STORY INLINE POST
Mexico has a historic opportunity it must grab to take the country to the next level of prosperity, similar to other developed economies with huge industrial capabilities. This opportunity is the constantly mentioned “nearshoring” concept. With the COVID-19 pandemic disrupting the world’s logistics value chains, the nationalistic movements that emerged in different countries worldwide, the economic war between the US and China, and the Russia-Ukraine war, regionalization emerged as a new trend. Our country, with the relatively recent implementation of the USMCA that substituted the former NAFTA, and with value chains being relocated closer to their respective markets, will be receiving a wave of investments that will allow companies to service the largest market in the world, the US. This, in a nutshell, is the nearshoring effect.
US and Canadian companies that had manufacturing supply coming from Southeast Asia, China, Taiwan, among others, are now bringing their supply chains closer to North America. Mexico is positioning itself as the host for many of these relocating companies due to its proximity to the US, its membership in the USMCA, its competitive advantage in labor costs and manufacturing capabilities, and because of its specialization in certain industries, such as automotive, aerospace, home appliances, steel, cement, and glass. According to the CCE, around US$40 billion in foreign direct investment is expected to arrive in Mexico just in 2023.
The Mexican economy must evolve and adapt to a changing world, especially when we talk about international efforts to combat climate change. We as a country are now obliged to comply with the commitments made by the government before international organizations to make the energy transition necessary to cut emissions of greenhouse gases. Additionally, most of the companies relocating to Mexico, whether they are from Asia, Europe, the US or Canada, are demanding green sources of energy to comply with their internal objectives and those demanded by financing entities, rating agencies and their stakeholders that are all exerting pressure to contribute to mitigation of global warming. This is all part of the ESG (environmental, social and governance) initiative that is driving businesses worldwide.
As we in Mexico slowly try to move away from fossil fuels toward more sustainable forms of energy (wind, solar, geothermal, among others), natural gas will play a pivotal role considering its greener status as compared to crude oil, fuel oil, coal, and other hydrocarbons with higher greenhouse gas emissions. In addition, it is much cheaper and quite abundant. According to CENAGAS, our country today is highly dependent on imports from the US, where 80% of our demand comes from imports, and the balance of 20% is being produced primarily by PEMEX.
Natural gas is the main source of fuel for power generation in Mexico. It accounts for nearly 55% of the electricity generated in our country, according to CENACE. CFE is the main consumer of natural gas, which is used in its power generation plants throughout the country. Other technologies for energy generation soon will become increasingly relevant to be able to comply with the energy mix Mexico is committed to, where solar, wind, geothermal, and bioenergy will continue to take a larger piece of the pie of the country’s energy matrix, according to the PRODESEN from CENACE. But natural gas will continue to be relevant for power generation in the medium term.
The relevance and importance of natural gas to our economy has been more than demonstrated. There are multiple examples of regions in our country, such as Nuevo Leon, Guanajuato, and Queretaro, where natural gas infrastructure is readily available for both industrial and residential use, and the economic development is a reality. The GDP of these regions is more than double that of those regions where natural gas infrastructure is lacking. Furthermore, the presence of natural gas is a differentiator in attracting investment, as demonstrated in studies done by IMCO. The real challenge we have as a country is to expand natural gas infrastructure to the south and southeast of the country, so they too have this incentive for attracting investment and to comply with the vision of our current government of transforming these regions. In these underdeveloped regions of Mexico, there are still many households who live in energy poverty, as defined by Mexico Evalua, which refers to home heating with coal or wood.
CFE, which, as mentioned before, is the main consumer of natural gas and which has a huge pipeline network in Mexico to move natural gas to its power generation plants, is in the process of expanding the marine pipeline, which brings natural gas from South Texas to Tuxpan and the port of Coatzacoalcos in Veracruz. This will provide the possibility of having competitively priced molecules coming from Texas that can be delivered to the Yucatan Peninsula, where the Mayakan pipeline is also being expanded to access this natural gas coming from Texas. There are also plans to develop LNG export facilities in Coatzacoalcos as well as in Salina Cruz, Oaxaca, taking advantage of the CIIT (Corredor Interoceánico del Istmo de Tehuantepec) which will have a pipeline to move natural gas across the CIIT. All these investments are materializing the possibility of having natural gas infrastructure present in the south and southeast that can trigger much-needed economic development in this region.
As this pipeline network capacity starts to come online, the next question for our country to solve is the much discussed and highly needed storage capacity for this critical hydrocarbon. Today, our country has less than 2.5 days of inventory, according to CENAGAS and SENER, concentrated in two LNG import terminals, in Manzanillo and Altamira. In other developed economies, their inventory levels are at least 30 days of national consumption and can go as high as 90 days in some instances, like in Japan, according to the International Energy Agency.
The primary mechanism to accomplish this goal is underground storage, which includes depleted reservoirs (two are being evaluated by CENAGAS, Jaf in Veracruz and Brasil in Tamaulipas) and salt caverns (available in Veracruz) as the main technologies for large-scale operational and strategic storage of natural gas. These technologies have been operational in many other countries for the past 50 years. Storage should be an integral part of the natural gas infrastructure expansion that is being implemented.
Our country must capitalize on the nearshoring wave, and natural gas will play a key role in attracting the investments that will come to Mexico. But we still need to continue expanding natural gas infrastructure (transport pipelines and much needed large-scale storage). The only way for this to happen is to work in a close and coordinated effort between the federal government and with the complementary input from the private sector, which is needed to provide financing, technology, know-how, among others. The opportunity is paramount, and can take our country to the next level, making all of Mexico (and not just the northeast and Bajio regions) an industrial powerhouse as it transitions to a developed economy, providing widespread economic prosperity.