Natural gas could help determine whether Mexico can shrink the economic gap between its industrialized north and developing south, according to a new report published by Rice University’s Baker Institute for Public Policy.

salina cruz

Through his Program for the Development of the Isthmus of Tehuantepec (PDIT), President Andrés Manuel López Obrador is aiming to succeed where his predecessors failed, stimulating industrial development in the states of Oaxaca and Veracruz.

“This program aims to expand the region’s economy on the back of a logistical platform known as Interoceanic Corridor (IC),” said the report authored by Adrian Duhalt, a postdoctoral fellow in Mexico energy studies at the Houston think tank.

The corridor project is meant to strengthen ties between the deepwater ports of Coatzacoalcos and Salina Cruz on either side of the 77-mile isthmus. Planned works include the expansion and modernization of road, railway, natural gas, telecommunications and electricity infrastructure.

Natural gas deserves special attention, Duhalt said, “as the drop in production, principally in the southeast of the country, and infrastructure bottlenecks, which hinder access to natural gas imports from the U.S., represent important hurdles to clear.”

Duhalt said that over the medium- and long-term, “the overarching goal of the PDIT is to bolster regional economic growth through the establishment of 10 industrial parks” in the Isthmus region. He noted that, “if industrial parks are to be competitive in national and even international markets, the supply of natural gas is an issue yet to be sorted out.

“The government acknowledges that there is a direct association between productivity and a state’s economic development (measured in gross domestic product per capita) and the consumption of natural gas.”

As a result, the IC project includes the 320 MMcf/d Jaltipán-Salina Cruz natural gas pipeline that would expand natural gas supply to the Salina Cruz refinery on the Pacific Coast, and to petrochemical facilities and industrial consumers in the surrounding area.

The new pipeline also would theoretically supply a liquefied natural gas (LNG) export facility proposed for Salina Cruz by the current administration.

The pipeline project requires capital expenditure of $434.8 million and is supposed to enter service by 2022, according to energy ministry Sener.

However, startup is likely to be after that, as “most projects are falling behind, partly due to the financial constraints caused by the pandemic,” Duhalt said.

The federal government determined in 2020 that the pipeline must be developed by state power utility Comisión Federal de Electricidad (CFE), which has anchored a massive buildout of the country’s gas pipeline system in recent years.

Gadex energy consultant Eduardo Prud’homme expressed skepticism about the Jaltipán-Salina Cruz pipeline’s feasibility under current conditions. He said the stakeholders involved “need to find a long-term solution for the lack of natural gas supply in that area.”

The scarcity is largely because of stagnant gas production in the region by state oil company Petróleos Mexicanos (Pemex).

“It’s clear to me that Pemex is not going to produce enough gas to get a good balance in that region,” Prud’homme said.

Gas imports would be the other supply option. Despite increased flows to the region from the subsea Sur de Texas-Tuxpan pipeline, imports cannot meet the projected gas supply deficits in southern Mexico under the system’s current configuration, according to Prud’homme.

He said an expansion of the Montegrande interconnection, along with upgrades and expansions of multiple compressor stations in the region, would be required. 

However, “nothing has happened,” Prud’homme said. “We have no news coming from authorities telling [us] that they are working on this problem.”  

Logistical challenges notwithstanding, industrial development in southern Mexico is sorely needed, according to Duhalt. He said the six states with the highest share of population living in poverty are in the south. These include Veracruz and Oaxaca.

Duhalt stressed the region’s strategic importance, citing that it “connects economic activities in the southern states with consumers in the rest of the country and vice versa, and boasts Mexico’s shortest distance between the Gulf of Mexico and the Pacific Ocean.”

The region’s potential also is boosted by the Salina Cruz refinery and another one in Minatitlán, along with “an important assembly of petrochemical firms” in Coatzacoalcos and neighboring towns.

“While progress appears to be made concerning the logistical component of the Interoceanic Corridor, the most challenging task will be to effectively establish the 10 industrial parks the López Obrador government plans to create along the Isthmus,” Duhalt said. “This is particularly difficult given the López Obrador administration’s complicated relationship with private investors, many of whom are hesitant to pour money into new projects in light of a perceived unfriendly regulatory environment.”

However, he said, proposed reductions of the value added tax from 16% to 8%, and of the income tax from 30% to 20%, could help lure investors to the industrial parks, along with discounted fuel prices.

However, he said, “Tax incentives are not enough if areas where industrial parks are meant to be located lack essential services such as water, electricity, transportation connectivity, and natural gas.

“Policymakers are conscious of this and intend to provide the zones with last-mile services.”