We believe a successful agreement in the near-term for operations to start on Sur de Texas-Tuxpan (STT) would have a limited upside of near 0.4 bcf/d to cross-border flows. Most LNG imports at Altamira would be replaced by flows on STT but some cargoes would likely be tendered due to lack of storage in Mexico and continuing need for supply to balance the pipeline system. Last week, the Mexican president made a string of announcements regarding the arbitration case between the Mexican government and pipeline developers on contract terms for new pipelines, suggesting a brokered resolution is potentially close. As both the government and aggrieved parties are attempting to compromise to put STT into service, we have factored a moderate ramp-up starting in October, taking heating season cross-border flows towards 6.0 bcf/d (+1.3 bcf/d y/y).
Comments from STT developer TC Energia in its 1 August Q2 19 earnings call on the development of the international arbitration case with CFE suggests cross-border flows with the US could be tempered for a long time. TC Energia stated the hearings in the London Court of International Arbitration could take place in Q3 20-Q4 20, assuming no unexpected delays, with a ruling likely to happen in Q1 21. CFE could still give STT the green light to start operating before a ruling, or even before the agreement Mexican president Andres Manuel Lopez Obrador (AMLO) indicates he is in the process of brokering is finalised, by issuing proof of acceptance of the in-service date. All these issues pose a great deal of uncertainty surrounding the timing of the much-awaited STT line. Should an agreement be concluded by end-August, as AMLO stated on 22 August and as news reports suggest today (26 August), the key for US balances is how quickly and at what volume would gas ramp up through the much-awaited STT. If (or when) an agreement is reached, we peg flows at 0.3-0.4 bcf/d during STT’s first operational month, which our balances assume to be October.
Tenders will continue to serve as an indicator for how much longer flows on STT might be delayed, as we assume that flows on STT will substitute out most LNG imports at Altamira. Cargoes for delivery into Altamira are tendered until 26 September, with stocks likely to last for two weeks after delivery. Recent LNG tendering activity has occurred 10-14 days ahead of delivery with the tenders happening on a monthly basis.
Even when STT starts flowing, we still expect at least one cargo to unload each month at Altamira because the Mexican system has no storage sites and is currently dealing with significant line pack issues that might need to be balanced by LNG. Assuming a STT October start-up, we forecast cross-border flows in the upcoming heating season to quicken to 6.0 bcf/d (+1.3 bcf/d y/y) from the current levels of 5.4 bcf/d and for LNG imports to marginally slow y/y by 0.1 bcf/d.
We maintain that maximum capacity on the 2.6 bcf/d STT is likely to be capped at 1.4 bcf/d owing to a lack of downstream connections. The connections that have been confirmed as completed are the 0.9 bcf/d of maximum capacity at Altamira and 0.5 bcf/d at Monte Grande, totalling 1.4 bcf/d. Contributing to the lack of downstream connections is the 0.9 bcf/d Tuxpan-Tula, which was initially planned for 2018 but is now set to be fully online in 2021, according to TC Energia’s Q2 19 earnings call. Tuxpan-Tula’s west and eastern sections are said to have been completed, with TC Energia stating it expects some flows to begin on the eastern section in Tula once STT starts operating. We remain sceptical as to how much demand for STT flows this will translate into, with works in the middle part of the Tuxpan-Tula pipe—in the state of Hidalgo—still at a standstill (see Mexico monthly: The baby and the bath water, 20 November 2018).
Aside from Altamira, STT will move gas into SISTRANGAS at two other points: Naranjos and Monte Grande. At Naranjos, STT will put gas into TC Energia’s 0.6 bcf/d Naranjos-El Sauz pipe, although there has been no confirmation that the connection is now ready. Naranjos-El Sauz currently acts as an interconnection within the SISTRANGAS system by taking gas from the system at Naranjos and taking it to El Sauz. As such, the ramp-up of STT will also depend on both whether the Naranjos-El Sauz connection is completed and whether SISTRANGAS gas will be substituted by STT. Should the connection be completed at Naranjos, it would increase STT maximum flow capacity to 2 bcf/d from 1.4 bcf/d.
|Fig 1: Injections into SISTRANGAS at El Sauz, bcf/d||Fig 2: Naranjos-El Sauz map|
|Note: Data only available from July 2017.
