TC Energy Corp. sees “a wealth of untapped demand” for natural gas in Mexico to be unlocked over the next decade, said Stanley Chapman III, the firm’s president for U.S. and Mexico natural gas pipelines, on Wednesday.

Mexico TC

“As demand across our backbone system in the heart of Mexico continues to emerge, future in-corridor expansions will be driven by building new laterals and interconnects to industrial and commercial end-users, by expanding our existing pipelines to meet demand, and by debottlenecking our existing infrastructure,” Chapman told shareholders during the Canadian pipeline giant’s annual investor day. These three opportunity sets could generate a combined $1 to $2 billion of new capital investments by 2025. 

“The larger opportunity, however, lies in the potential to build a new offshore pipeline to currently undersupplied regions of Mexico such as the Yucatán, which is facing growing demand for gas, and to which Mexico’s president has expressed a desire for a new pipeline to be built,” Chapman said. This project “could be a $4 billion-plus capital investment in and of itself.”

The offshore pipeline would be developed with state power utility Comisión Federal de Electricidad (CFE). CFE is the anchor shipper for TC’s five fully owned pipelines currently operating in Mexico, and for the 2.6 Bcf/d Sur de Texas-Tuxpan offshore pipeline, which TC co-owns with San Diego, CA-based Sempra. 

CFE also touted plans this week for the offshore pipeline, which would essentially function as an extension of the Sur de Texas-Tuxpan system.

If greenlit, the pipeline would “deliver desperately needed natural gas for power generation to Southeast Mexico,” Chapman said. The region has faced chronic gas shortages, particularly as production by state oil company Petróleos Mexicos, aka Pemex, has declined.

All told, “We expect economic growth and increased connectivity to new regions to trigger opportunities to expand our existing systems, as well as to build out and operate additional infrastructure that could amount to an opportunity of $5 to $6 billion by 2025,” Chapman said.

TC’s five fully-owned pipelines transport about 25% of the natural gas consumed in the country, and all are underpinned by take-or-pay firm transport agreements with CFE.

The pipelines provide “a critical link between U.S. gas supplies and key demand markets across Mexico,” Chapman said. 

In addition, Sur de Texas-Tuxpan now supplies 15% of Mexico’s gas imports, Chapman said. The subsea conduit “supports growing demand both in the industrial heartland and across southeast Mexico,” Chapman said. 

Strong Fundamentals

Chapman said that, “perhaps even more so than in the U.S., our business in Mexico is reinforced by strong fundamentals, which point to the need for additional midstream infrastructure. 

“We continue to play an important role in the development of this infrastructure…as emphasized by the start of our phased-in commissioning of our Villa de Reyes project at the end of this month.”

Mexico is the world’s 15th largest economy, “and natural gas demand across the country is expected to increase 65% from 8 Bcf/d to 12 Bcf/d by the end of the decade, driven primarily by the need for more natural gas-fired power generation,” Chapman added.

He cited plans announced by CFE to build 10 new combined cycle plants with combined capacity of 6 GW by 2024. Natural gas is already the dominant electricity source in Mexico, supplying about 55% of total generation, and is expected to maintain that share through 2050, Chapman said. 

“Given Mexico’s limited production base, much of their needs will continue to be sourced from the U.S., as imports are projected to grow by nearly 50% to 9 Bcf by the end of the decade,” he said.

Chapman explained that TC takes “a comprehensive, long-term view on Mexico’s macroeconomic and energy fundamentals to guide our decisions for our business.

“This entails being honest about the risks associated with investing in the country, but also understanding that in the specific context of our Mexico assets.”

Despite concerns among investors about the state-first energy policies of Mexico’s current government, Chapman said that, “Policies that are meant to strengthen its state-owned energy companies do not have the same impact to our business as they may have for others. 

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“We attribute this to our model being symbiotic with CFE’s priorities, in that we’re not competing against them, but instead we’re building out the critical energy infrastructure that they so desperately need.”

He said that while permitting and land access risks in Mexico “are very real, we believe them to be manageable and ultimately not that different in magnitude than the types of risk faced in our other geographies.”

‘Breakthrough’ on Stalled Pipelines

Chapman told investors that in 2021, “we had a breakthrough in the arbitration discussions related to our Villa de Reyes and Tula projects with CFE.”

Completion of the 886 MMcf/d pipelines has been delayed amid haggling with CFE over terms of the underlying firm transport capacity contracts signed under the previous government; permitting and right-of-way issues with local authorities; and opposition from local Indigenous groups.

Chapman highlighted a July 30 memorandum of understanding (MOU) “to create a strategic alliance with CFE that encompasses several value propositions. Most importantly, the MOU sets forth a set of principles to resolve the outstanding arbitration proceedings.”

The MOU calls for “full recognition and recovery [of] all invested capital in the Villa de Reyes and Tula projects as those projects are placed in service,” Chapman said. The agreement  also would consolidate all transport contracts for those projects under a single rate agreement with a levelized toll, and an alternate right-of-way and joint development agreement to complete the final section of the Tula project. 

In addition, the MOU lays the groundwork to jointly develop the new pipeline to the Yucatán.

Chapman said that “these principles are the stepping stones for a strategic alliance with CFE under which they would take a more active role in helping address right of way and permitting issues related to our Tula pipeline in particular.”

TC and CFE are working toward execution of definitive agreements that will underpin the alliance, Chapman said, adding that TC has presented CFE “with a win-win proposition and the ball is in their court.” 

TC is working to have Villa de Reyes fully in-service by mid-2022, “provided we can continue to make progress in procuring access to the final sections of land,” Chapman said. 

Following the MOU, “we continue to work in parallel with the state utility to solve our outstanding arbitration proceeding, to assess reroute alternatives to complete our Tuxpan-Tula project, and to enhance the commercial and operational competitiveness of our backbone pipeline system across central Mexico,” he added.