Heavy industry targets Mexico gas opening

Heavy industry is emerging as a vigorous participant in the opening of Mexico´s natural gas sector as it moves away from less efficient liquid fuels.

Luxembourg-based steelmaker ArcelorMittal and Mexican industrial conglomerates Industrias Peñoles and Grupo Alfa submitted bids in an initial round of an open season for gas pipeline capacity that closed on 10 March.

Gas pipeline administrator Cenagas had expected around six gas-trading companies to participate in the open season, a fraction of the turnout of 23 participants that included both industrial users and established traders such as BP and Shell Trading.

The industrial participation was a welcome surprise that signals the success of Mexico's energy reform so far, Cenagas technical management and planning director Eduardo Prud'homme told Argus.

"I thought a lot of the industrial companies would be more risk averse and stay with (state-owned) Pemex," says Prud'homme. "The fact that they have gone out on their own says they want more control over their contracts."

The participation of heavy industry reflects a growing trend toward gas-fired power generation and industrial operations, and away from more polluting fuel oil and diesel.

Gas use in the iron and steel industries jumped by 34pc from 104 petajoules (270mn cf/d) in 2010 to 140PJ in 2015, according to the latest energy ministry data, which includes both direct usage and related power generation.

Fuel oil and coking coal/petroleum coke use fell by 68pc to 1.81PJ and by 6.6pc to 60.4PJ, respectively, in the same period.

In the open season for gas pipeline capacity, the bids totaled 3.4mn GJ/d, exceeding total availability by around 30pc.

Pemex and state-owned utility CFE have been allocated 32pc of the national pipeline system's 6.2bn cf/d (62bn m³/yr) of capacity, while existing independent power producers (IPPs) have been assigned 1.7bn cf/d. This left 2.6bn cf/d (2.7mn GJ/d) for the open season.

Prud'homme attributed the larger-than-expected turnout to an extension of the bidding schedule as well as a significant expansion of information made available to participants.

"At the end of the day, it is a decision to get involved in something that is still unknown, unprecedented, but I think that lots of the industrial companies know that this is an unavoidable process," says Prud'homme.

Of the 24 injection points offered in the open season, bids for capacity on all import points were oversubscribed, while no bids were submitted for capacity on six of the 15 domestic injection points up for grabs.

The lack of bids on domestic injection points reflects declining gas production in Mexico, while import points were oversubscribed because of the value attributed to gas imported form the US, says Prud'homme.

While the number of bidders exceeded expectations, Cenagas had expected prices to be marginally higher.

Capacity will be awarded based on the best additional unitary cost per GJ. Cenagas says 56pc of the bids offered were in the range of Ps0.05/GJ to Ps1/GJ ($0.003/GJ to $0.05/GJ).

Prices offered by companies with previously acquired capacity rights such as IPPs were lower, with 94pc of bids up to Ps0.05/GJ, reflecting the fact that bidders knew their right to capacity was guaranteed.

In contrast, bids on oversubscribed injection points reached Ps5.11/GJ.

Participants can submit counterbids through 7 April. The winners will be notified on 8 May and one-year contracts for the reservation of capacity will be signed on 22 May-16 June, with reserved capacity available from 1 July.