Mexico: The Natural Gas Success

Mexican President Enrique Peña Nieto at the inauguration of Los Ramones, Phase I in december 2014. (photo: Mexico Government)

Mexico’s new natural gas pipelines represents $13 billion in new investment.

Inter-American Dialogue

The Los Ramones II pipeline in Mexico, which is expected to begin operations later this month, could boost U.S. natural gas deliveries to Mexico by 22 percent, planners say. The deregulation of Mexico’s energy market has made it easier to develop pipeline projects and has led to an increase in Mexican demand for U.S. natural gas. How will Mexico’s oil and gas sector change as imports of natural gas from the United States increase and exports of oil decrease? How can Mexico attract more foreign investment so that it can develop its own non-conventional oil and gas resources in the future? How will the shift in trends for Mexico’s natural gas sector affect the country’s demand for LNG and its investments in renewable energy development?

R. Kirk Sherr, president of Clearview Strategy Group, LLC: For the remaining doubters regarding the positive impact of opening the Mexican energy sector, the results for natural gas pipelines and related electricity sector development have been eye-popping. The Los Ramones II pipeline is a critical piece of the broader story in Mexican energy sector growth. In the hydrocarbons arena, the Los Ramones projects are part of one of the largest pipeline construction booms worldwide. Mexico is currently building, permitting or studying more than 3,000 miles of new natural gas pipelines (onshore and offshore) representing as much as $13 billion in new investment. These new pipelines provide clear benefits to the oil and gas sector as they pave the way for market access and thus make much easier the development of Mexican unconventional reserves in the near future. Equally important, they also signal a much deeper physical and financial integration of the U.S. and Mexican natural gas markets. In the electricity generation arena, Mexico may benefit even more. First, the pipelines provide fuel to natural gas-combined cycle power plants—the most rapidly growing electric generation source in Mexico—with 12,000 MW planned by 2020. Second, the pipelines help Mexico meet its climate change obligations under COP 21. Third, the pipelines provide essential baseload power for expansion of Mexican (intermittent) renewable generation—further supporting COP 21 implementation. This was clearly visible in the March/April power auctions where Mexican state utility CFE awarded nearly 2,000 MW of wind and solar renewable energy projects representing several billion dollars in new generation investments. The natural gas pipeline story is a big win for U.S.-Mexico energy relations.

Benjamín Torres-Barrón, head of the energy, mining & infrastructure practice group at Baker & McKenzie in Mexico: Natural gas demand in Mexico is expected to increase 44.1 percent by 2029 going from 7,300 million cubic feet (Mmdcf) in 2015 to 10,390 Mmdcf in 2029, which represents an average annual increase of 2.5 percent. The aforementioned assumes that more importation infrastructure is effectively developed. Considering this, it is almost certain that one of the trends in the Mexican natural gas sector (and opportunity for private investment) will surely be the construction and operation of new importation pipelines, as well as transportation ones. With regard to non-conventional resources, legal instruments are being issued on a daily basis to expand the regulatory framework and provide more clarity to investors interested in coming to exploit hydrocarbons resources in Mexico. There is also the Five-Year Plan that the Ministry of Energy issued, which includes interesting projects for the private development of non-conventional fields in Mexico. Now, regarding the constant increasing demand for natural gas in Mexico and its effect on the Mexican LNG industry, it is expected that in the medium term, LNG will still be an important player in supplying Mexico’s demand for natural gas. Although LNG is three or four times more expensive than U.S. imported natural gas, there are not sufficient importation pipelines to supply all the Mexican demand for U.S. natural gas. Mexico is in the process of developing additional infrastructure to increase importation capacity. However, until such infrastructure is completely developed and in operation, it is expected that in the following five to eight years, important amounts of LNG will continue to arrive at the terminals of Altamira and Manzanillo to aid Mexico’s natural gas needs. Finally, concerning renewable energy development in Mexico, despite the increasing trend of generating power through natural gas, a new Energy Transition Law promotes generation through renewables and provides certain national goals in connection therewith: 25 percent for 2018, 30 percent for 2021 and 35 percent by 2035.

Luis Miguel Labardini, partner at Marcos y Asociados Infraestructura y Energía: The energy reform in Mexico allows for private companies to develop power generation projects to sell power directly to the grid. The Mexican Power Commission is still the largest player, but the role of private generators will be increasingly important. Today, almost 40 percent of Mexico’s electricity is already generated by combined cycle power plants that utilize natural gas as the primary source of energy. The Los Ramones pipeline will provide a reliable source of natural gas to many of the projects that will come on stream in the next two years. This will also significantly increase the volume of natural gas imported from the United States, which is a reliable, cost-competitive source of natural gas for the Mexican market. There are other border crossings that will be laid out in the near future and that will definitely result in a mostly land-based flow of natural gas for power projects in Mexico. The above-mentioned developments will reduce the country’s speed of development of LNG projects. There is also the possibility that, as a result of the energy reform, private oil and gas companies will begin developing unconventional basins of dry natural gas in Mexico. This can only succeed if operations in Mexico become as cost-competitive as shale production has become in the United States. It would require Mexico to take advantage of the learning curve that the U.S. cluster of shale operators has developed for unconventional plays in the United States. Regarding renewable energy development, a first auction of future deliveries of electricity in Mexico, focused on renewables, showed that both solar and wind power is becoming increasingly competitive, and this segment of the industry will grow at double-digit numbers in the years to come.

Eduardo Canales, global energy transactions associate at Akin Gump Strauss Hauer & Feld in Houston: Los Ramones is an approximately 500 mile-long pipeline with the capacity to transport as much as 2.1 billion cubic feet per day (Bcf/d) of natural gas from southern Texas to northern and central Mexico. Los Ramones Phase I was completed in 2015 and Los Ramones Phase II is expected to start operations this summer. Once Los Ramones is fully operational and integrated into Mexico’s National Pipeline System, it is expected to meet 20 percent of Mexico’s natural gas requirements and will be an economic and industry game changer. Los Ramones will connect two energy industries experiencing opposite realities. On the one hand, natural gas production in the United States reached 92,020 million British Thermal Units per day (MMBtu/day) earlier this year, a historic output level despite low prices and market volatility. On the other hand, the natural gas industry in Mexico has been going in the opposite direction, as production levels have declined while energy consumption has grown at an accelerated rate. Ultimately, the integration of Los Ramones into the National Pipeline System will benefit both countries; it will give Mexico access to the United States’ shale revolution at a time when natural gas storage in the United States has reached historical levels while Henry Hub spot prices oscillate around $2/MMBtu, and it will also be a profitable outlet for U.S. producers and pipelines by giving them access to an expanding market where Mexico’s Federal Electricity Commission continues developing natural gas power plants and when LNG export facilities in the United States have lost momentum. Even though Mexico’s natural gas imports are expected to continue increasing, U.S. shale gas will progressively become a bigger slice of the pie, displacing LNG cargoes from countries like Peru and Nigeria due to more favorable Henry Hub pricing, and lower transportation, delivery and distribution. As U.S. producers continue producing natural gas despite low prices, Mexican power generators and industrial users in Nuevo León, Tamaulipas, San Luis Potosí, Querétaro and Guanajuato, some of Mexico’s most industrialized states, will be able to meet increasing energy consumption driven by the burgeoning manufacturing industry while taking advantage of cheap U.S. shale gas.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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