CFE International, the commercial arm of the Mexico’s Comisión Federal de Electricidad (CFE), is planning to hold an auction to tender the future construction of an LNG plant in the Mexican gulf port of Coatzacoalcos, CFE International CEO Miguel Reyes told NGI’s Mexico GPI in an exclusive interview at the U.S.-Mexico Natural Gas Forum in San Antonio last month.
“There’s going to have to be a bidding round” for the Coatzacoalcos LNG plant, Reyes said, adding that he can’t disclose further details until the auction terms are approved. “We’re currently in the process of readying the bidding terms,” he said. On Thursday, the company put out a call for interest in an LNG export project in Coatzacoalcos. Capacity would be up to 600 MMcf/d.
Reyes, who has served as the CEO of CFE International since Dec. 2018, said that the CFE decided to construct a liquefied natural gas plant in Coatzacoalcos instead of Salina Cruz, located on the Pacific coast, in order to meet growing demand for natural gas in the European market.
“What we’re going to do is move the liquefaction plant that was going to be in Salina Cruz to Coatzacoalcos and, with that in place, will speed up our ability to export natural gas,” Reyes said. “The plant we had planned for Salina Cruz was going to export LNG to Asia, whereas our project in Coatzacoalcos will direct LNG shipments to Europe.”
Prior to assuming the role as CEO of CFE International and CFEnergía in 2018, Dr. Reyes served as an academic at the Universidad Iberoamericana in Puebla and Mexico City from 2006 to 2020, where he held the titles of Director of the Department of Social Sciences and Director of the Salary Observatory, coordinator of the Poverty Network of the Association of Trusted Universities to the Society of Jesus in Latin America, and coordinator of the Poverty Area of the Research Institute for Development with Equity.
Reyes holds a degree in economics from the Meritorious Autonomous University of Puebla, a master’s degree in economics from the University of the Americas Puebla and a doctorate in Economics from UDLAP.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Reyes is the 91st expert to participate in the series.
NGI: You said in your presentation at the U.S.-Mexico Natural Gas Forum in San Antonio that a large concern for CFE is that Mexico has an excess in natural gas capacity. Would the CFE be willing to sell that capacity to private marketing companies?
Reyes: Yes, of course. You have to consider that it would be completely absurd when, if we aren’t recovering the amount of excess capacity we are losing, to just let it sit untouched.
The best part of our current situation is that we already have supply guaranteed for the generation plants, which in this case are subsidiaries of CFE. They were created for this. You create a subsidiary (CFEi and CFEn) that buys gas to guarantee the supply to these generation plants. And we already have the supply guaranteed. We already have the strategic alliances and have guaranteed supply for the liquefaction plants and fertilizer plants. And, even after supplying all of these plants, if CFE p still has excess transportation capacity, CFE will continue selling it. If private companies want to buy it and want to help us, that’s great and much better for the CFE to have those sources of revenue than not having anything. If it’s not being used and if someone is going to use it, great, we of course would welcome that.
Aniel Altamirano Ogarrio, Deputy CEO CFE International: To complement what Dr. Reyes said, currently, this is what we’re doing. We showed in our presentation how we’ve increased the use of natural gas pipelines in the U.S. and Mexico and, due to that, we have sold transport capacity and supply to other marketers and end users. So, currently, we are selling excess capacity and supply to private marketing companies and end users.
NGI: Does the CFE have natural gas capacity secured for all the new power plants being constructed?
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Reyes: Yes. As we mentioned, (i) we have excess capacity, and (ii) we are finalizing negotiation with companies to expand the capacity in the pipelines that require so (power plants in the Yucatan) or to construct new pipelines to connect the plants with the current CFE system (San Luis Río Colorado and Gonzalez Ortega). Therefore CFE will have capacity for all of the new plants at the time its construction is finalized. There are six new plants and the others require modernization, similar to what we are doing with the hydroelectric plants. In those cases, the plant already exists and, for example with the hydroelectric plants, turbines need to be changed, such as the gas turbines, the vapor turbines and the cooling system needs to be modernized. Previously, these turbines used a lot of water, and now more air is required for operation.
Normally when they tell you, hey, put a combined cycle plant by the ocean, it’s considered to be among the most efficient because it uses salt water but, when you’re putting it in the center of the country or where there’s a desert, where do you source the water? You use incredible amounts of water that can be used for urban purposes or for industrial development or for watering needs. So, what needs to be developed by technicians? An air cooling system, for example, which is part of what’s included in a modernization.
So, currently, nine CFE generation plants that already exist are being modernized. Additionally, new plants are being built and those will require gas supply. All of that capacity is included in the plans that we are carrying out.
NGI: Mexico’s dependency on the U.S. for natural gas supply continues to grow. What are your thoughts about the situation?
Reyes: It’s a very complicated topic. Because when we began to decrease the production of natural gas, it didn’t necessarily go hand in hand with the decline in the production of crude. Oil had some important spikes which led to extraordinary periods of revenues during the administrations of President Vicente Fox and Felipe Calderón. During that period, we produced more than 3 million daily barrels of oil, though the production of natural gas didn’t necessarily increase at the same rate, because the gas was burned or flared. There wasn’t existing technology and there wasn’t accompanying investment made to assure that gas produced in Mexico wasn’t burned off.
