Mexico will need to build out infrastructure to import ethane in order to keep its petrochemicals industry afloat amid insufficient domestic natural gas production, according to local experts.

Braskem Idesa

President Andrés Manuel López Obrador’s recent call to renegotiate or even cancel an ethane supply agreement between state oil company Petróleos Mexicanos (Pemex) and the Etileno XXI petrochemicals plant has underscored the challenges facing Mexico amid declining wet natural gas production by Pemex.

Ramping up ethane imports is “the only viable solution in the short and medium term,” IHS Markit’s Adrián Calcáneo, natural gas liquids (NGL) lead for Latin America and the Caribbean, told NGI’s Mexico GPI.

Pemex’s total natural gas output, including with joint venture (JV) partners, stood at 3.75 Bcf/d as of July, down from a peak of 6.52 Bcf/d in 2009, according to the latest figures published by the heavily indebted firm.

In 2010, Pemex signed a deal to supply Etileno XXI with the feedstock needed to reach the ethane cracker’s production capacity of 1.05 million tons/year of high and low density polyethylene.

At the time, Mexico was “swimming in ethane,” Calcáneo said in a webcast discussion this week with Mexico City-based energy expert Gonzalo Monroy.

Pemex used the abundant supply to feed its existing petrochemical complexes, and commissioned the construction of Etileno XXI through an international tender. The tender was won by Braskem Idesa, a JV between Brazilian chemicals giant Braskem and Mexico’s Grupo Idesa.

Braskem Idesa and Pemex signed a 20-year, take-or-pay/supply-or-pay contract for 66,000 b/d of ethane for the plant in Coatzacoalcos, Veracruz state.

Monroy noted that these contract terms are in line with international best practices, and were essential to justify the steep investment required to build the plant, which ended up totaling $5.2 billion. If Pemex were to terminate the contract early, it would be required to compensate Braskem Idesa for the plant’s construction costs, as well as the costs associated with lost production of polyethylene.

He noted the project was funded in part by $3.2 billion in financing from a consortium of development banks, export credit agencies and private lenders.

This is money, Monroy said, “that Petróleos Mexicanos today does not have.”

In the years since the contract was signed, ethane prices have increased both in real terms and relative to natural gas, according to the U.S. Energy Information Administration. Demand has risen as new fractionation and pipeline capacity has entered service, namely along the U.S. Gulf Coast, leading to a burgeoning global NGL trade.

In a note to clients earlier this month, RBN Energy LLC analyst David Braziel said ethane demand “will be taking off like a skyrocket” over the next two years as new export capacity comes online in the Gulf region.

Amid this backdrop, López Obrador has called the Etileno XXI supply contract terms “unfair.”

The real issue though, according to Calcáneo, is not the price, but rather Pemex’s declining wet gas production. Selling the ethane, even at a discount to today’s higher prices, would be a lucrative venture for Pemex if it had the production to do so, he said.

In its 20-F annual report for 2019 to the U.S. Securities and Exchange Commission, Pemex listed the low availability of ethane and wet gas among the “critical risks” facing its downstream business, and said it was aiming to increase its shipping, vaporization and storage capacity for imported ethane in 2020.

A Braskem Idesa spokesperson told NGI last week the firm was in constant talks with Pemex on solutions to the methane supply shortage, and that it was willing to invest in a new import terminal.

The company indicated in its 2Q2020 earnings presentation that 13% of Etileno XXI’s feedstock needs were met by imports during the period due to insufficient local supply.

Pemex’s ethane production fell by 9.5% to 77,000 b/d in 2019. It reported a 12% decline in the production of petrochemicals products for the year.