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Analysis

Pipeline Infrastructure Development Opportunities

Tue, 01/22/2013 - 11:20

Since Mexico has linked its natural gas prices to U.S. prices through its netback pricing model, the country is now facing a situation where prices are extremely low as a result of the shale gas boom across the border while supply is constrained. The combination of low gas prices and a growing economy has boosted natural gas demand in Mexico, which grew at 4% per year over the past five years while production increased by only 1.2% annually. While Mexico would like to increase its imports from the US, cross-border pipelines are already operating at near full capacity and Mexico resorted to purchasing expensive LNG shipments from Peru in recent months to ensure that the country’s power needs can be met. While this is bad news for Mexican energy consumers, as well as American natural gas producers, it is good news for pipeline operators, constructors and pipe manufacturers.

A report published in 2012 by Mexico’s Energy Ministry, states that the country’s natural gas transportation infrastructure is scheduled to grow over 40% by the end of 2016. Mexican steel and steel pipeline manufacturers have accelerated their production capacity expansion over the last two to three years in anticipation of rising demand, according to Teodoro González Garza, CEO of Tubacero, a Monterrey-based steel pipe manufacturer. For example, Altos Hornos de México, Mexico’s biggest integrated steel manufacturer, has made an investment of US$1.8 billion to increment its plate and coil steel capacity in Monclova. Similarly, Ternium, another big player in the Mexican steel market, is developing a new facility for the manufacturing of higher grades of carbon steel, a key ingredient for the production of more resistant, higher-quality pipelines destined for the oil and gas industry. González Garza sees the current market situation as a huge opportunity from the supply perspective for Mexican pipeline manufacturers.

Companies like Tubacero have begun producing bigger and thicker carbon steel pipes, and incorporating new technologies into their manufacturing processes in order to comply with the technical requirements from the oil and gas industry and meet rising demand. “We have been planning our expansion for the past two years,” González Garza explains. “We currently have three continuous rolling mills operating in Monterrey and Pánuco, and the first step was to increase its capacity by at least 50%. By sharing some technologies, processes, and growing the capacity to supply energy more constantly in our process, we have increased the capacity of the welding machines by 75%. Now we are finalizing the next step, by aiming to grow 50% more by the end of this year, which happens to be our 70th year anniversary.”

The Pánuco rolling mill, acquired in 2011, enabled Tubacero to increase both the diameter and thickness of its pipe. This has been the company’s response to the opportunities that the upcoming deepwater projects are expected to o†er. Another advantage of the Pánuco acquisition is its strategic location next to the Pánuco River, which is 7 meters deep, close to the Port of Altamira, and on the way to the southeast. The land around the plant will also enable Tubacero to meet its future expansion needs as business continues growing.

Another planned improvement, the manufacturing of spiral seam pipes, is also a direct response to the domestic gas industry’s growing requirements. Moreover, this technique allows Tubacero to benefit from a lower production cost relative to the manufacturing of longitudinal seam pipes. “We decided to build a plant with two spiral mills in Salinas Victoria, Nuevo Léon, with a diameter capacity of 24-144in (60.96-365.76cm) and 1in (2.54cm) thickness, as well as equipment to test 24m long pipes. I believe we should be able to start producing this pipes with API certification by the last quarter of 2013,” González Garza says.

Nevertheless, the slew of pipeline projects is attracting a growing number of companies who are eager to do business in Mexico. This means more competition for Mexican pipe manufacturers, and not always on the best terms. “In this market, all tenders are international,” says González Garza. While manufacturers like Tubacero o†er prices that are very similar to those in the US, the lack of demand for pipes in Europe is pushing some companies to come to Mexico and sell their product at lower prices. “China is extremely aggressive: a couple of years ago, Chinese manufactured pipes were even cheaper than the rolls of American steel coil needed to produce one,” he adds.

Pipe producers have countered this cost disadvantage with added value, namely regarding quality and service. González Garza explains that their clients’ specifications have increased and the tolerance allowed in pipes has decreased. “We have to help our clients to optimize their margins. Therefore, we have to solve their problems and, in this way, earn their trust. For example, pipe-laying ships have to complete their processes in less time and, in order to make this possible, they need pipes with very specific traits. We are members of the International Committee of the American Petroleum Institute and, even if this organism’s variance tolerance is eight thousandths of an inch, we can lower our tolerance to four thousandths of an inch at our clients’ request.” For instance, following Fermaca’s specifications, Tubacero has even added barcodes that allow their clients to trace the origin of every piece of pipe. In fact, the company controls the quality of its pipes throughout both its supply chain and production process. “We request 200 to 300 tonnes of steel from manufacturers and cast it in order to test the material. Even after this stage, our sta† visits the steel mill in order to ascertain and approve the quality of the process. Then we produce our pipes, we check them, and request the steelmaker to make any necessary changes, since the properties of steel can shift in the process. Our quality and inspection policies mean that we have become the first pipe-making company in the American continent to obtain an ISO-9002 certificate,” González Garza details.

According to González Garza, innovation will continue being an essential element to face the future challenges of the industry: “We are working on a nanotechnology project with Conacyt and Comimsa. Furthermore, we have three projects with students at the PhD level at ITESM (Monterrey Institute of Technology and Higher Education) to foster productivity. Based on our commitment to innovation, we were able to achieve the even-coating of 24m pipes, and we have replaced outdated welding technology; instead of transformers we now use inverters. Also, we have two programs per year where employees present improvement projects and we choose the five best projects, provide budget to the winners, and help them with the implementation. We need our people to understand that our aim is to change routines in order to face the challenges the future will bring.”