Recent conflicting reports have claimed that TransCanada’s 0.9 bcf/d Tuxpan-Tula project has either been cancelled or that construction works remain suspended. Operations on the connecting 0.9 bcf/d Tula-Villa de Reyes now seem even more unlikely to start in H2 19. This raises serious questions regarding just how much gas Mexico will take post-2020 and whether other lines beleaguered with delays could face a similar fate. Additionally, recent news of Valley Crossing’s status as technically complete has not shifted our views on cross-border flows. The Valley Crossing and Sur de Texas-Tuxpan lines still need to be linked under water, while connections south of Sur de Texas-Tuxpan also need to be completed. For that reason, we assume gas will start flowing through Sur de Texas-Tuxpan in Q1 19 at the earliest, and we expect Mexico’s pipeline imports will average 5.1 bcf/d this heating season, mostly in line with the 5.0-5.1 bcf/d flow rates seen since October. Factoring in the risk of further infrastructure setbacks, we project Mexican pipeline imports to average 5.4 bcf/d (+0.7 bcf/d) y/y in the 2019 injection season, with peak cooling season flows reaching 5.6 bcf/d.
The now-cancelled (or still-suspended) 0.9 bcf/d Tuxpan-Tula pipeline developed by TransCanada—which was meant to start flowing gas in 2020—was expected to be a critical downstream connection of Sur de Texas-Tuxpan. Works on the connecting 0.9 bcf/d Tula-Villa de Reyes pipeline, expected to become operational in H2 19—now highly unlikely—were confirmed as still-suspended due to a court ruling. TransCanada has quoted rising costs due to permits and extortion, which have caused millions in losses and made development of the projects infeasible. We have previously highlighted the significant problems with progress on both pipes, ranging from archaeological issues to extortion and extended indigenous consultation (see Mexico – Waiting…, 30 May 2018).
In the case of the troubled Tuxpan-Tula, construction works have been halted since November 2017 following a court ruling. The stoppage was due to environmental concerns, as the pipeline’s path was supposed to cross the mountain ridges of Otomi-Tepehua in the state of Hidalgo. In June, local authorities begun an investigation into allegations that public officials falsified the signatures of local community leaders in the states of Puebla and Hidalgo in a bid to have the court injunction lifted. Representatives of Puebla’s indigenous communities also reported TransCanada and the local government to the UN for corruption and violence against indigenous peoples. In late August, local news sources reported that TransCanada managed an agreement with the communities, allowing construction to resume.
The cancellation—or suspension—of the Tuxpan-Tula translates into a loss of 0.9 bcf/d of takeaway capacity from the Sur de Texas-Tuxpan pipeline, which would have transported gas into Mexico’s central demand hubs through its connection into the 0.9 bcf/d Tula-Villa de Reyes. With uncertainty around the completion of the Tuxpan-Tula, current connections south of the Sur de Texas-Tuxpan are now only into the SISTRANGAS system—Altamira and Monte Grande—with a total estimated capacity of 1.4 bcf/d, raising the question of the pipe’s mid-term capability to hike its capacity utilisation to 2.6 bcf/d. Currently, flows on Sur de Texas-Tuxpan will depend on:
- A connection with Altamira through a small underwater link. No further details have been released so far on the capacity or progress of this connection, although we suspect it is nearing completion and assume it will be operating in H1 19. As the interconnection is to ultimately replace Altamira LNG imports, which currently have a maximum injection capacity into SISTRANGAS of 0.9 bcf/d—based on SISTRANGAS data available from July 2017 to date—we assume the interconnection with the Sur de Texas-Tuxpan will be able to count on the same capacity long term.
- A connection at Monte Grande, Tuxpan, which is expected to be completed by year-end with 0.5 bcf/d capacity (though there has been no recent news on this project).
- The reconfiguration of the Cempoala compressor station, which will allow SISTRANGAS to transport gas north to south. Its initial capacity will be 0.35 bcf/d in Q1 19 with an additional 0.5 bcf/d in Q4 19, increasing gas availability in the states of Veracruz and Tabasco. Currently, the Cempoala station can only flow gas south to north, as historically PEMEX gas output from southern fields was transported to northeastern demand hubs.
