Column: Gateway Pipeline shows that CFE is willing and able to work with the private sector

Editor’s Note: Mexico Gas Price Index from NGI, a leader in tracking reform in the Mexican natural gas market, features the following column by Eduardo Prud’homme as part of a series regularly on the understanding of this process.

There’s no denying the positives of the 1.3 Bcf/d Southeast Gateway pipeline project announced by TC Energía the first week of August. At a time when the Yucatán Peninsula is facing great vulnerability in its electricity system, caused in large part by the shortage of natural gas, the announcement was celebrated by businessmen and politicians in the region, but especially by the Comision Federal de Electricidad (CFE).

The extension of the 2.6 Bcf/d Sur de Texas-Tuxpan offshore pipeline will have an extremely positive effect on the availability of natural gas in an area where Petroleos Mexicanos (Pemex) has been the only supply option.

The $4.5 billion investment planned for this project, which will be jointly developed by TC Energía and CFE, represents approximately 45% of all the capital spent in the execution of the previous administration’s five-year gas pipeline plan. Therefore, in terms of natural gas, it is the most important project of the López Obrador government.

With a length of 715 kilometers and a capacity of 1.3 Bcf/d, the pipeline that most closely resembles it is phase 2 of the Ramones project. This pipeline system solved the chronic low pressure problems in the Bajío and western Mexico. Undoubtedly, the extension of the maritime gas pipeline will have a similar effect: imported gas will powerfully supplement the national supply in an area where natural gas balancing problems date back decades. The Yucatán Peninsula will no longer be vulnerable to fluctuations in production from Pemex’s processing centers and will no longer have to burn high nitrogen gas. Texas gas will be available to users in communities adjacent to the marvelous Mayan ruins of Chichen Itzá.

It is also a victory in the sense that CFE is once again demonstrating its willingness to work with the private sector. And it’s no exaggeration to say that this project will change southeastern Mexico. But it’s worth considering if this is the best way to do it. The economic information on this gas pipeline is currently very brief, but it is possible to make some rudimentary calculations. Each mile of this pipeline will cost an average of $6.3 million – a value well above the $3.7 million/mile spent on the original marine pipeline from South Texas to Tuxpan in Campeche. The new pipeline, at 36 inches, would also be smaller in diameter than the original.

In the first maritime pipeline, the initial five-year plan considered an investment of $3.1 billion to be reasonable. A bidding process for this strategic pipeline generated an even lower investment, at $2.9 billion. There was no tendering process for this pipeline. A strategic pipeline, either because it has a minimum diameter of 30 inches, a length of at least 100 kilometers, or because it provides system redundancy, or constitutes a new supply route to a relevant market, must be tendered in accordance with the Hydrocarbons Act. The pipeline is therefore breaking the law.

Although the project is sponsored by the CFE, the system will benefit the operations of the other national champion in the energy sector, Pemex. The pipeline would touch the ground at two points. In the first, at Coatzacoalcos, it will transport gas to an area where Pemex needs gas for its refining and petrochemical production operations. Second, the pipeline will pass through Dos Bocas, the site of the current government’s most iconic project, the Olmeca refinery. With this connection, the reliability of supply of this installation is ensured, and this by 2025.

The complexity of the journey and the multiple end uses intended for the gas transported highlight another deviation from the law and the institutional design of the energy sector. The great absent and displaced agent of gas logistics in the southeast is now the manager of the Sistrangas: Cenagas.

Cenagas had devised a plan to secure gas to the southeast. It revolved around adding compressor stations to its system. These facilities would act in synchrony with the Cempoala compressor station to boost the gas received at Montegrande, added to the production of Ixachi in the Playuela node. This plan would have cost 800 million dollars. Even if the development of a project with such characteristics involved the replacement of pipeline sections in certain areas, the amount of replacements would never exceed $2 billion, given that the linear distance between Tuxpan and Cactus is approximately 1 000km. In other words, the worst case scenario for upgrading the Sistrangas would not be as onerous as the expansion of the marine pipeline in terms of cost.

[Mexico LNG: Global eyes are on Mexico’s Pacific Coast as LNG liquefaction projects progress to export U.S.-sourced natural gas. NGI’s Hub & Flow podcast digs into the fundamentals, project development and market outlook for Mexico’s LNG export. Listen now.]

At a time when the government’s discourse revolves around austerity, it is surprising that the cheapest solution has not been adopted. Not only was a public bidding process evaded, but the government stopped listening to Cenagas. Today, the old system operated by Cenagas has a net worth of just $350 million. With a much smaller investment, with a direct impact on employment in the communities of Veracruz and Tabasco, with the possibility of advancing new production (that of Ixachi, Quesqui and other fields), a solution less expensive was to take.

But this plan should have started more than two years ago if the goal of guaranteeing the flow of natural gas to Dos Bocas was to be achieved before 2025. Perhaps the government is aware of the additional price it pays with Southeast Gateway, that’s the cost of getting the refinery up and running without further delay. But by foregoing project award processes with incentives for efficiency, there is no way to assert that the public interest is at the center of policy decisions.

There are other priorities and we will never know if another infrastructure company could have offered a cheaper gas transmission solution. TC Energia is within its rights to maximize its benefits, but CFE is obliged to minimize its costs. The agreement between CFE and TC Energía could also have a political interpretation. Perhaps the agreement serves as a sign that the private sector is welcome in Mexico. The López Obrador government seeks to convey the message that it knows how to collaborate and join forces with North American companies. The process was not transparent, did not respect competition rules, but the end result can be considered positive. The project will transform the Southeast. But it will also help transform the market from a paper-based open access market to one in which the dominant intermediary will be the powerful and increasingly empowered CFE.

Prud’homme played a central role in the development of Cenagas, the national gas pipeline operator, an entity created in 2015 as part of the energy reform process. He started his career at the national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), becoming Chief Economist and, from July 2015 to February, was General Manager ISO for Cenagas, where he oversaw the technical, commercial and economic management of the nascent integrated natural gas system (Sistrangas). Based in Mexico City, he heads the Mexican energy consultancy Gadex.