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News Article

CFE Works on Increasing Natural Gas Availabilty

Wed, 02/24/2016 - 16:06

The Energy Reform, pushed by the Executive Branch and approved by Congress, aims to offer more competitive electricity tariffs for industries, commerce, and households. Achieving this goal is crucial, as it will enable Mexico to develop socially and economically, thus benefiting the general population. The Energy Reform has created new opportunities for CFE, which is now transforming into a productive enterprise of the State in an environment characterized by competition. In this sense, CFE moves forward with the clear objective of providing its users a high-quality, more affordable, and environmentally friendly electricity service.

Electricity services cover 98.4% of the Mexican population, and CFE has enough installed capacity to satisfy the country’s energy demands. In fact, the highest energy demand in 2015 was covered with 40,000MW of installed capacity, while CFE has a total of 54,000MW installed capacity for electricity services. Before the Energy Reform was passed, the challenge the country faced regarding energy was not related to the availability of electricity services, but to high generation costs. This situation raises the question of why electricity tariffs have been so high in the country. The simplest answer is in the fact that 80% of generation costs depend on the price of the fuels used to generate electricity. If more competitive eco-friendly fuels are used, such as natural gas and renewables, then generation costs, tariffs, and the impact on the environment will be lower.

Back in 2012, Mexico had limited access to affordable, less polluting fuels, as the country’s infrastructure was not enough to guarantee availability and supply. For instance, the country did not have enough pipelines to punctually satisfy the demand for natural gas because the national pipeline system for the fuel was only 11,300km long and was not entirely interconnected. The system did not have redundancy and half of the states lacked pipelines. As a reference, the US pipeline network was 43 times longer than that of Mexico. Texas alone, which is three times smaller than Mexico, had eight times the length of pipelines. This lack of infrastructure resulted in 35 critical alerts between 2012 and 2013, during which time PEMEX asked the Mexican industry and CFE to reduce their natural gas consumption, which in turn harmed the country’s productivity. The critical alerts also forced CFE to use more expensive fuels for electricity generation, incurring additional expenses of more than US$1 billion.

In order to address the lack of infrastructure in the energy sector, CFE is running 85 projects across 30 states, amounting to an investment of US$28.5 billion. Four of these pipeline projects, which received investments of US$1.2 billion, are already operating, adding more than 1,300km to the National Pipeline System. Through these projects, CFE is able to secure long-term transportation capacity, while the private companies that own said pipelines assume the risks entailed during operation and construction. In other words, the risk falls on the private sector while the benefits are public.

At the moment, there are eight CFE pipelines under construction, with two recently tendered that will begin construction soon. These ten pipelines have been awarded to six different consortia through international public biddings, representing investments of US$4 billion and adding 2,600km to the National Pipeline System. During the second half of 2015, CFE tendered six more pipelines, amounting to 1,700km and an estimated investment of US$5.8 billion. In addition, CFE is currently tendering four more pipelines as well as a project to transport natural gas to Baja California Sur, representing the first of its type. CFE has also participated in open season schemes to reserve natural gas capacity, as is the case with the Howard Midstream Energy Partners open season, where the Mexican energy company ensured natural gas transportation from Webb County in the US to Escobedo and Monterrey in Nuevo Leon. Aligned with the National Infrastructure Program and under the Ministry of Energy’s coordination, CFE and PEMEX are tendering pipelines that will increase the National Pipeline System by more than 75% from the 2012 baseline. All of these projects will be finished and operational by 2018.

Q: Now that CENAGAS is the technical system operator, what will PEMEX’s role be in the natural gas sector?

A: PEMEX maintains its natural gas processing and commercialization activities, with which it will compete in an open market. In addition, PEMEX has a logistics company that operates natural gas infrastructure, and the company will sign contracts with shippers that will deliver gas to the end users. In order to guarantee an efficient, competitive, and safe long-term supply, PEMEX will have to coordinate with current and potential users so that it can plan the expansion of transportation infrastructure. This will be based on the expected demand and the country’s estimated economic growth, which will in turn foster private investments.