On 31 October, Enbridge announced that its Valley Crossing pipeline, which will feed gas into the Sur de Texas-Tuxpan, was operational. However, its most recent FERC filing (14 November, covering construction works from 16–19 October) reveals that the system cannot flow any gas south into Mexico because the offshore system that links it to the 2.6 bcf/d Sur de Texas-Tuxpan pipeline still needs to go through pressure testing, followed by a seafloor survey, in order to determine the final pipeline elevation between the two systems. While such a process could take as little as two weeks to finalise, in TransCanada’s 1 November earnings call, rough seas were cited as delaying the works.
While we await the next FERC filing (due 28 November), we assume gas will start flowing through Valley Crossing to the Sur de Texas-Tuxpan system no earlier than Q1 19. The initial ramp-up on the Sur de Texas-Tuxpan is expected to be gradual, with reports earlier this year noting the pipeline would first run at a maximum of 1.6 bcf/d of its 2.6 bcf/d nameplate capacity. For the system to flow 1.6 bcf/d, its interconnections to SISTRANGAS would have to be fully completed and running at full capacity, which seems unlikely in H1 19 (and H2 19) judging from the range of Mexican infrastructure setbacks of late. The volume of new gas supply into Mexico delivered by the Sur de Texas-Tuxpan will also be limited by the timeliness of its downstream connections. The cancellation or suspension of 0.9 bcf/d of takeaway capacity originating from the Tuxpan-Tula pipeline is a major setback, as it calls into question what the run rate on the Sur de Texas-Tuxpan will be within the next two years.
During this withdrawal season, we forecast that pipeline imports will average 5.1 bcf/d (+0.7 bcf/d). Based on the possibility of more delays continuing into the 2019 injection season—the Wahalajara system was recently delayed and will now start up in March 2019 at the earliest, as we discussed last month in Mexico - ¡Sorpresa!, 25 Oct 2018—we peg flows slightly higher at 5.4 bcf/d (+0.7 bcf y/y), with peak cooling season flows reaching 5.6 bcf/d. In 2020, we expect that cross-border imports will average just above 6.0 bcf/d (+0.7 bcf/d y/y).
Shortages and living with them
According to preliminary data from Kpler, Mexican LNG imports in November so far stand at 0.4 bcf/d (-0.3 bcf/d y/y), which follows last month’s 0.2 bcf/d y/y drop to 0.5 bcf/d. Technically, there is still some time for additional cargoes to be added to the schedule. However, the recent slowdown in LNG takes suggests more acute gas shortages to come in parts of Mexico, with upcoming pipeline projects such as Sur de Texas-Tuxpan and Wahalajara still not flowing gas.
Local reports show a 24% increase in Monterrey first-hand PEMEX gas sales in the last three months, with Nuevo Leon’s industry chamber highlighting a surge in gas prices to industrials due to shortages in the centre and south of Mexico. Reports put prices of LNG imported into Altamira at 7.7 $/mmbtu, while LNG sold to industrial users costs 13 $/mmbtu. Some industrials who have access to declining PEMEX gas fields are consuming gas without nominations and incurring large balancing penalties from CENAGAS. As CENAGAS turns to LNG to balance the system, the balancing fees can increase LNG prices by as much as 50%, pricing industrial consumers out of accessing LNG.
On the back of more possible setbacks to upcoming pipeline infrastructure and growing industrial sector concerns regarding unsustainable gas shortages, we expect LNG imports this withdrawal season to average 0.7 bcf/d, flat y/y, before trending slightly lower at 0.6 bcf/d (-0.2 bcf/d y/y) in the upcoming injection season. Even through 2020, we expect Mexico to still be importing around 0.5 bcf/d of LNG (-0.2 bcf/d y/y) in order to keep meeting demand.
|Fig 1: Mexican pipeline infrastructure map|
|Source: Company websites, CENAGAS, Energy Aspects|