Pipeline Deal Means More U.S. Natural Gas for Mexico Power Plants

Mexico is preparing to import more U.S. natural gas to supply the country's gas-fired power plants and industrial facilities after the Mexican government reached a deal that will allow several stalled pipeline projects to be completed.

Mexican President Andres Manuel Lopez-Obrador on Aug. 27 said his administration's deal with Canadian pipeline operator TC Energy; IEnova, a Mexican subsidiary of San Diego, California-based utility company Sempra Energy; and Mexican construction firm Grupo Carso ends a $3 billion stalemate over contracts for a handful of pipelines that will bring natural gas to Mexico from the Eagle Ford Shale of South Texas and the Permian Basin of West Texas.

Grupo Carso is owned by Mexican billionaire Carlos Slim. He said Tuesday that the agreement will give Mexico access to cheap natural gas, some of which can be used to further the development of natural gas-fueled vehicles in Mexico.

"This will allow us to substitute diesel and gasoline, which are not only more expensive but more polluting," Slim said. "Natural gas is one-third the cost but there are also environmental benefits."

The deal comes one month after Texas Gov. Greg Abbott sent a letter to Lopez-Obrador asking the Mexican president to end the political stalemate around the pipelines. Abbott said the deal was needed to get more natural gas moving from Texas to Mexico.

Negotiations continue between state-owned power company Comision Federal de Electricidad (CFE) and Mexico City-based contractor Fermaca, an infrastructure firm that operates two pipelines in central Mexico that converge at Aguascalientes.

New Gas-Fired Power Plants

Sener, Mexico's Ministry of Energy, earlier this year said the country expects to add an estimated 29,294 MW of combined-cycle gas-fired power generation capacity over the next 15 years. The forecast was published in Sener's 2019-2033 Prodesen power sector development plan. Prodesen is the Program for the Development of the National Electrical System, which was introduced in 2015.

The projected capacity additions are up slightly from the forecast of 28,105 MW for the 2018-2032 period outlined in last year's Prodesen plan under the previous Nieto administration. Sener is required to update the Prodesen document each year.

The latest ministry forecast said gas-fired generation from combined cycle plants accounts for 41.6% of the 70,313 MW of total capacity estimated to come online from 2019-2033. Other generation capacity additions include photovoltaic solar (29.4%), wind (18.9%), hydroelectricity (4.2%), and cogeneration (3.4%).

CFE has 6,234 MW of projects in either the construction or testing phase that are scheduled to enter operation between now and year-end 2020, according to the Prodesen report. The 2019 projects include Empalme I (770 MW), Empalme II (791 MW), Topolobampo II (887 MW), Escobedo (857 MW), and Valle de Mexico II (615 MW). The 2020 projects include Topolobampo III (765 MW), Norte III (907 MW), and Centro (642 MW).

There are five proposed CFE combined-cycle projects, totaling 3,822 MW of capacity, that are expected to begin operating between 2022 and 2023. They include Salamanca (757 MW), San Luis Potosi (740 MW), San Luis Rio Colorado (450 MW), Lerdo (911 MW), and Tuxpan (964 MW).

2.6-Bcf/d Capacity Pipeline Set to Enter Service

Manuel Bartlett, CRE's director, said the Sur de Texas-Tuxpan Pipeline operated by Marina del Golfo, the joint-venture company owned by the pipeline's developers, TC Energy of Canada and IEnova, will be the first under the new deal to enter service. That pipeline has capacity to transport 2.6 billion cubic feet per day (2.6 Bcf/d) of natural gas. The pipeline, which was finished in July of this year, was originally scheduled to enter service in October 2018.

"This agreement establishes a new tariff structure and considers a 10-year extension for both contracts," IEnova said in a statement, referring to Sur de Texas-Tuxpan-a marine pipeline that runs 480 miles across the Gulf of Mexico between Texas and the port of Tuxpan-and the Guaymas El Oro pipeline in northern Mexico.

The Guaymas-El Oro segment will transport gas to Mexico's northwestern region and supply CFE's Topolobampo and Guaymas power plants, and is being built by IEnova subsidiary Gasoducto de Aguaprieta. It is part of IEnova's Sonora pipeline project.

"The Sur de Texas-Tuxpan and Guaymas-El Oro pipelines are among Mexico's most important infrastructure projects, bringing more reliable supplies of clean U.S. natural gas to Mexico to help meet the growing energy needs of the country for generations to come," Sempra Energy said in a statement.

Mexico consumes more than 8 Bcf/d of natural gas, but produces just 2.6 Bcf/d. The U.S. Energy Information Administration said Mexico imported about 5.1 Bcf/d of natural gas from the U.S. in May 2019, the latest figure available, up slightly from the average of 5.0 Bcf/d across 2018.

Savings of $4.5 Billion

The CFE deal with the pipeline operators reworks the terms of contracts signed between the companies and the previous Mexican administration of Enrique Pena Nieto. Officials said the new deal will eventually save the government $4.5 billion, as the amount Mexico pays the firms to transport natural gas is reduced.

"We'd like to thank the companies for reaching an agreement that advances both natural interests and business interests," Lopez-Obrador said at a Tuesday news conference.

Lopez-Obrador launched a review of the pipeline projects and requested international arbitration hearings as his administration sought to undo $3 billion in payments and to dispute force majeure clauses on the pipeline contracts. The clauses allowed the pipeline companies to collect payments from the government due to construction delays and circumstances beyond their control. Those issues included delays caused by weather, along with landowner disputes and contentious protests from indigenous groups.

TC Energy's Mexican subsidiary, TC Energia, had halted work on two projects in the state of Hidalgo after construction costs skyrocketed, a situation attributed to alleged acts of extortion by local officials that triggered the force majeure clauses. The company Tuesday in a statement said, "Access to natural gas for these regions will contribute to promote the industrial activity, the social and economic development and job creation, while enabling the CFE to produce cheaper and cleaner power benefiting the Mexican people."

Lopez-Obrador on Tuesday said the new agreement is the result of a series of meetings with the pipeline companies. Government officials said they expect about 63% of the natural gas from the pipeline projects will be used by government-owned power plants, with the rest going to industrial facilities.

"This guarantees a supply of gas for the electricity industry," Lopez-Obrador said. "We won't have blackouts in future years. It also provides for the development of national industry."

Lopez-Obrador, in response to concerns the Nieto administration was being too quick to call for the retirements of about 12 GW of aging Mexican power generation, in December 2018 said "not one more plant will be closed " the policy of closing the CFE's power plants is over." The 2019-2033 Prodesen report said, "In the present planning exercise, in conformity with the new energy policy of the federal public administration," it did not "consider the retirement of power plants."

This year's Prodesen report said CFE produced 54.2% of Mexico's electricity in 2018, with the rest supplied by independent power producers.

-Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine).

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