Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.
This 12th Q&A in the series is with James Delano, vice president of Atco Structures & Logistics, government and community relations since 2017. Delano served previously as the Atco Mexico managing director from 2014-2017 and oversaw the Canadian company’s entrance into the country after winning rights in 2014 from the Comisión Federal de Electricidad (CFE) to construct a natural gas pipeline near the town of Tula. The project is one of the seven natural gas pipelines now stalled in Mexico.
Delano holds a bachelor’s degree from Case Western Reserve University in Ohio, where he studied accounting and business management. He has been with Atco since 2005, both in Calgary and Mexico.
NGI: The biggest story in the Mexican natural gas industry of late has been the stalled pipeline projects. What is the current state of the Atco pipeline that was under construction in Tula?
Delano: Even though my role has changed some at Atco, I continue to seek and fight for a way to resolve the situation we are in, which is the natural gas pipeline that is stalled. That hasn’t changed in some time now.
What we have continued to do, during the previous and current administrations, is to try to resolve the issue through the support of highest ranking members of the government, as well as the ministers and officials of all possible government offices involved in developing infrastructure in the country. We understand and are convinced that we need the support of people in important positions within the government to advance and move forward with the project.
The project is quite simple really: Construct a 17-kilometer natural gas pipeline from point A to point B. That’s our job. The difficulty that we have encountered, basically, is a group of people that doesn’t want us to continue to develop the project, and they have found a way to stall the construction, through legal measures and have issued injunctions. As a result of these injunctions, known as amparos, which prohibit us from continuance of construction, we are stalled and can’t build a centimeter more.
NGI: What has the company done to resolve these legal injunctions?
Delano: We have sought to resolve the issue in two ways. One is legally, following the process in detail. That is the route we continue to follow as Mexican law indicates.
The other path to attempt to resolve the problem is through support from political channels, to meet with congressmen and women, governors and people in government ministries at the highest levels, such as the Ministry of the Interior, Ministry of Foreign Relations, Economy Ministry, Energy Ministry, the Development Ministry, known as Sedatu, and even the [state power company] CFE, in hopes of receiving their support to continue advancing the project.
I think that this process has lasted too long from 2015 to date. My involvement has been non-stop and my perception is that the government has shown interest in forming working groups to solve the issues at hand. I think they could have shown more interest in staying the course and resolving this issue. If this was purely a transaction, it would have been resolved a long time ago. It is a political issue because, above all, we have sought to comply with all the laws, with all the permits, with everything that has been asked of us. Despite our efforts, we find it impossible to advance the project from where we were ordered to stop construction progress in 2015.
We have spoken with and met with the leaders of the local Ejido communities that live where the natural gas pipeline would pass through and we have acquired the needed right of passages. The project has only been stopped by legal compulsory statutes generated by 4 Ejido community leaders, which keeps us from completing the final 1.5 kilometers left to finalize the construction of project successfully.
The last time we met with the landowners a couple of months ago they told us that they agreed to the project and agreed to let it pass through the necessary areas to complete construction. But when the moment came for them to make requests, they asked us for stratospheric levels of compensation. The amounts that they were asking for was enough to build an entire new 600-kilometer pipeline from Mexico City to Guadalajara easily.
NGI: Have there been any advances on the state of the pipeline since then?
Delano: It really hasn’t prospered since then. Some of the communities -- of the four communities that are against the project or have filed injunctions -- two have agreed to work with us and try to settle things in a reasonable way...the other two communities, definitely not.
We are a company that respects the law and are convinced of working transparently and with the highest moral working values. We don’t give a cent away to anybody to resolve a dispute. That’s not aligned with our ethics nor what we came to Mexico to do. Our interest is to further the nations infrastructure needs by offering value through our products and expertise.
For us, it’s very clear. We continue to follow our processes, we continue to follow legal procedures to the letter, we defend our interests that were determined as part of our contract and, at the same time, we continue to seek political and community support.
In this administration, we have discussed the situation with the president’s office, including Alfonso Romo, one of the president’s chief advisers, who offered his support. We have also met and worked with some federal congressmen and women, this was achieved with assistance from Tatiana Clouthier, congresswoman and campaign manager for President López Obrador, who has been actively involved in mustering support to help us resolve the case. People from Sedatu have also proposed strategies to assist us with community negotiations.
