Lino Patiño
Senior Partner
Promotora Energética E3
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Insight

Virtual Pipelines Develop Ahead of Real Ones

Wed, 02/19/2014 - 15:16

In large part due to the fortuitous development and maturation of technology, North America now has a reserve capacity of natural gas that will last for over a century. “Mexico currently has the fourth largest shale gas reserves in the world. That is a resource that has to be developed,” says Lino Patiño, Senior Partner at Promotora Energética E3 (E3). Other fossil alternatives such as fuel-oil, diesel or LPG are very expensive while the Mexican market has been very dependent on these types of resources. Natural gas would offer a cheaper and cleaner alternative, potentially reducing energy costs from US$15 per million Btu when using fuel oil to US$4 per million Btu, bringing very important savings. “North America is the region which enjoys the cheapest natural gas, and according to the Energy Information Administration of the Department of Energy of the United States, there will be no high volatility as far as 2045, not even in the US with all the exports they are undertaking,” comments Patiño. The US, from being a net importer of natural gas, has shown a desire to become a net exporter. The country has concentrated its efforts on increasing its own gas reserves, trying to sever itself from a reliance on imports from Trinidad and Tobago, Niger, and Qatar among others. In the past, the volatility of natural gas prices could see prices quickly spike from US$6 per million Btu to over US$10 per million Btu since it was tied to oil prices. This is no longer the case and the market is expecting to have access to cheap natural gas for 30 years or more.

The situation in Mexico is different since PEMEX is the only entity allowed to carry out exploration and production activities for natural gas, even though it is no longer the exclusive transporter of natural gas in the country. “One of the challenges for natural gas production in Mexico is that this fossil fuel does not represent the best investment opportunity for PEMEX given its investment budget limitations. However, it is an excellent business for the private sector,” comments Patiño. New policies that allow the private sector to use those skills that PEMEX has not developed would likely rapidly boost natural gas production.

“Virtual pipelines” have become an alternative in regions as yet not serviced by pipeline infrastructure, consisting of trucks that ferry natural gas to these locations. Even though these virtual pipelines are not as competitive as the real deal, they have proven to be a feasible alternative for many industries. Several companies are taking advantage of the opportunity that arose from the lack of pipelines in the country, taking the natural gas from the cheapest source available. “Virtual pipelines have been used formally since the 1990s but the use of trucks to transport natural gas started long before,” states Patiño. However, in order to be able to transport natural gas while keeping the cost as low as possible requires experience. “As individuals, we have been in the natural gas market since 1990, encouraging other companies to go into this business while neither acting as company owners nor resellers, and we have worked with some of the major companies in Latin America,” adds Patiño. E3 has created a partnership with IMW that has experience working with virtual pipelines in Indonesia, China and Europe, all of which pose their own difficulties as a natural gas market.

The market will keep growing due to the increasing demand for natural gas. Mexico will not be an exception to this rule, with the government being very aware of the benefits natural gas can offer and axing much of its energy planning around the fossil fuel. “This fuel is the only one that can guarantee a feasible transition toward real clean energy generation such as wind, solar and geothermal. Transportation and virtual pipeline companies have found an important opportunity in Mexico since they have mitigated the risk of volatility and believe that the prices will not change importantly in the near future. The advantage is that natural gas is the only fossil fuel that does not have any kind of subsidy and yet remains very cheap.” As a market maker and consulting services firm, E3 wants to maintain its partnership with IMW, and continue acting as the representative of the brand in the market. “The Mexican market is a product market. You have to go to companies, show them that they have a problem and offer them a solution,” Patiño says. “When the market gets mature enough, we will become a more commercial company. We might be called a market leader once the market becomes a reality but today, we are still one of the market makers.”