Mission to Gasify Mexico Calls for Infrastructure

Simply writing that natural gas has become important to Mexico would be quite the understatement in 2021. Nevertheless, significant expansions to the internal infrastructure network are needed if more regions in the country are to benefit from this cleaner fossil fuel. With much to do around infrastructure, one question arises: How could public and private sectors work together to grow the reach of Mexico's increasingly important natural gas infrastructure? Industry experts outline the path forward in a discussion with MBN.

Natural Gas’ Growing Importance

What makes natural gas such an important resource? In the global context, natural gas is often touted as the ideal ‘transition fuel’, referring to the final goal of the global energy transition to power the world with 100 percent renewable energy. As a fossil fuel, gas does not burn completely clean but it nevertheless burns much cleaner than coal and fuel oil, the latter still an important component of Mexico’s energy mix. The benefits do not stop there. Natural gas is incredibly cost-effective for countries close to its supply. Burning natural gas also provides firm power, as opposed to the potentially problematic intermittency of wind and solar energy. Because of this stability, it can function as a baseload for the energy matrix. Modern combined-cycle power plants can even be cycled up and down to meet fluctuating demand. So-called peaker power plants are ideal candidates to turn natural gas into a stabilizer for the grid, as well. “Although not a renewable power plant, as it is powered by natural gas, peaker power plans do support the integration of further wind and solar energy into the grid as a very flexible asset that can quickly respond to changes in supply and demand or grid conditions,” said David Fatzinger, Vice President and Country Manager Mexico of Invenergy, about one of the company’s landmark projects.

Since natural gas is mostly methane, a powerful greenhouse gas and therefore harmful to the environment, energy transition experts point out that eventually even natural gas would have to be phased out of the global energy mix. For the decades to come, however, the cleaner footprint this hydrocarbon provides will remain an important benchmark for many places.  PRODESEN shows that currently, over 40 percent of Mexico’s total power generation relies on natural gas. Moreover, given President López Obrador’s vow to rescue state-owned utility CFE and with private renewable energy developments slowing to a halt due to the resulting uncertainty, the government’s faith in natural gas will likely increase this percentage even further over the years.

CFE announced in March 2021 that it will tender the construction of six combined cycle plants with the aim of increasing its power producing capacity by 4,233MW. Compared to the industrialized north of Mexico, the south trails behind in terms of commercial and industrial development. Providing stable and cheap energy through natural gas can help level the playing field, which is something already in the government’s radar. Specific attention toward states like Oaxaca and Veracruz are therefore warranted. Virtual pipelines, which can bring compressed or liquefied natural gas much further than more conventional ways of transport will be crucial in gasifying Mexico, as well. Yet, dry pipeline gas still represents the cheapest and paramount form of transport as virtual pipelines are also limited by their proximity to the closest pipeline access point.

Most of the supply needed to quench Mexico’s thirst for gas will come from the US. Even though most of the country’s gas production is used directly by PEMEX, the country has a considerably cheap supply available right across the border. “14 Bcf/d of pipeline interconnectivity is operational between the US and Mexico, with a supply and demand imbalance in which Mexico imports 70 to 80 percent of the natural gas not used by PEMEX. This situation is unlikely to change due to the nature of exploration and production cycles in hydrocarbons,” said Geoff Street, Director of Natural Gas Origination at Tenaska Marketing Ventures.

Projects and Expansions Ahead

According to Street, much of this international connectivity is found in Texas. The 14 Bcf/d already developed does not need significant expansions. “The challenges at this point are entirely within Mexico, related to interconnectivity between pipelines. This includes large interstate pipelines or last-mile pipelines that connect with local distribution companies or individual projects,” he added. Currently, Mexico’s internal SISTRANGAS network features 10,068km of pipeline infrastructure. Recent additions have helped along the network such as the southern-most segment of the Wahalajara system called the Villa de Reyes-Aguascalientes-Guadalajara (VAG) pipeline, which began operating in 2020. In 2021, TC Energy hopes to complete its 886 MMcf/d Tula-Villa de Reyes pipeline, located in the center of the country. This will grant the heart of Mexico access to pipeline gas, which is cheaper than having to rely on liquefied natural gas (LNG).

Developers have felt the effects of the COVID-19 pandemic as it translated to delays in their projects, but now see potential to complete their expansions in 2021. CENAGAS sees advances to gasify the center of Mexico are progressing rapidly and therefore shifted its attention to states such as Oaxaca, Chiapas, Yucatan, Tabasco and Quintana Roo. Several projects to create new gas hubs in these areas are in the pipeline, costing hundreds of billions of dollars. CENAGAS and CFE can take on various of these projects, according to the development plan, but significant private participation through either contracting or even full ownership of these expansions is required, according to the latest 2020-2024 plans from SENER.

Hurdles Should Not be Taken Lightly

There are several obstacles that need to be considered within the wider mission to gasify Mexico. A recent decree from the Mexican government, part of President López Obrador’s push to undo the 2014 Energy Reform and put the country’s state-owned companies back at the forefront, effectively revised the 2014 Hydrocarbons Law by granting the government greater power in issuing and revoking permits. Fitch Ratings, for instance, highlighted that the new reform could leave pipeline projects susceptible to suspensions or terminations, although a force majeure clause would still protect the project to a large degree given the state would be the offtaker. A federal judge suspended the decree, which is in line to be reviewed by Mexico’s Supreme Court. The issue is therefore anything but resolved at the time of writing although the government’s consistent respect for the country’s legal framework gives confidence to investors.

Social and environmental issues also need to be taken into account. Thousands of kilometers of pipeline construction mean that intersections and interactions with various ejidos and indigenous communities are inevitable. “Land-owner rights and ejidos have played a large role in the completion of pipeline projects within the country,” highlighted street. TC Energy’s Tuxpan-Tula pipeline, for example, has been held up by a lengthy indigenous consultation process. President López Obrador has involved himself in the matter, saying it has asked the company to search a different route for a large middle section of the pipeline. Many pipeline projects face similar issues, so maintaining close contact and generating good will among communities will remain key to the success of these developments.

Environmental regulation has only becoming more stringent, as well, such as a change in the forestry law impacting any project that needs to remove forestation. Threats can come from unexpected angles: the Morelos pipeline, developed by Spain’s Elecnor and Enagás, was confronted with community concerns due to the project’s proximity to the Popocatepetl volcano. As this volcano is still active, residents feared for an environmental disaster if an eruption were to occur. Clear communication about environmental safety measures can help prevent misunderstandings, experts agree. Furthermore, companies should simply take the time to review their environmental impact plan to set up the right approach from the get-go. “Clients are generally happy when they are not required to take further measures because the strategy was done correctly the first time around. This approach provides a great deal of certainty,” said María Cristina Hernández Calzada, Partner at Vera & Asociados.