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Analysis

Expanding The Reach of Mexico's Baseload Fuel

By Cas Biekmann | Thu, 03/25/2021 - 19:29

Natural gas is the fossil fuel of choice in Mexico but there is a growing need to address its shortcomings.

 

Due to the inherent benefits of natural gas, demand from both CFE and private industry continues to rise. Imports reached a record high in 2020, climbing to 5.9 bcf/d on June 10, according S&P Global Platts. Amid the unabated growth in demand, challenges are emerging. In particular, infrastructure is at a tipping point, and therein lies the opportunity.

PRODESEN 2020-2034 shows that Mexico relies heavily on natural gas to fuel its power production, with gas-fueled combined cycle alone representing 38 percent of installed capacity. How this percentage will grow relative to other energy sources remains to be seen, yet the government’s inclusion of combined cycle power plants in its recent infrastructure packages and development plans guarantees that capacity will continue to expand. SENER also expects that domestic demand for natural gas will increase until at least 2031.

Growing demand among industrial consumers poses a further challenge to be met by Mexico’s distribution infrastructure. In the Mexican automotive sector, for instance, companies such as General Motors and Volkswagen use natural gas to provide power to their production facilities. Natural gas can be used as a lever toward development as well, says Tania Ortiz, Director General of infrastructure giant IEnova: “Mexico is an exporting and manufacturing economy. Providing an adequate energy supply is crucial to the country’s growth and hence, the creation of jobs for its citizens.”

 

Expanding the Reach

Importing natural gas has only become easier in the past year, as several pipeline projects were completed successfully. The completion of the Wahalajara-system, for example, was finalized with the addition of the 0.89 bcf/d Villa de Reyes-Aguascalientes-Guadalajara (VAG) pipeline, connecting Texas’ Permian Basin production area with Guadalajara. The US Energy Information Administration (EIA) projects that imports will increase further. The Sierrita pipeline expansion is another example of such an expansion, allowing for wider access to natural gas in Mexico’s northwest. In other areas, players like Mirage Energy are planning to expand the San Fernando-Cactus pipeline so that industrial parks in Puebla can benefit from its access.

Nevertheless, much work remains to be done. “Mexico will need more physical pipelines to interconnect the main pipelines that already exist in the country,” said Alberto Escofet, Country Manager of Enagás, in an interview with MBN. But developing pipelines in Mexico’s large and diverse territory is anything but easy, as investments required run into billions of dollars and issues with rights of way can happen at any moment. But gas can be transported across virtual pipelines as well. “Most of the coming gasification efforts will be done on wheels, using virtual pipelines instead of physical pipelines,” Escofet added.

The benefits of virtual pipelines are plenty, not least of which is the ease of transport. “This has the advantage that almost nothing needs to be done. LNG can be transported via trucks, just like diesel or LP gas. Unlike pipelines, no special permissions or rights of way need to be established through contracts because you can use the existing highway,” Escofet says, adding that especially in the isolated areas of Baja California, natural gas could bring a wealth of benefits.

 

Export Opportunity

One particular issue that President López Obrador has had to deal with are CFE’s natural gas supply contracts. This has led to an excess of supply in the northern Pacific area, as the state utility continues to rely on fuel oil in that region. A solution presented itself, however. By liquefying natural gas into liquefied natural gas (LNG), it can be exported to faraway markets where there fuel shortages abound. Asia is a good  example. In Ensenada, Sempra Energy’s Mexican Unit, IEnova, was finalizing its LNG plant at the regasification terminal it already owned there. After mulling it over for some time, López Obrador decided to grant IEnova the export permit, a first in the Mexican market. “Right now, IEnova is very connected to the North American region. This is one of our most exciting initiatives, because it opens a position for us as a global player,” says IEnova’s Ortiz.

Whether Mexico should produce its own natural gas has long been a discussion within the country’s energy sector, where the economic argument for cheaper importation has long prevailed. Yet, several industry experts disagree with this approach. “Mexico should have been producing its own gas for a while now,” said Escofet.

The discussion will likely receive further encouragement after Mexico experienced a shortage in supply when Texas suffered extremely cold climate conditions and could not export natural gas as a result, leading to blackouts in parts of the Mexican territory.

Storage is considered another solution that addresses issues surrounding a lack of gas supply. Mexico’s lack of storage is clear but broad-based projects to address this have yet to materialize. Mirage Energy CEO Michael Ward told MBN the situation is a missed opportunity. “I would argue that storage is essential for the Mexican government, whether it prioritizes it or not.”

Awareness does seem to be improving, and along with it the potential opening of a new niche opportunity in the Mexican market, as showcased by CFE’s February 2021 communication that it would include storage in its commercial and operating strategy “as a strategic short-term action to minimize the negative impacts of abrupt price fluctuations and drastic variations in requested volumes.”

The data used in this article was sourced from:  
PRODESEN, SENER, IEA, CFE
Cas Biekmann Cas Biekmann Journalist and Industry Analyst