At this point, we continue doing as much as we can; we continue to work with government officials. We’ve reached a limit really where there isn’t much else we can do. The solution to the problem is in Mexico’s hands, not only for our pipeline, but for all the other ones that are stalled as well.
Things are on the verge of becoming a bit rockier. What is starting to happen with the calls for arbitration announced recently by CFE is that the conflicts moves from a local to a broader scene. With the involvement of the international courts, and governments supporting foreign investments of companies developing projects locally. Our Canadian government has been very interested in working with Mexican ministries to support the progress of our projects in Mexico, and the results of our investments. Other countries are doing the same. This speaks to the real interest of developing opportunities in Mexico.
With the call for arbitration, the situation becoming more heated than before. If you look at what was recently announced about the marine pipeline (South Texas-Tuxpan), the ambassador of Canada weighed in to denounce the decision from the CFE.
NGI: How do you think the talks between the CFE and private companies will evolve in the short-term?
Delano: I think this will come to a tipping point. There are meetings underway to resolve these contract disputes and stalled pipelines. I’m not sure what the Mexican government is trying to resolve if they’ve already determined the contracts to be “abusive.” The contracts in question complied with all the requisites and were signed by the CFE. They were international auctions and the contracts comply with industry standards anywhere in the world.
So, how do they consider these contracts to be abusive? It is a perplexing response by the country to continue to pay for fixed natural gas capacity and not receive the product as a result of force majeure.
There is a great area of opportunity in the country to establish a more transparent and a clear path to develop projects in a seamless fashion, resolving political and social issues with ease in the country. This will allow foreign investment to install state-of-the-art pipelines in Mexico efficiently so that the country has natural gas and energy at a competitive cost comparatively. Currently, there isn’t enough gas. The pipelines can’t provide the needed natural gas volume for growth, they aren’t flowing because they can’t be connected. As a result, the economy is beginning to fear what will happen if the country has shortages of natural gas.
I think that, if we want to have cheaper electricity available in Mexico and we want to develop the economy through industrial growth, we have to support it with a sufficient supply of energy. If that’s not provided, well, no industry can be run without energy.
NGI: One thing that has been discussed often in regard to the CFE negotiations is the take-or-pay contract model. As the contracts in question are written, the CFE has the obligation -- as defined by the contract -- to begin to make payments on a determined date, even in the event of a force majeure that impedes the connection of the pipeline. Is that correct?
Delano: I think the problem is that the CFE needs to define what a force majeure is for them.
Obviously, they don’t think there are force majeure conditions in some of the cases.
If you listen to the government’s public statements, foreign companies are only seeking to take money out of Mexico and they make it sound like outside investment is a bad thing, when the truth is, the foreign investment brought to the country was intended to provide something needed and positive -- natural gas -- to Mexico.
The CEO of CFE, Manuel Bartlett, has been very aggressive wanting to seek international arbitration. Usually, you’d expect a company to seek arbitration if it knows it is in the right. Though, in all of the take-or-pay contracts where CFE agreed to the terms to begin paying money, they are seeking arbitration or in the process of doing so.
NGI: Is Atco currently receiving payments for the work on its stalled Tula pipeline?
Delano: We haven’t charged the CFE a single cent. Nothing. Zero. CFE isn’t paying us a thing.
NGI: Is Atco seeking legal measures or a lawsuit against the CFE for the stalled pipeline?
Delano: We haven’t filed a lawsuit. We are defending our rights to the terms of the contract. We are following the agreed upon terms of the contract to the letter.
NGI: What is the impact of so many natural gas pipelines incomplete or offline on the Mexican economy?
Delano: Generating electricity with fuel oil is two times more expensive than using natural gas. Fuel oil is much more expensive. Liquified natural gas is also much more expensive than natural gas. So, the direct impact is that electricity is much more expensive, as well as the cost to make products. This makes Mexico less competitive.
If you calculate the four years that our pipeline has been stalled and the amount of additional money that is being paid to burn fuel instead of natural gas; it’s a ton of money.
