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Analysis

The Bedrock Of Mexico’s Energy Transition

Mon, 02/25/2019 - 14:23

The debate over natural gas’ role in Mexico’s energy mix continued unabated in 2018, with imports of the fuel overpowering local production to meet increasing demand. The imbalance has led to calls for infrastructure improvements to maintain energy security. But the dilemma may have an economic upside, some insiders say.
“Natural gas imports are seen as negative but from a regulatory standpoint this activity represents an economic opportunity,” says Neus Peniche, Commissioner at CRE. “Imports by themselves do not necessarily infringe on energy security; on the contrary, they provide an additional layer of diversification to guarantee energy security. Infrastructure availability and international price conditions in the US render such an approach technically and economically viable. The equilibrium lies in diversifying our options.”
The IEA estimates that US natural gas production in 2019 will total 853.9bcm and is projected to increase to 922.4bcm by 2023. BP’s Statistical Review points out that US natural gas price levels remain the lowest on a global scale, ahead of Germany, the UK, the Netherlands and Japan, at an average 3US$/MBtu. Given this macroeconomic scenario and considering Mexico’s natural gas infrastructure includes 24 interconnection and import points with the US, it is economically sound for Mexico to import the fuel from its northern neighbor.
In recent years, however, the country faced a delicate situation in which local natural gas production has been overrun by consumption growth. The Ministry of Energy’s Statistical Report from October 2018 reveals a point of convergence was reached between local production of natural gas and imports in 2015. From that point onward, local production continued to be overrun by imports to such an extent that by August 2018, Mexico produced 2.7bcfs/d of natural gas and imported 5.2bcfs/d to cater to 8bcfs/d of national consumption. Projecting into the long-term, this state of affairs appears unsustainable and calls for a revamped natural gas production capacity.
Mexico also stands at a crossroads between increasing local natural gas production and extending natural gas infrastructure nationwide. While the two notions can be considered contradictory, considering an extended natural gas infrastructure implies more imports, it is necessary for the country to tackle its regional imbalance in natural gas infrastructure, most apparent between the south and northern regions.
“It is also critical to address the infrastructure gap between Mexico’s northern and southern regions. Historically, natural gas infrastructure availability has been identified as the primary reason for the economic development gap between both regions,” says Peniche.
FUELING THE ENERGY TRANSITION
Natural gas is by definition Mexico’s transition fuel. Environmentally friendly and cost-effective, power generation technologies fueled by natural gas are expected to take an increasingly important role in the country’s energy mix. Even in an aggressively competitive environment such as the long-term electricity auctions, natural gas was able to make its mark with turbogas and combined cycle projects, such as the Los Ramones 550MW natural-gas fired thermal peaker. Companies fully dedicated to Mexico’s midstream niche are recognizing the opportunity and organic growth possibilities of diversifying their business to natural gas-powered generation. “Fermaca expanded its business to natural gas compression with a cumulated operational 170,000HP compression capacity at its Chihuahua and Soto la Marina compression stations. Our compression investments respond to our long-term vision and the anticipated increase in natural gas demand,” says Fernando Calvillo, Chairman of the Board at Fermaca. “Upgrading our natural gas corridor to an energy corridor provides the opportunity to transform and adapt natural gas to several other applications such as petrochemical, fertilizing or kWh production.”
To find further efficiencies and consolidate a solid business case for natural gas-based power generation, Mexico is benefiting from the long-standing expertise of foreign players looking to establish a foothold in the country’s unlocked market. “Since the third quarter of 2018, Mexico has held the perfect conditions for cogeneration’s development, with a fully deployed regulatory framework,” says César Sánchez, Regional Sales Manager of AB Energy México. “We are identifying a ROI of less than two years, which is what we observed in Italy when the boom of cogeneration took place.”
EXTENDING REACH
Natural gas access is synonymous with economic development. Superposing natural gas infrastructure availability and economic growth across Mexico’s states, a direct correlation between both variables can be easily found. “At the moment, Mexico is still in the development process to achieve an adequate production platform, so it has to import over 60 percent of its natural gas consumption. Nevertheless, a national production capacity would be in place to reach a healthy commercial balance,” sasy Alberto Escofet, Country Manager of Enagás. Ricardo Cardiel, CEO and General Manager of Latin American Rainmakers, points out that pipelines are the direct economic trigger of a country’s regional growth. “Their impact spills over into efficient production processes, environmental improvements, competitive energy costs and a revamped industrial tissue with the entry of new economic players, wherever new pipelines are entering operation. Extending natural gas pipelines to the southeastern region of Mexico will bring a much-needed economic boost for the Yucatan Peninsula. Electricity rates in that region are much higher than the national average due to the lack of energy infrastructure, which is why its extension is an urgent matter,”
CENAGAS, the natural gas pipeline system operator, is doubling efforts to bridge the prevalent infrastructure gap within the country. “In the next few years, a pool of strategic projects for the extension of Mexico’s pipeline network tendered by CFE will come into operation. This implies Mexico’s transport and distribution capacity is poised to significantly increase,” says David Madero, Director General of CENAGAS. “For a brief time, we are expecting Mexico’s transport capacity to surpass natural gas demand. This effort is designed to the country’s increasing natural gas demand, which will also remain in an upward trajectory for the next 10 years. The challenge with this increasing demand is to find the best way to satisfy it. Beyond extending the existing infrastructure, we need to think of ways to render the existing pipelines in a more useful way.” One way of doing this, Madero says, is to continue emphasizing the importance of multiplying the number of interconnections between existing and new pipelines. The end game is to provide natural gas in the most efficient and cost-effective way to support the country’s power producers, industries and families. “CENAGAS is looking to use natural gas as a lever for national development and reach greater economic growth rates. From the new administration’s perspective, this level can prove to be fundamental in reaching the stipulated objectives from an economic growth standpoint. The Energy Reform attributes a key role to CENAGAS to detonate projects that enable the expansion of natural gas supply to benefit the country,” he adds.
NATIONAL PRODUCTION CHALLENGE
Still, according to the Ministry of Energy’s latest Statistical Compendium published in October 2018, Mexico’s total utilized cryogenic capacity in its Gas and Petrochemical Processing Centers remained above 60 percent on average from 2000-14. Starting 2015, this capacity witnessed a steady decline to average 40 percent throughout 2018. Getting Mexico’s natural gas production back on track will prove difficult but not impossible. In a document published by the hydrocarbons regulator on Sept. 20, 2018, CNH listed a series of recommendations for the country’s natural gas sector to fulfill the entirety of its potential. CNH looked at the country’s petroleum provinces, including Sabinas, Burro-Picachos, Burgos, the Gulf of Mexico, Tampico-Misantla, the Southeast Basin and Veracruz. Adding the 1P, 2P, 3P, conventional and unconventional reserves, the country is sitting on 217.8Tcf of natural gas. Despite the fact CNH anticipates a continued natural gas production drop up to 2020, the exploratory tasks of PEMEX and the Licensing Round winners allows it to estimate an increased production starting in 2020, which could reach 7,250MMcf/d by 2029.