Thinking about Mexico’s sweeping Energy Reform, what likely first jumps to our minds is oil. Sorry to prove you wrong, but these days in Mexico, it is all about natural gas.

Mexico’s demand for electricity has indeed risen tremendously over the past few years, predominantly as a result of the country’s recent economic growth. This in turn has produced a natural gas deficit, which the Mexican authorities are now attempting to solve. At the Dutch-Mexican Forum on Innovation and Technology in the Energy and Maritime Sectors, which was held in Mexico City on September 3rd, 2015, Mexico’s Deputy Secretary of Energy for Hydrocarbons Lourdes Melgar addressed the natural gas supply topic by proposing two solutions: the first one being an increase in domestic natural gas production (both conventional and unconventional), and secondly, the strategy of developing pipelines to import natural gas from the United States. Deputy Secretary Melgar particularly stressed the latter option, and voiced the view that Mexico may well remain dependent of U.S. natural gas production.

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Credits: The Energy Consulting Group

The latter implies a rather ambitious goal, namely to increase Mexico’s gas pipeline capacity by an astounding 86%. Despite this, it remains a very attractive option, especially in the light of the US shale boom-induced low prices of natural gas. According to James Brick, an analyst with Wood MacKenzie, Mexico’s economy is much better off importing the cheap U.S.-produced gas and exporting its oil resources. The cheap natural gas allows Mexico to meet its growing electricity demand, which according to GlobalTrade is projected to grow at an average annual rate of 4.4% through 2028, and presents particular benefits to the country’s manufacturing sector.  Brick’s view is accurately reflected in U.S.’s pipeline export numbers, which doubled between the years 2009 and 2013 and according to the U.S. Energy Department were up 25% this year April, thereby helping to solve Mexico’s natural gas deficit.

Photographer Diego Giudice/Bloomberg News

In addition to being cheaper than oil, natural gas presents another crucial advantage. Although the so-called process of ‘fracking’ – the means by which it is extracted from the soil – has faced criticism from environmentalists, the burning of natural gas emits significantly less carbon dioxide than traditional fuel does. In the light of the Mexican government’s pledge that it will aim at cutting greenhouse gas emissions by 25% in 2030, natural gas provides a viable solution to increasing demand for a reliable and continuous electricity supply all the while reducing carbon emissions. Other non-carbon emitting energy sources such as solar and wind are also being developed in Mexico but it is expected they will not take off until the next decade.

This does not mean that the first option of increasing domestic gas production can be entirely dismissed. On the contrary, Mexico is heavily investing in natural gas infrastructure. This both involves the construction of new energy infrastructure and modernization of installed pipelines and plants, as well as the conversion of oil-fired power plants into natural gas plants. Mexico’s Energy Ministry SENER recently announced that it will present its five year natural gas pipeline expansion plan in the coming weeks, through which the country is aiming to develop a gas transportation network of 20,000km by 2018. With the continued tumbling crude oil prices and related decreased investor appetite, it seems as though what will attract significant levels of foreign direct investment in Mexico will be the surge in gas-pipeline construction.

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Aiming at entirely restructuring the North-American natural gas transportation network, Mexico’s Federal Electricity Commission (CFE) has launched a licitation round of 24 projects with a total estimated investment value of over MX$150 billion (approximately US$8.96 billion). According to Ernst & Young, CFE will seek bids for the construction of 5 major pipelines, with the primary aim to increase U.S. natural gas imports. In terms of total investment, the largest gas-pipeline that CFE will seek bids for is the Southern Texas-Tuxpan project, which is set to transport natural gas through a submarine pipeline in the Gulf of Mexico. It is valued at US$ 3.1 billion, and will have a transportation capacity of 2.6 billion cubic feet of gas from the South of Mexico to Veracruz. The energy sector overhaul has already attracted its fair share of private industry players, and many others may well be poised for future participation.

The investor’s growing appetite for natural gas is acurrately reflected in the growing number of billion-dollar valued investments. In January, a consortium consisting among others of Texas-based Energy Transfer Partners, and Carlos Slim’s Carso Energy, won two contracts valued at US$1.3 billion, and just this week, the Mexican gas utility CFE subcontracted Carso Electric y Promotora de Desarrollo de América Latina for the construction and operation of the Samalayuca-Sásabe pipeline, valued at US$471 million. The preparations for the further licitations are in full swing, and with projects such as the Nueces-Brownsville pipeline – valued at US$ 1.5 billion – being open to bidding, the process most certainly will provide interesting outcomes.

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