New Pipelines, New Savings, New Deals in Mexico
by Christina Nagy-McKenna, Enerdynamics Facilitator
To develop its economy, Mexico needs more energy. To get more energy resources, Mexico needs capital from international investors. But unfortunately, political risk is holding back investors’ appetites. Recent events concerning new pipelines demonstrate the issue.
The Federal Electricity Commission (CFE) of Mexico, TC Energy Corp. of Canada, Sempra Energy’s IEnovo, and Grupo Carso of Mexico recently reached an agreement to restructure existing natural gas transportation agreements that will save up to $4.5 billion in fees for the Mexican government. The agreement also allows TC Energy and IEnovo to place into service a pipeline that is ready for commercial operation but had not yet received final approval from the CTE.
On its surface, the announcement made by Mexican President Andreas Manuel López Obrador, is a win-win for all parties involved, and it ends a dispute that was headed to the London Court of International Arbitration later this year. Digging deeper, the agreement demonstrates the vulnerability of contractual agreements when one party, in this case the Mexican government, decides that it no longer likes the terms previously agreed to by a former administration. It also leaves behind a tenuous tone for those companies looking to invest in Mexico at a time when more infrastructure is needed to ensure adequate gas and electric service for all customers.
The crux of the disagreement was tariff structure of the contracts for natural gas transportation service. The largest project, the Sur de Texas pipeline, is a $2.5 billion project designed to bring up to 2.6 Bcf/d of natural gas from Texas to Tuxpan, Mexico, through a 482-mile pipeline. The project was completed in June 2019 and, until the recent agreement, was not acknowledged as complete by the CFE despite the market need for natural gas. Instead, the CFE pushed to restructure the transportation contract through arbitration, asking for $899 million from several companies, and a reduction in capacity and usage payments. President López Orbrador supported the restructuring of the contracts, which had been signed during the administration of his predecessor.
According to IEnova, the renegotiated agreement establishes a new tariff structure and consideration for a 10-year contract extension for the Sur de Texas project as well as another IEnova project, the Guaymas – El Oro pipeline. Additionally, the CFE has pledged to help IEnova in its pursuit to resume operations of the Guaymas – El Oro pipeline, which has been stopped since 2017 due to a dispute with a local Yaqui tribe that opposes the pipeline on its land. Grupo Carso’s subsidiary also reached an agreement, however negotiations are still ongoing with Fermaca, the second largest operator of natural gas infrastructure in Mexico.
The lack of adequate pipeline capacity has pushed natural gas and electricity prices
in Mexico significantly higher than those found in the U.S. where gas is cheaper and plentiful. In the Yucatán, some industrial customers must burn diesel fuel to power their factories as natural gas is not available to them and electricity blackouts are common. Electricity prices in Mexico are also high due to high fuels costs. These factors leave Mexican companies less economical than their international competitors.
Until the previous administration made it easier for foreign companies to invest in infrastructure projects in Mexico, all segments of the energy industry were controlled by the federal government. Since taking office, President López Obrador has reversed this course as he halted auctions for oil drilling rights and canceled joint government and private sector drilling projects. The CFE also canceled several electrical transmission projects and removed itself from a renewable energy auction, both of which included private investors. However, in a webcast in June 2019 the President pledged to solve the natural gas shortage problem in the Yucatán, saying “We are providing all our support to solve the natural gas shortage, which is the source problem behind blackouts." He also has authorized the CFE to build a new electrical power plant in the Yucatán to alleviate the electrical shortage.
How the government of Mexico will solve its gas and electric capacity issues is not yet known, however, putting the Sur de Texas – Tuxpan pipeline into operation will add natural gas capacity to the Mexican market. The next steps will be helping IEnova negotiate a resolution to the Guaymas – El Oro pipeline standoff and making continued progress on other infrastructure projects in the works. Reaching agreements with the three pipeline companies signals that the current administration is willing to work with companies, even if it disagreed with how contracts were handled by its predecessor.
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