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Growing Natural Gas Opportunities in Mexico

Growing Natural Gas Opportunities in Mexico

   Subject Matter Expert:
   Kenny Zeng
   Principal, Management Consulting, 
   Black & Veatch

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Archives of Energy Strategies Report.

FUELS FOCUS: Growing Natural Gas Opportunities in Mexico

By Kenny Zeng, Black & Veatch 

Spurred by reform in the energy industry, Mexican domestic natural gas production is expected to reverse years of decline through an increase in associated gas production. The boost is linked to rising oil output in the Burgos Basin, an extension of the prolific Eagle Ford shale formation. Mexico may have one of the best shale resources in the world despite geological and infrastructure challenges. 

For now, however, the real economic transformative force is the access to abundant natural gas resources in the U.S. to satisfy growing demand. U.S. gas can be purchased for less than $4 per million British thermal units (MMBtu) and transported across border for another $1 to $3/MMBtu to anywhere in the country. 

Petróleos Mexicanos led the first development project, contracting National Energy and Trade LP of Houston to build a 2.1 billion cubic feet (Bcf) per day pipeline from the Agua Dulce hub in Texas to the border at Reynosa where it connects with the new Los Ramones pipeline to Frontera. Phase I of the project commenced operation at the end of 2014 and it has been flowing at an average of about 500 million cubic feet (Mmcf) per day during the first quarter of 2015, according to data provided by Pointlogic.

The second phase of the project is under construction and is expected to be in operation by the end of 2016, when an additional 1.5 Bcf/day of gas can be delivered to the central district of the Pemex Gas y Petroquímica Básica (PGPB) pipeline system. The third phase will bring gas to the remote mountainous state of Aguascalientes in central Mexico.

Going forward, the state utility Comisión Federal de Electricidad (CFE) will drive the majority of the infrastructure developments (Figure 1). CFE launched a tender for 12 electric power and natural gas infrastructure projects in January 2015 and is working on 48 energy infrastructure projects for a total investment of $12.5 billion. 

A consortium led by Energy Transfer Partners of the U.S. will build the two pipelines from the Waha hub in West Texas to the U.S.-Mexico border. IENova, the Mexican subsidiary of Sempra, will build the segment from Ojinaga to El Encino, at which point TransCanada is already building a pipeline to Topolobampo. From there, CFE is also tendering for maritime transportation of about 170 Mmcf per day of natural gas, or equivalent volumes in the form of liquefied natural gas (LNG), to the southern Baja California port of La Paz to supply that region.

A separate leg is being tendered from Samalayuca (located south of Ciudad Juarez) west across northern Mexico to Sasabe on the Arizona border to tie in with the Sonora pipelines that IENova is constructing, with multiple natural gas-fired power generation projects to be built along the corridor.

Figure 1: Mexico Planned Natural Gas Infrastructure Projects

Source: Secretaría de Energía 

In addition to opening up investment in the primary energy sector, there are secondary reforms enacted which are intended to convert Pemex and CFE to operate more like private enterprises and to encourage private participation in the midstream, distribution and marketing activities. A new entity CENAGAS will be created to take over the PGPB system and will be charged with pipeline operations. Its counterpart CENACE will be created to take over CFE’s transmission and distribution contracts and to function as an independent system operator for power dispatch. Private sector participants will be permitted by the Secretaría de Energía and regulated by Comisión Reguladora de Energia.

Mexico is quickly taking advantage of low natural gas prices to move away from the oil-based economy. CFE is converting seven oil-fired power stations and planning to add six more natural gas-fired generation plants, with a total of more than 9 gigawatts of installed capacity. The country will have the ability to completely displace LNG imports from 2017, and may even have the capacity to export LNG in the long term, which will be a remarkable feat considering it competed against Asia for LNG imports in 2013 and 2014. 

In addition to the power sector, low energy prices will likely attract investments in mining, manufacturing, and other industrial operations, such as the tremendous growth projected for the auto industry.

The U.S. Energy Information Administration projects natural gas exports to Mexico to reach more than 8.5 Bcf/day in 2040, just slightly less than the volumes projected for U.S. LNG exports. A growing neighbor in the south will certainly have a profound impact on the U.S. natural gas market and players.

April 2015 Issue