Mexico midstream gas retains appeal amid oil rout

Mexico's midstream natural gas sector remains on an upswing at a time of tumbling oil prices and deep budget cuts.

Mexico, which is injecting at least $15bn to expand its national gas pipeline grid, is still attracting private-sector investors who are banking on the longevity of cheap US shale gas.

In November 2015, the latest available data, Mexico's state-run Pemex produced 6.315bn ft3/d (177mn m3/d) of gas, or 3.2pc less than a year ago. The same month, it imported 1.435bn ft3/d, nearly 30pc more than in November 2014. The import volume includes pipeline gas and LNG, but the former accounts for the lion´s share of the volume.

"We haven't been impacted by the fall in oil prices," says an executive with Italian contractor Bonatti, whose Mexican operations have been focusing on the construction of gas pipelines and gas compression stations. "Mexico is by far our best country. They need to make things happen really quickly, which helps," he added. Most projects are scheduled to be completed by the end of the current administration in late 2018.

At a time when other major Mexican hydrocarbons projects have been postponed and many contractors are under financial strain, the midstream gas sector offers contractors a respite.

Among the drivers behind Mexican gas demand is the government´s campaign to convert oil-fired power plants to natural gas.

Mexico´s gas grid is made up of more than 8,700km (5,406mi) of pipelines, with a total capacity of 5.107bn ft3/d, according to energy ministry figures.

By the end of president Enrique Peña Nieto's six-year tenure, Mexico will have constructed more than 5,000km of additional pipelines, including strategic cross-border lines, through 26 tenders.

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

Among the companies with a major presence is IEnova, the Mexican branch of US Sempra, which operates eight Mexican pipelines and has several other projects under way, including an ethane pipeline, the Los Ramones Norte gas pipeline and the San Isidro – Samalayuca and Ojinaga – El Encino gas pipelines.

TransCanada was awarded the $500mn Tuxpan–Tula gas pipeline contract with the CFE in November. The company told Argus it is currently evaluating each of the projects to be auctioned by the utility.

Fermaca, a longtime CFE contractor, and Mexican tycoon Carlos Slims' Carso, have also secured separate contracts. New actors are emerging too, starting with the CFE itself.

Under the energy reform enacted in 2014, which opened the oil, gas and power markets to private investment, the country's gas pipeline system was transferred to an independent operator, Cenagas, linked to the energy ministry.

Mexico's energy regulator CRE subsequently authorized the CFE to expand beyond the electricity sector into the sale of refined oil products and gas under a new subsidiary, CFEnergía.

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," says Raúl Monteforte, chief operating officer of Fermaca. Until now, he says, the regime was "very complex" and "not so efficient", with intermittent investment.