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Natural Gas Storage Remains on the To-Do List

By Cas Biekmann | Thu, 06/24/2021 - 14:23

Mexico’s lack of hydrocarbons storage has long been identified as a pain point in the country. Resolving this problem has proven to be difficult, however. Both public and private sector keep examining possibilities to fill the gap. Through the insights of MBN’s experts, the possibilities and challenges that lie ahead in this area become clear.


Storage Moves Into Focus

The consequences of not having adequate natural gas storage infrastructure were never clearer than in February 2021 when a winter storm hit Texas. Mexico sources most of its natural gas from the US; state oil company PEMEX does produce its fair share but consumes it all further down the line. Luckily, imports are more than viable, with industry insiders often pointing out that Mexico has direct access to some of the cheapest dry natural gas in the world through its connection to Texas. But when the state froze, Mexico was deprived of the one fuel that powers the national grid when pipeline capacity and liquefied natural gas (LNG) stored in terminals runs out. “If Texas sneezes, Mexico gets pneumonia; 58 percent of all electricity in Mexico is generated through the constant flow of Texas’ natural gas,” said Héctor Moreira, Commissioner at the National Hydrocarbons Commission (CNH) at Mexico Energy Forum.

But moving away from natural gas is not really an option, said José García, President of AMGN. “It is important to point out that the shortage that occurred in Mexico in early 2021 was an extraordinary event for North America. It was the first shortage in over 100 years. Natural gas has positioned itself in Mexico as a lever for development for industries, small businesses and a growing number of homes.” Instead, Garcia sees storage as the ideal solution for such an issue when national production cannot keep up. “It is important to push storage policies to prevent situations like these from happening,” he said.

Storage has more benefits than a strategic emergency supply. It can be used to balance pipeline flows and reduce price volatility. Furthermore, storage can be key to meeting regulatory demands. The recently suspended change to the hydrocarbons law, for instance, featured a clause requiring market participants to have a minimum storage capacity to be able to keep their permits. Mexico’s public sector is looking into storage as well. "CFE will 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," CFE published in February.


Options Are Available

In terms of large-scale natural gas storage, the most common option is a depleted gas reservoir. After commercial production is no longer viable for this reservoir, it can be used to contain natural gas for storage, as well. Underground salt formations and underground aquifer reservoirs also have good potential.

Storage can be distributed more widely, as well. By expanding the pipeline infrastructure, whatever gas is already in the pipeline can be transported to wherever it needs to go, no matter if no further gas can be sourced from the origin at that moment. LNG facilities in the country can also store LNG in storage tanks, an option that could be developed further at existing terminals. In general, storage should be close to the market and existing infrastructure should be sufficiently well-established so new infrastructure can inject and recover natural gas easily.


Challenges Ahead

One country to look up to when it comes to natural gas storage is the US. “(Its) strategic petroleum reserve is a great example for Mexico. The reserve is located right across the border with Mexico and has functioned well for a long time,” said Geoff Street, Director of Natural Gas Origination at Tenaska Marketing Ventures. According to the US Energy Information Administration (EIA), working gas in storage reached 2,313Bcf as of late May 2021.

Storage in the US will grow in the coming months because of the cycle it follows: during summer months, when gas prices are cheap, storage capacity is added. In winter, when demand is higher and prices climb, storage capacity is released. Street believes that the absence of such a strategy in the Mexican market prevents commercial opportunities from taking off. “Mexico’s natural gas market does not really have the price signals necessary to properly incentivize private development of natural gas storage. One issue is the absence of seasonality of demand, which exists in Europe and the US where there is high demand in winter and considerably lower demand in summer. This creates a natural imbalance in which storage plays an obvious role,” Street said.

Price signals leading to commercial opportunity are one way to develop storage, but the government can play an important role by creating the right incentives or by investing in strategic storage. The Peña Nieto administration investigated opportunities to develop storage, which included a floating regasification facility and underground gas storage. When the López Obrador administration entered, however, these projects were scrapped. Nevertheless, the government is still looking into possibilities, even if the outcome of this research is unclear. “The Mexican government’s policy regarding storage has changed quite a bit from previous administrations. It is still not fully clear what the strategy is, although the government does believe it should include storage for its national energy security,” explained Street.

For private participants, developing such storage projects is an interesting opportunity. Tania Ortiz, Director General of IEnova, recently alluded to the possibilities of Mexican storage in a call with investors. “It is wonderful to have access to low-priced gas but to have a reliable supply, it is critical to have long-term storage in Mexico,” Ortiz explained. “I believe this is certainly beyond an investment opportunity for IEnova. I think it would be important for Mexico to consider it, as far as its energy security planning is concerned,” she continued.

US-based Mirage Energy discussed a 786Bcf storage project with MBN last year. With a capacity as large as this, the project would immediately become the largest single natural gas storage facility in North America. “We are not developing this only as a strategic reserve but as a commercial operation of which industrial players can benefit,” said CEO Michael Ward. As of June 2020, funding for the project has been secured. Now, all Mexico’s government would need to do is give it a green light.

The data used in this article was sourced from:  
EIA, S&P Global, MBN
Photo by:   Wikipedia Commons
Cas Biekmann Cas Biekmann Journalist and Industry Analyst