Mexico’s midstream sector flourishes amid downturn

Map boundaries USA and Mexico
Source: DollarPhotoClub

Amid the doom and gloom plaguing the U.S. oil and gas industry, south of the border, in Mexico, the country’s midstream sector is doing surprisingly well. Mexico is a net importer of natural gas, mostly via pipeline from the United States, and its natural gas demand is rising because of expanding power generation capacity.

According to the U.S. Energy Information Agency (EIA), Mexico’s total energy consumption in 2014 consisted mostly of petroleum (45%), followed by natural gas (40%), with natural gas increasingly replacing oil in electric power generation. Mexico has considerable natural gas resources, but its production is modest relative to other North American countries. The development of its shale gas resources is proceeding slowly, while consumption is projected to increase 64% from 2013 to 2027.

Consequently, Mexico’s import needs are rising as domestic production stagnates and as demand increases, particularly in the electricity sector. In order to facilitate natural gas imports from the U.S., a considerable expansion in pipeline infrastructure is necessary.

Private investors – betting on the longevity of cheap U.S. shale gas – are attracted to the country which, under its current president Enrique Peña Nieto, is injecting at least $15bn to expand its national gas pipeline grid while it converts oil-fired power plants to natural gas.

Companies like US Sempra, TransCanada, and domestic natural gas pipeline company Fermaca, have all been awarded contracts to develop Mexico’s midstream sector. As a result of this frenzied activity, by 2018 – the date of Mexico’s next presidential elections – the country will have constructed more than 5,000km of additional pipelines, including strategic cross-border lines, through 26 tenders.

According to Mexico’s power utility CFE’s official auction listing, nine projects are yet to be tendered, including the Nueces – Brownsville cross-border pipeline in South Texas, that will bring gas to eastern, central and western regions of Mexico.

US asset manager BlackRock and fellow investment fund First Reserve purchased an equity stake of about $900mn in the 744km second phase of Mexico’s Los Ramones gas pipeline last year. BlackRock later signed an agreement with Pemex to invest in other energy infrastructure projects in Mexico for an undisclosed amount.

“Open access [to pipelines], the push for new investment, the competitive involvement of new and better players had been greatly sought by the industry itself,” Raúl Monteforte, chief operating officer of Fermaca, told Argus Media. Until now, he says, the regime was “very complex” and “not so efficient”, with intermittent investment.

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