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    Mexico’s Pipeline Gridlock [NGW Magazine]

Summary

Stalled pipeline projects are hampering Mexico’s efforts to expand its gas industry as the state urges the builders to engage more effectively. (This article is featured in NGW Magazine Vol.3, Issue 18)

by: Adam Williams

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Featured Articles, Americas, Premium, NGW Magazine Articles, Volume 3, Issue 18, Pipelines, Mexico

Mexico’s Pipeline Gridlock [NGW Magazine]

In Mexico’s northwest Sonora state, a segment of Sempra Energy’s Guaymas - El Oro pipeline was ripped out of the ground in 2017 by members of the indigenous Yaqui tribe. Using an excavator, members of a local Yaqui community, known as Loma de Bacum, extracted the segment, cutting the flow of gas between Arizona and the Mexican port of Mazatlan on the Pacific Coast.

They did so in protest. While neighbouring communities had consented to the building of the pipeline, the residents of Loma de Bacum had not. More than a year later, the pipeline remains out of commission. Sempra Energy’s Mexico unit IEnova, in its second quarter earnings report in July, described the situation as a force majeure that “has interrupted operations since August 23, 2017.”

As Mexico’s natural gas pipeline network expands at an unprecedented pace, legal delays, local resistance and blockades such as the one in Sonora have become more and more common. Four gas pipeline projects are now stalled in Mexico by legal issues, David Rosales, general director of natural gas and petrochemicals at Mexico’s Energy Secretary (Sener), told NGW in an interview in Mexico City.

Of the 18 new natural gas pipeline projects that have been developed in Mexico during the current administration, several have been stalled, delayed or blocked since 2012.

“The blockades don’t mean there isn’t supply, but it means natural gas has to be distributed through different channels,” Rosales said. “This makes for elevated prices.” 

In each case of a blockade or delay, Mexico has been forced to use alternative pipeline routes to provide natural gas supply to the intended destination, which drives up distribution and consumption costs, he said.

17-month delay

The disrupted 320-km Guaymas - El Oro pipeline is half the size of Mexico’s largest project currently delayed. The 650-km Samalayuca - Sasabe line, which runs parallel to the US border in northern Mexico, has also been stalled by legal disputes, Rosales said. While construction on the pipeline is expected to be completed by November, that is 17 months behind the original projected completion date in June 2017. The Samalayuca - Sasabe project is being built by Grupo Carso, which is owned by billionaire Carlos Slim, at an estimated cost of $620mn.

Delays in the project have made for higher import costs from US hubs, Rosales said. Instead of importing natural gas from the Waha hub in the Permian basin and sending it west to the Puerto Libertad port, Mexico is forced to import from the Sasabe hub in southern Arizona, where prices are higher.

“The price available isn’t as good as it could be at Puerto Libertas,” Rosales explained. “The price difference isn’t that big, but as I mentioned earlier, with an operational pipeline, it provides more flexibility of options.”

Community interference

Part of the reason for the higher incidence in pipeline delays or resistance to natural gas pipelines stems from Mexico’s energy reforms of 2014, which enforced stricter rules on the government and private companies to conduct more rigorous and detailed social consultations with local communities before seeking approval.

As is the case with the Sempra Energy pipeline in Sonora, if members of local communities are against the project and do not give consent prior to its construction, they can legally impede development.

Calgary-based Atco, which won rights to its first-ever Mexico pipeline project in 2014, has faced similar problems. Though only building a 16-km pipeline to transport natural gas to a power plant near the central Mexico town of Tula, local landowners protested construction in 2015 and stalled the project when it had just 1.5 km left to go. Now, almost four years after Atco was awarded the $50mn project, the pipeline remains unfinished.

In a September 20 report on Mexico’s natural gas industry, the National Hydrocarbons Commission (CNH) highlighted that improved relationships communities, such as providing them with better information ahead of a project’s undertaking, is essential as the country expands its national pipeline grid. Since 2012, Mexico has added nearly 4,000 km to its national pipeline network, and now has more than 15,000 km, which permit the import of 8.86bn ft³/day, up from 2.76bn ft³/day in 2012.

Mexico needs to “generate more awareness and provide more information” to communities directly impacted by natural gas projects, according to the CNH report. “This should be done through truthful information and by presenting the advantages offered for the community and the country, which can prevent social conflicts.”

Imports surge

The stalled projects come at a time when Mexico’s need for natural gas infrastructure options is at an all-time high. The country’s natural gas production has dropped by a third since 2010, while imports from the US have tripled. According the CNH report, between 2014 and 2017, Mexico’s natural gas imports from the US rose 72%.

In addition to forcing costly imports from the US, stalled pipeline projects create bottlenecks and inflate costs for residents and industrial hubs, such as Aguascalientes in central Mexico. There, a 440-km pipeline, from La Laguna to Aguascalientes, remains incomplete following a legal injunction in May by an environmental group.

The $500mn project, being developed by Mexican company Fermaca, will provide a vital connection between the country’s northern and central distribution networks and bring gas to Aguascalientes, home to major car manufacturing plants owned by Volkswagen and Kia. It was initially planned for completion in December 2017.

Amlo administration

On December 1, Mexico’s new president, Andres Manuel Lopez Obrador, known as Amlo, will take office. His comments about plans for the energy sector have the oil and natural gas industry concerned, as he has vowed to cancel upcoming shale field auctions and potentially pause all future exploration and production bid rounds for at least two years.

The incoming administration, which has promised less foreign dependence and more homegrown energy industry development, will also be tasked with addressing the community and social unrest generated by some of the natural gas pipeline projects, according to Rosales.

“The blockades in places like Sonora and Chihuahua have caused higher prices and will be an important challenge for the incoming administration,” Rosales said. “It is enormously valuable that there has already been a dialogue created there with the communities.”

Talks between members of the current government and incoming administration have been ongoing to assist with the transition and to address the existing social issues with certain projects, according to Rosales. Still, if the natural gas pipeline network continues to expand as anticipated throughout the country, it is likely more delays, suspensions and protests will follow.

“While transport infrastructure and natural gas distribution has increased significantly in recent years, it is necessary to continue advancing, with the objective to assure more coverage at the national level and improved availability of this hydrocarbon to final consumers,” the CNH recommended in its report. “In the event that natural gas coverage is increased in the country, it will have a positive impact on the national and regional development.”