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Analysis

Urgent Need for Expansion of the Pipeline Network

Wed, 02/19/2014 - 11:50

With natural gas production having declined over the past five years, Mexico has proven to be a lucrative market for US gas companies keen on exporting their own product, and bringing the US closer to becoming a net energy exporter. In 2013, Mexico imported around 2Bcf/d (billion cubic feet per day), but this figure could double by 2016 as new pipelines come into operation. This is a dramatic increase over just five years ago, when imports hit 1Bcf/d. However, Luis Vázquez Sentíes, President of the Board of the Mexican Natural Gas Association (AMGN), says that SENER is predicting Mexico will be able to once again become a net natural gas exporter by 2020, because of advancements in deep water drilling and shale gas production.

The inflow of natural gas from the US poses several challenges, with limited pipeline capacity being the highest hurdle to jump. Vázquez Sentíes explains that talks about new pipeline infrastructure development have been ongoing for more than 10 years now, revolving mostly around opening the market to let the private sector invest in pipeline construction. Agustín Humann Adame, Executive President of AMGN, confirms the urgency of such opening up as the pipelines currently being built will not satisfy the country’s needs. Nevertheless, Vázquez Sentíes claims that the government is very aware of the challenges that the natural gas industry has been facing over the past 20 years and is intensifying its efforts to accelerate the construction of this infrastructure. The Pacific coast region is taking priority, according to Vázquez Sentíes, with a new north-to-south pipeline increasing the flow of gas along the coast. However, despite government goodwill, Humann Adame says the pipeline construction process suffers from many limitations in terms of institutional support and financing. Although recent bids were demanded to have at least 50% of pipelines being of Mexican origin, AMGN realized that domestic firms could not reach the production levels needed to reach this target. However, Vázquez Sentíes compliments the way the bidding process for the Los Ramones pipeline took place. “It was very good, fast, and the results are quite positive. Now we just have to wait for the pipeline to be built.” The first phase of the Los Ramones pipeline runs for approximately 120km from the US border through Nuevo Leon and has the capacity to carry 2.1Bcf/D. The project’s second phase has been divided into two parts, Los Ramones Norte and Sur. The 441km Norte section will be developed by a JV made up of TAG Pipelines and Gasoductos de Chihuahua, while the 287km Sur section will be developed by TAG Pipelines and GDF Suez.

Vázquez Sentíes explains that the market cannot wait for the pipeline construction process to be completed. This is the reason that drove the introduction of compressed natural gas (CNG) into the Mexican market, as it is more expedient. Compressed natural gas distribution is a limited and temporary solution and companies doing it know that; they are merely waiting for pipelines to be built. “This way, we can at least participate in the market and have industrial clients. By the time the pipeline is built, we will know what the market is like,” Vázquez Sentíes adds. Humann Adame points out that players who have the infrastructure in place to receive compressed gas could also develop distribution channels for domestic and commercial use once the pipeline network reaches their place of operations. In order for Mexico’s pipeline network to be sufficient to meet commercial and industrial demand as quickly as possible, Vázquez Sentíes says that the construction of new pipelines has to be carried out under open access schemes. AMGN is backing government efforts to gradually decrease natural gas imports by increasing production in the Burgos Basin and its deepwater natural gas fields that are under development, as well as through shale gas.

To concerns that exploiting shale gas might not be atop PEMEX’s list of priorities, Vázquez Sentíes responds that PEMEX has announced it will be creating a new company to exploit shale gas, as well as deepwater crude, both in Mexico and in the US. “The reality is that PEMEX is too big to handle small shale gas fields, but they will put elements in place to develop this. It is going to take time but it will happen.” From AMGN’s perspective, the private sector is the safest bet in developing the shale gas industry. And with the Energy Reform now having passed, the opportunity for the private sector to participate in the exploitation of shale gas could accelerate activity in this area.

As AMGN’s main priority, the development of new pipelines remains absolutely paramount to cater to the country’s growing demand. AMGN expects to see CRE issue more distribution permits in new regions of Mexico currently outside the pipeline network. The pace at which the Mexican pipeline network needs to expand can be hinted at by looking at past growth. Since 2009, natural gas exports from southern Texas have grown by 600%, as opposed to just 15% growth for the rest of the US gas export points combined. The arrowhead of this growth explosion is aimed right at Mexico. Data from the US Energy Information Administration shows three major pipeline expansions to be completed in 2014, that will allow more natural gas to flow from Sierrita in Arizona, Samalayuca in New Mexico and South Texas. Yet, with the private sector potential the Energy Reform has helped to unlock, it seems these expansions may just be scratching the surface of future pipeline growth.