Just when the long-awaited 2.6 bcf/d Sur de Texas-Tuxpan pipeline was ready to begin flowing gas, an arbitration request by CFE threatened to delay the mega project once more. Almost a month later and the arbitration request has been extended to six other pipelines. Developers IEnova and TC Energia have highlighted that the arbitration does not prevent Sur de Texas-Tuxpan from beginning operations, but CFE has yet to issue ‘proof of acceptance’, which is necessary for first flows to reach Mexico. Altamira’s last tendered cargo is scheduled to arrive on 1 August and with no additional deliveries requested, LNG stocks will last until mid-August. It is unclear whether CFE will allow operations on Sur de Texas-Tuxpan to begin while arbitration proceedings are taking place. If not, extra LNG will need to be tendered into Altamira to meet demand and cross-border flows will remain capped near 5.3 bcf/d.
We have long held a conservative view on Mexican pipeline import growth given the numerous setbacks to project completions, ranging from land disputes with ejidos (communal landholders) to environmental concerns to permitting issues to social unrest and delays to construction. First flows on Sur de Texas-Tuxpan seemed imminent in June, but CFE’s arbitration request has prevented first flows on the pipe. Considering international arbitration cases can take years to resolve, the question now is whether CFE will keep Sur de Texas-Tuxpan shut until the arbitration is resolved or if it will allow it to commence operations.
As it currently stands, Altamira’s last tendered cargo is to arrive on 1 August, according to Kpler and we estimate LNG stocks at Altamira can last until mid-August. Judging from the announcement date of past tenders, should CFE seek cargoes from mid-August onwards, it will need to issue a new tender within the next few days. A fresh LNG tender for Altamira would give us an indication of how much longer CFE expects gas to not be flowing through Sur de Texas-Tuxpan, as pipeline gas is to eventually substitute LNG. Should no additional cargoes be tendered for delivery into Altamira, it could be a sign that CFE is prepared to allow flows through Sur de Texas-Tuxpan as soon as next month, as LNG would otherwise be necessary to bolster already scarce supply. Some industrial consumers in southeast Mexico. have said they are currently only receiving supply to meet 50% of their gas needs.
Once upon a time there were seven pipeline arbitrations…
Since news first broke on 26 June of CFE’s arbitration request regarding Sur de Texas-Tuxpan (see E-mail alert: CFE arbitration request threatens further delay to first flows via Sur de Texas-Tuxpan, 26 June 2019), the situation only seems to have escalated further. Only a few days later, reports emerged that CFE’s request to eliminate force majeure contract clauses and refund payments made was extended to another six projects: the 0.5 bcf/d Samalayuca-Sasabe, 0.5 bcf/d Guaymas-El Oro, 1.2 bcf/d La Laguna-Aguascalientes, 0.9 bcf/d Villa de Reyes-Aguascalientes-Guadalajara, 0.9 bcf/d Tuxpan-Tula and 0.9 bcf/d Villa de Reyes-Tula. On 1 July, CFE filed the requests with the international courts of Paris and London, and negotiations are set to be ongoing with project developers IEnova, TC Energia, Carso Electric and Fermaca. On 9 July, president Andres Manuel Lopez Obrador’s finance and public credit secretary Carlos Urzua resigned from his post, citing his disagreement with the pipeline arbitration requests as one of the reasons.
So, where does it leaves us?
A lack of pipeline flows through Sur de Texas-Tuxpan would limit cross-border pipeline imports to the current run rate, near 5.3 bcf/d. In order to meet local demand for gas, LNG imports should remain mostly flat y/y, totalling 0.8 bcf/d in Q3 19. Should flows through Sur de Texas-Tuxpan be allowed to begin, a steady ramp-up should be expected, with a maximum initial takeaway capacity near 1.4 bcf/d. This estimated takeaway capacity assumes that works at the Cempoala compressor station are completed. If gas through Sur de Texas-Tuxpan ramps up, LNG import requirements at Altamira would gradually reduce, but some imports would still be needed given the Mexican gas system has no storage sites and lacks system redundancy.
There is also a high probability that the Cempoala compressor station has not been finalised as CENAGAS cancelled engineering contracts in May. Despite CENAGAS confirming the station is ready to flow from north to south and is awaiting gas to arrive through Sur de Texas-Tuxpan, other reports have emerged suggesting the station does not have enough compression power for gas to reach southeast Mexico. Initial capacity on Sur de Texas-Tuxpan could fall below 1.4 bcf/d should issues at the Cempoala compressor station limit flows into the south of Mexico.
Finally, the actions taken by CFE against the completed Sur de Texas-Tuxpan will set a precedent for the rest of projects under development that also face arbitration cases. Should CFE not allow Sur de Texas-Tuxpan to flow gas, it would be safe to assume the Wahalajara pipeline system would not be allowed to start operations either until the legal battle is resolved. It is also unclear whether construction works will continue. The last two sections of the Wahalajara system are composed of the now-disputed La Laguna-Aguascalientes and Villa de Reyes-Aguascalientes-Guadalajara lines. We had otherwise expected the Wahalajara system to become operational in H1 20 as it was the next project in line after Sur de Texas-Tuxpan. Likewise, Guaymas-El Oro could potentially be prevented from entering full operations. The pipeline has only been partially operating since August 2017 as a court ruling prevented repairs to a section of pipe that was damaged as part of a protest by the Yaqui community. On 11 July, a judge overturned the injunction, theoretically allowing IEnova to fully start the pipeline once the pipe has been fixed.
|Fig 1: Net pipeline imports, bcf/d||Fig 2: Pipeline flows, mmcf/d|
|Source: SENER, EIA, Energy Aspects||Source: Enbridge, TC Energia, Energy Aspects|
|Fig 3: Mexican pipeline infrastructure map|
Note: (*) Under arbitration case by CFE.
Source: Company websites, CENAGAS, Energy Aspects