials or anything else in our area. That whole border area is booming right now, including the Monterrey area. Their growth is going to be stymied somewhat if they can't get a reasonably priced natural gas commodity in there that is reliable."
Tidelands expects to have its pipeline permits in 90 days. It plans to file applications for its other projects in the next few weeks. All of the projects are expected to be in service by January 2008.
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