Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.
The idea to export natural gas from Texas to East Asia through gas pipelines that cut across Mexico has been around for a long time now. Thus Mexico President Andrés Manuel López Obrador’s long-winded response on August 10 to a few questions from journalists on the matter was not breaking news. All the same, the president’s words were revealing, and given how policy in Mexico these days centers around the revelations of one man, could suggest a few things pertinent to the natural gas market and maybe even lead to some new investment opportunities.
In what ended up being around thirty minutes of winding responses to energy questions, López Obrador provided his vision of the natural gas industry in Mexico. His words were a mixture of accusations and allusions to last year’s renegotiation of gas transportation contracts, but he also mentioned three sites on the Pacific Coast that could be used to export U.S. gas to Asia, and even Central America. These sites were Ensenada, Topolobampo and Salina Cruz. He said the idea of exporting gas is a solution to “an inherited problem” and a way to use surplus gas acquired “in a good business proposition for the private sector.” It is all part of his government’s commitment to “honoring contracts.”
He said that poor, irregular planning had led Mexico to sign off on gas contracts to supply thermoelectric plants that were never built. His government, he said, is stuck with solving this problem, and so sending out liquefied natural gas (LNG) from Mexico, even though the pipeline rates are expensive, is a good solution in part because Texan gas is “the cheapest in the world.”
President López Obrador also used the time to accuse the previous government and the private sector of poor pipeline layout planning. For this reason, last weekend he promised the Yaquis of Sonora the option to change the route of the stalled 510 MMcf/d Guaymas-El Oro gas pipeline owned by IEnova, the Mexican subsidiary of California’s Sempra Energy. It will be costly, but it will be more expensive not to complete the pipeline. Here he did not miss an opportunity to criticize the contracts signed by state utility Comision Federal de Electricidad (CFE) that must pay this company for each day that the pipeline does not operate.
It is extremely interesting that the president has related the full operation of the Sásabe-Guaymas-El Oro segment with the need for gas supply in Topolobampo. It is there, according to his statements, where his government plans for “companies” to build an LNG plant for export to Asia. In a direct reference to Sempra, he pointed out that a company needs a permit to export gas to Japan from its plant in Ensenada. In a geographical leap of thousands of kilometers, in his next sentence he stated that the export of gas could also occur in Salina Cruz, but this time using gas from the Gulf. For this purpose, the existing pipeline in the Isthmus can be used and the project can include the supply of gas to Central America.
In his laid-back, conversational style, the president went over different plans and presentations that have already been previously proposed by CFE, Petroleos Mexicanos (Pemex) and pipeline operator Cenagas. It’s true that the financial pressure resulting from gas purchase and gas transportation contracts is real. The commercial management of the entire Mexico portfolio of gas is complex. CFE is the largest player in the gas market in Mexico and has outsized weight in gas transactions carried out in Texas as a result of a sequence of contracts signed in the last decade, even before the energy reform of 2013-2014. López Obrador is right in indicating the presence of surplus gas in CFE’s purchase portfolio along with an underutilization of reserved capacity in different systems with different private companies.
However, his analysis lacks the right context.
The design of the network of pipelines anchored by CFE was underpinned by a medium and long-term analysis, and it was never assumed that they would be full from the outset. In addition, the capacity of the pipelines must meet consumption peaks over time and not be limited to average levels. This is even more relevant in a network that lacks storage capacity.
There are seasonal elements to consider and undeniable growth trends. The demand forecast some years ago was based on a situation of systematic shortage in which many consumers, electrical and non-electrical, were simply not served by the Sistrangas pipeline system. National gas production was in decline. In the calculations of the planning models, an annual growth of approximately 400-500 MMCf/d per year was estimated. Every forecast is fallible but reviewing the data from this year, even in a pandemic environment, we can see healthy growth. From January to June 2020, flow on the Sásabe-Guaymas pipeline increased from 67 MMcf/d to 153 MMcf/d. In the Ojinaga-Encino system, gas injections rose from 111 to 218 MMcf/d. In the San Isidro-Samalayuca pipeline, injections rose from 80 to 230 MMcf/d. The entry into operation of the marine pipeline has also contributed significantly to the increase in imports from Texas.
It’s also important to underline that the geographical layout of pipelines not only took into account proper routes, but was also about creating a meshed system that would improve reliability and service continuity. The scale of the Mexican market is not enough to see a proliferation of pipelines like in the rest of North America where urban demand centers are connected by different lines with different origins. The underlying idea in the layout of the Mexican projects tendered in the last decade sought to address the lack of access making the country’s main cities vulnerable. It’s worth remembering that in July 2007 a radical leftist guerrilla group caused an explosion in a Pemex gas pipeline that left the Bajío area without gas and there was no alternative way of maintaining gas supply to all types of users in the area.
There were also many logistical details overlooked in López Obrador’s statements. In order for Sempra to start exporting gas to Asia from the Energía Costa Azul terminal, it not only needs an export authorization. There is also uncertainty around the expansion of the Rosarito gas pipeline and contractual coordination with other upstream actors to achieve additional capacity to the existing line in North Baja, owned by TC Energy. The lack of gas transportation capacity in the area for electricity generation projects is no small matter. Baja California’s interconnected electrical system lives in a constant emergency situation.
For Topolobampo to become a new base for exports to Asia, it is also important to be clear about the economic rationale involved. Achieving competitiveness in LNG requires clarity in tariffs and marketing margins. When López Obrador talks about seeking the help of companies through tenders, it is important that there is transparency in the terms and conditions of transportation from Waha to Topolobampo. Will it be a conventional rate, a regulated rate or a transfer of the payment program agreed between IEnova and CFE? For Salina Cruz to be a starting point for supplying gas to Central America, we need to figure out if the capacity will be allocated throughout the entire journey from Nueces, Texas to Montegrande and from there to the Jaltipan-Salina Cruz line. More important is to clarify whether the gas trading arms of CFE or Pemex will be involved in the design of the supply chain or whether there will be partial or total participation of private companies.
New LNG options undoubtedly opens a door to business opportunities in the Mexican gas market. However, the details of implementation are key. Undoubtedly, many players will appreciate the gesture, but it would help the market more if the correct institutional work of planning along with the implementation of open and transparent tenders was the basis of investment in projects that are not only important for Mexico, but also strategic for the North American region.
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