Source: Ventyx, Energy Aspects
|Note: SISTRANGAS system in black
Source: Company websites, CENAGAS, Energy Aspects
Gas flowing from South Texas will also be injected into SISTRANGAS at Tuxpan, via a 0.5 bcf/d connection at Monte Grande and into the Cempoala compressor station. Following reports that CENAGAS cancelled the engineering contract for the reconfiguration works at Cempoala (see Monthly: Mexico - Legal blockade, 25 July 2019), it remains unclear whether the station is complete. SENER’s most recent pipeline status update as of 2 August reported that the first phase of the Cempoala reconfiguration is now complete, with 0.9 bcf/d of capacity. This initially suggests the STT flows of 0.5 bcf/d through Monte Grande should be processed through SISTRANGAS via Cempoala with enough spare capacity. However, reports of acute gas shortages in southeastern Mexico continue, further raising questions over whether the Cempoala station is now operational. Initial capacity on STT could fall below 1.4 bcf/d should issues at the Cempoala compressor station limit flows into southern Mexico.
The remainder of the pipelines in the arbitration case are under development—except for IEnova’s Guaymas-El Oro (see Monthly: Mexico - Legal blockade, 25 July 2019)—and are considerably delayed from their original scheduled start dates. These include the last legs of the Wahalajara pipeline system—1.2 bcf/d La Laguna-Aguascalientes and 0.9 bcf/d Villa de Reyes-Aguascalientes-Guadalajara—which we expect online towards the end of H1 20. The delays, which we have covered extensively in our monthly reports, stem from land disputes with ejidos (communal landholders), environmental concerns, permitting issues, social unrest and delays to construction. CFE’s arbitration process is just likely to exacerbate the delays. However, even if an arbitration agreement is reached, the local court injunctions paralysing some of the projects—such as 0.5 bcf/d Samalayuca-Sasabe, 0.9 bcf/d Tuxpan-Tula and 0.9 bcf/d Tula-Villa de Reyes (see Monthly: Mexico - Timing risks remain, 29 March 2019)—are still holding up progress.
The elephant in the dark room - Yucatan
Power blackouts in Yucatan have been reported on a nearly daily basis owing to shortages in gas at power plants and an inadequate power transmission system. CFEnergia recently stated that power plants in Yucatan need around 0.3 bcf/d of gas and are only currently receiving as little as 60-80 mmcf/d. With local reports confirming the Mayakan pipeline is often underutilised due to the low amount of gas available, CFE has had to turn to burning diesel at the power plants in an attempt to meet local power demand. The Yucatan relies on domestically produced gas. Falling Pemex gas production owing to underinvestment in fields, increased use of gas for re-injection into wells to maximise oil output, and deteriorating gas quality issues are feeding Yucatan’s energy crisis.
STT has often been posed as the solution to the region’s gas supply woes, but some issues still exist which makes us believe the crisis is likely to continue even if flows into Tuxpan start. Initial plans included feeding gas from STT into the Cempoala compressor station and into Mayakan via an interconnection. However, the interconnection between SISTRANGAS and Mayakan at Nuevo Pemex is still under consideration by CENAGAS, according to SENER’s monthly pipeline status update.
Additionally, chatter in early July of a 0.24 bcf/d gas swap between Pemex and CFE would imply there is no interconnection plans in the short-term. The gas swap involved Pemex supplying 0.24 bcf/d in Yucatan to CFE, and CFE to give back the same amount of gas to Pemex through a point in the Sistrangas system. Days later, the plan was replaced by a proposal to import LNG through an FRSU to meet local gas demand. Considering the Mexican government’s focus on strengthening Pemex, it is increasingly probable that any medium- to long-term solution taken to solve Yucatan’s energy woes will also need to benefit Pemex, rather than substitute Pemex flows with imported gas (via STT in this case).
We assume flat cross-border flows to current levels at 5.4 bcf/d through the end of September. This is based on the announcement of an impending resolution from the discussions with AMLO and pipeline companies involved in the arbitration, along with tendered cargoes for delivery into Altamira until end-September. To backfill demand, LNG imports will be necessary at Altamira and Mexican LNG takes will be flat y/y at 0.5 bcf/d. Assuming moderate STT flows begin in October heating season cross-border flows would average near 6.0 bcf/d with LNG imports marginally lower by 0.1 bcf/d y/y as balancing issues in the Mexican gas system will maintain Altamira LNG imports a necessity.