Normally, in associated fields, you have gas first and then below there’s oil. So when you drill in the field, you inject nitrogen, which contaminates the gas. Additionally, if you burn it, you also don’t use that gas. So, for many years, Pemex increased its oil production and the demand for gas increased, though the production of gas was limited. This left the country no other option than to seek outside supply from the U.S. If we had sought to obtain gas from other sources, it would have been much more expensive. The idea of bringing in natural gas from other countries that have available resources, such as in Africa or Russia or Bolivia, didn’t make much sense considering the U.S. has supply and is right next door.
That did, however, generate a vulnerability problem in terms of dependency. This is what we’re seeing with Europe currently, which is dependent on Russian gas. Russia provides more than half of Europe’s gas and to cut off Russian gas from one day to the next isn’t a possibility. It has to do with the availability of resources.
There is a vulnerability in Mexico and I think that the way in which they’ve attempted to reduce that vulnerability is through strategic action by President López Obrador. We’re producing more gas in Mexico, but it’s not going to be enough to make us self-sufficient and provide a solution to our demand. We are planning to increase natural gas production in time, but we’d have to increase oil production significantly, which isn’t a feasibility given international agreements to maintain and reduce crude production. This will keep Mexico’s oil and gas production relatively in the same position.
So, what do you do to resolve this situation? This can be done with ample agreements with the U.S. government, with natural gas producers or marketers from the U.S., and to maintain the best possible relationships with the U.S.. President López Obrador has been betting a lot on economic integration in North America, with the thinking that soon there will be a bloc in China, that there will be a bloc with Asia and India, or even Russia with one of the two. As a result, this administration is seeking to strengthen North America. He’s also bet on the integration with Latin America, though that doesn’t seem so easy or feasible. If we achieve a North American integration that includes the U.S. continuing to supply Mexico with natural gas — and doesn’t view Mexico as a foreign entity but as part of the same bloc — that could reduce the vulnerability we currently have. If we don’t achieve that and there are sectors in North America that don’t want Mexico to consume U.S. gas, it’s going to be complicated.
NGI: Is there concern that something similar to winter storm Uri in Texas in Feb. 2021, in which Mexican natural gas prices proliferated, could happen again?
Reyes: If you remember, in Feb. 2021, the governor of Texas wanted to prohibit natural gas exports to Mexico. He threatened that and said he wasn’t going to allow for gas to be exported to Mexico. There were widespread blackouts and pipelines and infrastructure were frozen, which kept gas from flowing. So, there is always the latent threat that there will be someone, such as the governor of Texas, that says they don’t want to export gas out of the country and to keep it in the U.S.
So, if we achieve that the U.S. understands that it will benefit them to be integrated with Mexico, this vulnerability will be reduced. But if not, this vulnerability will remain and it won’t be very easy to resolve. This vulnerability also goes hand-in-hand with the fact that we have signed 25-year, long-term transportation contracts, or 15-year supply deals. That makes it far more difficult for us to reduce our dependency on the U.S. Even if we had options to increase our national natural gas production, we’d still be locked into 15, 20 or 25-year contracts with the U.S.
The Mexican dependency on U.S. gas is a complicated situation and isn’t easy to resolve. People think the easy solution would be to produce more gas in Mexico, but we’d still be tied in to long-term contracts with the U.S. That said, we do need to find a way to solve the dependency issue. The next administration is going to have to think a lot about how to continue to evolve this relationship.
NGI: What are the CFE’s plans for the trans-isthmus and Salina Cruz pipeline?
Reyes: At this time, President López Obrador wants to leave some of his projects in place for future implementation, and he’s said that it’s currently complicated to construct the Salina Cruz pipeline. There is a Pemex pipeline there, however, which supplies industrial plants that are going to feed industrial parks, for example.
But what we’re going to do is move the liquefaction plant that is going to be in Salina Cruz to Coatzacoalcos and, with that in place, it will speed up our ability to export natural gas. The plant we had planned for Salina Cruz was going to export LNG to Asia, whereas our project in Coatzacoalcos will direct LNG shipments to Europe. So, we changed our plans some and will now construct the plant in Coatzacoalcos instead of Salina Cruz.
NGI: What is the plan for the LNG export plant in Coatzacoalcos?
Reyes: There’s going to have to be a bidding round, though at this point it is yet to be approved and I really can’t say anything further until it is approved. We’re currently in the process of readying the bidding terms.
NGI: How does the new CFE business model work regarding exporting LNG out from Mexico to other countries?
Reyes: It’s an export model. In some cases it will use exports of Pemex gas. In the Lakach field, for example, I understand New Fortress will be exporting natural gas produced by Pemex. The LNG exports out of Altamira will be using imported gas from the U.S.
The business model that we are setting up is profit sharing/monthly return. We are going to share a percentage of the earnings, as if it were a renter’s fee. We will receive a percentage of the profits that are earned from the LNG sales. That is the business model. We give them gas at the point where they are going to do the liquefaction process. We will use our transportation infrastructure and our existing natural gas contracts to supply the gas. We will assist with the permits and required licensing to assure the LNG can be processed and exported. So, the LNG exporter will buy gas from the CFE and share a percentage of their earnings. That’s the model.
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