So, the question is, why isn’t the government interested in completing the pipeline if it would save them so much money? And why are they seeking to resolve these issues outside of Mexico?
The goal of the energy reform was to produce electricity at a lower price than current costs, though efforts to do so have been blocked. By doing so, the CFE has lost money. It could be generating electricity at a lower cost, though instead is losing money by producing electricity with fuel oil.
Industrial and manufacturing companies have complained as well. If given access to natural gas, they too could save significant amounts of money on electricity generation costs. But, because the pipelines are stalled, they are having to pay much higher costs to burn fuel oil for electricity.
NGI: In recent years, Atco has diversified in Mexico, including development of a hydroelectric project, for example. What are Atco’s long-term plans in Mexico?
Delano: The easy response to that question is, we’re here in Mexico for the long-term and we’re going to keep investing in Mexico. This is our interest.
Currently, we have this project that is problematic for us and we are looking to resolve it. That’s what we want to do. We want to complete this project and we are looking for support from different sectors from the government to make that happen. That is our principal interest.
Atco has continued investing in the electric modular business sectors. The objective is to be in Mexico for the long-term. To grow in Mexico, help Mexico and contribute to Mexico, both with capital and as well as with our knowledge, and establish ourselves as a international entity that benefits the country. All of the products and solutions that Atco has, Mexico needs. We are a great fit.
NGI: Does that include plans for more possible projects in natural gas and pipelines?
Delano: It does, yes.
NGI: In general terms, what is your perspective on the current state of the natural gas industry in Mexico?
Delano: Currently, I see the industry as very stuck. Particularly in regard to the rulings against infrastructure companies. So, first and foremost, the disputes with the infrastructure companies have to be resolved because, in terms of natural gas volumes, the pipelines that were constructed in the last four to five years are basically a little more than half than what existed before the start of the energy reform (in 2014).
In hard terms, in Mexico, there were around 10,000 kilometers of natural gas pipelines in Mexico. Private companies have since constructed about 12,000 kilometers of new pipelines. We need that those 12,000 kilometers are working so that the plans that were made for the country’s energy industry. The plans were made with the understanding that they were needed by the country.
I think that the first priority is to arrive at agreements that are considered good and fair for the owners of the natural gas pipelines and Mexico. The flow of natural gas is needed for the country and that requires working pipelines. The country is in need of that energy.
There is hope that this difficult moment will pass. I say difficult because the government disagrees with how these contracts were made for the natural gas pipelines. According to the president, these are “abusive” or “one-sided” contracts.
As soon as these things are cleared up between the government and the private companies, the better. There is so much need for natural gas in Mexico. The hope is that this situation can be fixed soon because there are still around 10,000 kilometers of pipelines that are expected to be built.
NGI: There has been a lot of conversation about pipeline operator Cenagas taking possession of the CFE natural gas pipelines during the current administration. Do you consider that a possibility?
Delano: There could be an agreement, yes. Cenagas is supposed to be the specialist that manages and oversees the operation of the country owned natural gas pipelines. It would be logical to have a neutral authority and the idea seems like a good one. If there is a specialized agency dedicated to overseeing the natural gas pipelines, it will make the industry more productive for everyone. I’m not exactly sure how this would be accomplished, but it would allow for the adaptation of several things that the CFE did in terms of managing natural gas. I think if the CFE is entirely dedicated to electricity generation, it would be for the best.
NGI: We have seen a lot of changes with the energy regulatory agencies such as the CNH and CRE in recent months. How do changes such as high turnover in regulatory agencies affect the energy industry?
Delano: The function of a regulator is to assure the markets work in a manner that sets fair rules for all the market participants and doesn’t favor certain parties or sides. If that is maintained by the regulator, the market functions well. There has been a lot of discussion of late about the regulators and the commissioners that have been elected and proposed. It is important that they have the expertise and understand the international energy market. The regulator in Alberta, where Atco is based, was very close to the regulatory agencies that were being developed in Mexico and providing valuable knowledge and experience. They did so to help them determine the best methods to regulate the market.
It is important that the refereeing of the market, as provided by the regulators, continues to assure that the industry functions well, and to avoid the formation of another monopoly in Mexico.