Editor’s Note: This is one of a 14-piece series NGI undertook as the energy industry readied for the new year, with Lower 48 natural gas and oil supply continuing to surge in an uncertain environment as liquefied natural gas exports ramp up, Mexico markets remain shrouded and stakeholders demand more value. Get your complimentary copy of NGI’s 2020 Special Report today.
As the year winds to a close, NGI’s Mexico GPI took a look at the five stories that shaped the natural gas industry in Mexico in 2019.
The Pipeline Conflict
From his first day in office, President Andrés Manuel López Obrador began criticizing the contracts on the pipelines being developed as “unfair” to Mexico. His rhetoric reached a head in June, when the anchor customer on the pipelines, Mexican utility Comision Federal de Electricidad (CFE), said it would seek international arbitration with the developers. Thankfully, this was avoided, and two months later, new contracts on the seven pipelines in question were signed, ending the pipeline conflict.
In October, Infraestructura Energética Nova (IEnova) CEO Tania Ortiz Mena said the new arrangements were a “win-win” for all parties involved, and internal rate of return was “neutral.” IEnova developed the 2.6 Bcf/d Sur de Texas marine pipeline in a 50/50 partnership with TC Energy Corp., which, when it finally came online in September, increased Mexico’s import capacity by 40%.
The new terms extended the contract tenor to 35 years, from 25, and established a levelized tariff for the entire period.
War On Regulators
While López Obrador has done nothing to dismantle the energy reforms of his predecessor, perhaps the area most hit by his presidency is energy regulation.
Only one commissioner of seven at downstream regulator Comisión Reguladora de Energía (CRE) has survived the president’s first year in office. In June, CRE President Guillermo García Alcocer resigned, saying that he had lost his powers to implement policy, and said the arrival of new members of the commission appointed by the government represented "a majority view that is different to mine." His resignation came amid steep budget cuts, layoffs and resignations at energy sector regulators.
In early October, López Obrador sent over three picks for a new CRE president to the senate, and Vicente Melchi, an engineer with experience within the Energy Ministry (Sener) was chosen to take over from Alcocer. Although the changes are worrisome to the health of free markets in Mexico, “in the natural gas industry a degree of normality persists,” said energy expert Eduardo Prud’homme. “The permitting of transport, distribution and commercialization of gas continues to operate without interruptions, and other everyday affairs continue as before. And, as before, progress has not been made on pending regulatory changes.”
Booming U.S. Natural Gas
North of the border, natural gas production and pricing continued to be favorable to Mexico in 2019. In the Permian Basin, soaring gas production coupled with a lack of takeaway capacity led to periods of negative pricing at the Waha hub. The recent entrance into service of Kinder Morgan Inc.’s Gulf Coast Express (GCX) pipeline provided temporary relief to Permian gas prices, reducing basis differentials between Waha and Henry Hub, but going forward, prospects are not helped by the postponement by Kinder of the in-service date for its 2.1 Bcf/d Permian Highway Pipeline.
There is currently “not a stellar outlook” for Permian natural gas prices through 2020, RBN Energy LLC analyst Jason Ferguson said recently, although that fact is “certainly an opportunity for those buying gas, including Mexico.” The fact that the Waha-to-Guadalajara system should be completely done in the next few months bodes well for Mexican buyers of gas.
Despite the call from the government for “energy sovereignty,” Mexico continues to import increasingly higher levels of natural gas from the United States. The United States exported 5.3 Bcf/d to Mexico via pipeline in July, up from 4.87 Bcf/d during the same month a year ago, according to the U.S. Energy Information Administration.
Imports accounted for 68% of Mexico’s gas supply in July, up from 67% in July 2018, per data from the Comisión Nacional de Hidrocarburos (CNH).
Yucatán Energy Crunch
One of the major pending issues in Mexico’s energy market in 2019 was the precarity of the Yucatán Peninsula’s energy system. Over the past three years, regular brownouts and power shortages have impacted industry and the area’s tourism business. The situation became so severe in June that Mexico’s independent system operator Centro Nacional de Control de Energía (Cenace) declared a state of operative emergency throughout the Yucatán Peninsula because of a shortage of gas to power the area’s combined-cycle gas turbines.
On average, state oil company Petróleos Mexicanos (Pemex) supplied 70-90 MMcf/d to the Mayakan during 2019, “barely enough” for CFE to meet its demand for electric power supply, according to Talanza Energy analysts. Additionally, frequently the gas supplied at Nuevo Pemex is of poor quality from high nitrogen concentrations. The problem was made even more acute earlier this year when the government canceled a tender to install a floating storage and regasification unit in Veracruz state.
News improved nearer the end of the year. In November, it was announced that the connection of the Mayakan pipeline to the national grid would finally occur, allowing gas from other parts of the country to reach the area.
However, the “functionality of the interconnection depends on the completion and full operation of the adjustments to the Cempoala” compressor station, Talanza analysts said. The Cempoala reconfiguration project would allow gas to flow from the north to the south of the Gulf of Mexico, and then on to the Yucatán.
Once Cempoala is ready, the interconnect would also allow gas from Texas to reach the peninsula, thanks to the aforementioned September startup of the marine pipeline.
Pemex Business Plan
One of the biggest changes in Mexico’s energy sector this year was the halting of oil and gas rounds in the upstream sector. This meant that private companies could not continue to grow their presence in the country; once again, state oil company Pemex would be king in Mexico’s energy sector.
In June, Pemex announced a business plan to focus on 22 key fields. CEO Octavio Romero Oropeza said the plan reduces the profit sharing tax on the company to 54% from 65%, meaning savings of $7.1 billion for Pemex over the course of the next two years that can go into exploration and production.
The plan calls for crude production to reach 2.7 million b/d in 2024, a level not reached since 2008 and an increase of about 1 million b/d on current production.
"We're going to rescue Pemex, along with its workers and its technicians," López Obrador said.
Romero Oropeza pledged to "turbo-charge" production at Pemex. "We're aiming to slash the times between new discoveries and first fruits of the new fields.”
While the plan was strongly criticized by analysts, two natural gas-rich fields included in it -- Ixachi and Quesqui -- raised hopes for increased domestic gas production in the country.
Pemex plans to spend 56 billion pesos or about $3 billion in Ixachi in Veracruz with the aim of reaching production of 80,000 b/d of crude and 600 MMcf/d of gas by 2023.
The Quesqui discovery, meanwhile, in the president’s home state of Tabasco, is described by Pemex as "gigantic" and the company's largest since 1987. Quesqui could hold more than 500 million boe in 3P reserves, and could produce as much as 410 MMcf/d of natural gas by 2021.