[NGW Magazine] Mexico pays for pipeline delays

Mexico's economy is suffering from delays on pipelines built to import cheap US gas, pushing up power prices and focusing attention on domestic production – where there are high hopes of a bonanza.

Mexico’s state-owned utility Comision Federal de Electricidad (CFE) is using more fuel-oil and importing more LNG than it planned a few years ago. Key natural gas pipelines in Mexico, designed to boost imports of shale gas from Texas, have come on late. 

Total US gas exports to Mexico have risen to a record 4.3bn ft³/day, up just 6% from last year, as key natural gas pipeline projects have been delayed by opposition from local landowners and other issues.

Denver-based S&P Global analyst Ross Wyeno, a past bull on gas exports into Mexico, said, although US exports have reached an all-time high, “land rights issues and other factors have led to delays in construction of the pipelines.” He told NGW: “That’s having an impact on LNG imports and electricity power prices. The lack of export growth can largely be traced back to pipeline construction delays in Mexico.”

As a result, Mexican LNG imports have risen to an average of over 600mn ft³/day this year, up 15% from last year.

Mexico's Altamira LNG terminal took delivery of 10 LNG cargoes between June and late August 2017, triple the number of deliveries in the same period the year before.

The US has emerged as the primary supplier of LNG to Mexico, having delivered over 107bn ft³ to the country, representing three quarters of total LNG imports

Meanwhile, CFE shifted to fuel-oil, according to government data. It used 58% more in the first quarter of last year, even though it wants to stop using it in the power generation sector, where it accounts for about half of the production. That in turn pushed up power prices by about 42% above those in 2016, Wyeno said. 

The key pipeline that has been delayed at this point is the 1bn ft³/day Villa de Reyes-Aguascalientes-Guadalajara link, which was already supposed to be carrying gas by now to western Mexico and Guadalajara, Mexico’s second largest city. “We expect it to go into operation by mid-year in 2018,” Wyeno said.

Villa de Reyes – Aguascalientes – Guadalajara gas pipeline (Credit: Mexico's Federal Electricity Commission (CFE)

In addition, he said the Sur de Texas-Tuxpan natural gas pipeline, an 800-km, $2.1bn, 2.6bn ft³/day link from Brownsville, Texas to Tuxpan, in the state of Veracruz, will likely be delayed until late this year. Calgary-based TransCanada, the 60% majority owner of the 2.6bn ft³/day pipeline project, has not discussed delays in the commissioning of the project.

There are other, smaller inter-country pipeline projects that have been delayed and Wyeno said it is difficult to get a handle on the progress of pipeline projects in the country, the smaller ones as well as the major developments. 

“Unlike Federal Energy Regulatory Commission-sanctioned projects in the US, which are required to publish construction status reports, the current status of these Mexican gas pipelines is largely unknown,” he said. “The timely completion of these projects will be instrumental in both limiting constraint pricing in Mexico, as well as alleviating oversupply in areas such as the Permian Basin. 

Mexico now consumes a little over 8bn ft³/day of gas and the country’s energy secretariat, Sener, has said that will grow to 11.6bn ft³/day by 2027, as CFE shifts to more gas use and as the country’s manufacturing sector grows. Wood Mackenzie’s chief North American gas analyst James Brick is even more bullish on future gas use in the country. He predicts demand will grow by more than 74% over the next 15 years, with US imports growing by 200% in that time.

While Wyeno remains bullish on the country’s long-term gas use, with seven new or expanded pipelines built between the US and Mexico in the last three years, he also believes continued LNG imports will be needed, especially to meet seasonal demand. Most of the growth will come from CFE’s shift away from fuel-oil to gas; and industry.

Previously, large industrial consumers, such as auto plants, were unable to develop their own cogeneration or other power facilities. However, the monopoly of CFE, like its oil and gas counterpart, Petroleos Mexicanos (Pemex), is set to wind dow. Now large gas and power users have other options.

Industrial demand now accounts for about a quarter of total gas use, while the power sector accounts for about half. Pemex itself accounts for most of the balance as it utilizes gas within its own operations. 

It has been estimated that Mexico will need $164bn in investments in electricity generation, transmission and distribution over the next 20 years.

Upstream ever more vital 

Mexican officials have said they would like to see domestic gas production grow in the future, which they have said is a major goal as the energy reform process advances and more private sector players become involved in the country’s energy industry.

A step toward that goal was taken on January 31, when Mexico’s National Hydrocarbon Commission (CNH) accepted bids on 19 of 29 parcels offered at auction in the Perdido, Cordilleras, Mexicanas and Cuenca Salina regions of the Gulf of Mexico. And one of the most successful bidders at that auction was Shell, which won 9 of the 19 blocks that were awarded, with cash bids totalling some $343.5mn and royalties and work commitments worth hundreds of millions.

In a conference call February 6, Shell CEO Ben van Beurden said the company had won the blocks it had targeted in the Perdido area, which borders American waters in the Gulf. But it had actually expected to win as many as 13 of the 19 blocks that were awarded.

The blocks it bid on, he said in explaining Shell’s aggressiveness, “are good fields… (which will be) relevant to the company.”

Despite concerns that left-leaning Mexican presidential candidate Andres Manuel Lopez Obrador (AMLO), who leads in the polls leading up to the country’s July 1 election, might stall the reform process that ended the monopoly of state-owned Pemex, Shell Mexico’s boss Alberto de la Fuente seemed relaxed about the threat. He said: “We have 60 years (of operating) in Mexico and, in the long run, we seek to contribute to production (of oil and gas) from Mexico,” as well as to the production growth of Shell. 

Shell, which is already a major player in the Perdido and Stones projects in US waters of the Gulf of Mexico, won with partners the bidding for five of the nine blocks offered in the highly prospective Perdido area, following by just a few days news of its biggest exploration find in US waters of the Gulf in at least the past decade. 

The deepwater Whale well encountered more than 427 net metres of oil-bearing rocks, and further evaluation, including appraisal drilling, is under way to further delineate the discovery and define development options.

“Deepwater is an important growth priority, as we reshape Shell into a world-class investment case,” Shell’s upstream director Andy Brown said when the Whale discovery was announced. “Today’s announcement shows how, through exploration, we are sustaining a strong pipeline of discoveries and future projects to sustain deepwater growth.”

Through exploration, Shell has added more than 1bn barrels of oil equivalent resources in the last decade in the Gulf of Mexico. It now has three US Gulf of Mexico deepwater projects under construction, at Appomattox, Kaikias and Coulomb Phase 2, and is investigating options for additional subsea tiebacks and for Vito, a potential new hub in the region.

It’s expected that some of its infrastructure in US Gulf waters could be used on the Mexican side as well.

In early January, Shell Midstream Partners signalled the importance of oil and gas production from the deepwater offshore when it announced it was taking stakes in two oil pipelines and a natural gas pipeline.

The Houston-based company said it would take a 10% stake in the Proteus Oil Pipeline Company, a similar stake in the Endymion Oil Company Pipeline and a 1% stake in the Cleopatra Gas Gathering Company. All are majority owned by divisions of the UK major BP.

The 145-km Cleopatra pipeline is connected to the Holstein, Atlantis, Neptune, Shenzi and Mad Dog offshore platforms and has a capacity to transport 500mn ft³/day of gas.

Jim Bentein