Mexico’s shift towards gas-fired power creates attractive ROI for pipeline developers

A new cross-border pipeline being jointly developed by US’ ONEOK and Mexico’s Fermaca will pave the way for “additional upstream-related capital projects at attractive returns,” a spokeswoman for ONEOK said.

ONEOK and Fermaca’s “Roadrunner” pipeline will extend from the ONEOK WesTex Transmission natural gas pipeline system at Coyanosa, Texas to a new international border-crossing connection at the US and Mexico border near San Elizario, Texas, where it will connect with Fermaca’s Tarahumara Gas Pipeline.

As Mexico spurs development in its oil and gas sector by welcoming private investment, a handful of companies are developing major gas pipelines to transport gas flowing from the US’ shale boom to feed growing Mexican gas-fired power plant capacity.

Natural gas exports to Mexico, which account for nearly 50% of US natural gas exports, rose 12% in 2014, the US Energy Information Administration (EIA) said in a report last month.

US pipeline gas exports to Mexico doubled between 2009 and 2013, and SENER, Mexico's national energy ministry, projects that US pipeline exports to Mexico will double again in the five year period 2013-2018, to 3.8 billion cubic feet per day.

A number of new pipelines are under development aimed at supplying the Mexican market, including projects led by TransCanada, Canada’s ATCO Gas and Pipelines Ltd, US' Sempra Energy’s IEnova, Mexico’s Fermaca, as well as a consortium led by the conglomerate Grupo Carso, controlled by Mexican billionaire Carlos Slim.

The Roadrunner pipeline, to be constructed in phases, includes approximately 200 miles (322 kilometers) of new, 30-inch diameter pipeline currently designed to transport up to 640 million cubic feet per day (MMcf/d) of natural gas, with up to 570 MMcf/d to be transported to Mexico’s growing markets.

The pipeline will allow ONEOK to leverage the US’ Permian, Mid-Continent and Upper Midwest gas platforms, and the pipeline capacity was fully subscribed in an open season process held in December 2014, the ONEOK spokeswoman told FC Gas Intelligence.

“We continue to gather the necessary right of way, survey permissions and permits necessary for the project. Phase one is expected to be completed by the first quarter 2016,” the spokeswoman said.

Note: All pipeline imports are from the US. Gross imports equal net imports beginning in 2013. Logistical pipeline imports are imports from the United States to regions of northern Mexico that have no access to any other sources of natural gas. PGPB is the natural gas subsidiary of national oil company Pemex. Source: Mexican national energy ministry SENER, 2013 natural gas market prospectus.

Competing for power
Mexico’s energy reforms will make the country a major gas importer from the US and lower the price Mexicans pay for electricity. Within two years, competition from private gas suppliers is expected to drive down the price electricity generators pay for their fuel and open up a host of opportunities in a market long monopolized by state oil company Pemex.

Mexico traditionally relied heavily on oil-fired power, but in recent years gas-fired generation has seen its share of the generation mix increase.

Pemex currently controls most of the existing gas pipelines, but its network is being handed over to another federal agency, CENEGAS, separating production and distribution.

CFE, Mexico's state power utility, is providing financial security to the new pipeline projects through long-term capacity contracts. This is a “very competitive” method, according to Jaime de la Rosa, president of the Mexican Energy Association (AME) and CEO of Mitsui Power Americas.

It’s a “win–win,” promoting private sector investment to develop needed infrastructure and giving the CFE very competitive pricing for capacity, de la Rosa said.

The pipeline projects are in line with Mexico’s long-term goal to increase the interconnectivity with US infrastructure, and the focus has switched from exporting gas and LNG to the US, to importing it, Warren Levy, Managing Partner at Latin American consultancy Frontier Hydrocarbons Ltd, said.

Power utility faces competition
CFE has long dominated Mexico’s power sector with its 54 GW of installed power plant capacity.

The utility is now gearing up to go head to head with private electricity producers in a newly established wholesale power market, which will be significantly influenced by new gas pipelines.

Starting in 2017, private companies, traders and wholesalers will be able to enter the pipeline network and begin supplying gas to industrial, residential and local distribution companies, and competing with Pemex for the domestic market.

According to the CFE, installed gas-fired power plant capacity will expand from 21 MW in 2014 to almost 56 MW in 2028, and this will require major pipeline investment.

Negotiations are underway to develop new legislation for the electricity market. It is key for the government to “smoothly move from one set of rules to the next…to encourage investment,” AME’s de la Rosa said.

US net imports of natural gas fell 9% in 2014 to 1,171 billion cubic feet, continuing an eight-year decline to hit the lowest level since 1987, according to EIA data.

US dry natural gas production hit record highs, and lower US domestic prices helped to displace natural gas imports, the US agency said.

Investor interest
Companies have been eager to enter Mexico’s transportation market. In October 2014, Canada’s ATCO Gas and Pipelines Ltd. won the contract to build the Tula branch pipeline in Hidalgo.

The company is spending $66 million to build a 30-inch pipeline running 17 km to supply the Francisco Pérez Ríos power plants, which have 300 MW of installed capacity. Construction is scheduled to be completed in August 2015.

Sempra Energy’s IEnova won the $192 million contract to build the Ojinaga – El Encino pipeline in Chihuahua state. The 205-km, 42-inch pipeline will be able to transport 1,400 million cubic feet of gas per day when it comes online in the first half of 2017, according to the CFE.

On December 16, Mexico’s Fermaca Pipeline won the bid to build the 414-km El Encino – La Laguna pipeline for $530 million. The 42- inch pipeline will be able to carry 1.5 million cubic feet per day to fuel power plants in Chihuahua and Durango states when it comes on line in March 2017.

A consortium led by Mexican billionaire Carlos Slim’s Carso Energy also won $767 million and $596 million contracts to build a pair of 42-inch pipelines in Texas to connect the Waha gas fields to Presidio and San Elizario.

One pipeline will stretch 230 km and transport 1.35 million cubic feet per day when completed in March 2017. The second pipeline will carry 1.45 million cubic feet per day when it comes online in January 2017, according to Grupo Carso, Carso Energy's parent company.

TransCanada was one of the first foreign firms to build Mexican gas pipelines, completing two of the first privately-owned Mexican pipelines in the mid 1990’s.

TransCanada sold those but is now building two new pipelines to connect US natural gas to the Pacific coast of Mexico. When completed in 2016, TransCanada will have invested $2.6 billion in the country, according to the company.

By Shane Romig