Mexico offers opportunities, challenges: experts
By Markham Watson
Mexico’s energy reform offers strong opportunities for growth, particularly in renewable energy and natural gas pipeline development, but challenges remain, attendees of the second annual University of Texas Energy Week learned Tuesday.
“I think Mexico drew from worldwide best practices in a number of different markets,” said Max Yzaguirre, CEO of the Yzaguirre Group, a consultancy based in the Austin, Texas, area. “We’re now in what I call the ‘blocking-and-tackling’ phase, which is execution, execution, execution.”
Barry Smitherman, a former Texas petroleum and utility regulator now a partner with the Houston law firm of Vinson & Elkins, said, “I am incredibly optimistic and excited about what can be achieved in Mexico.”
Investors, however, need to be convinced that “this is sustainable reform, that you aren’t going back on it, that it’s a sea change that has permanency,” Smitherman said.
Yzaguirre and Smitherman spoke during a panel about the day’s presentations regarding electricity and natural gas market reforms in Mexico. Among the day’s speakers was David Madero, general director of the Centro Nacional de Control De Gas Natural (CENAGAS).
CENAGAS is a new entity created by President Enrique Pena Nieto to enhance Mexico’s natural gas security, Madero said.
“We have a 6-Bcf/d system in Mexico with practically no gas storage capability,” Madero said. “We don’t have any redundancy. We don’t have the ability to move gas around.”
Pipeline deficits impede the Mexican government’s proposed massive expansion of natural gas generation capacity, Madero said.
“The main driving force for natural gas in Mexico is power generation,” Madero said. Mexico now relies largely on fuel oil, he said, which is more expensive and less clean than natural gas, to supply its roughly 68,400-MW generation fleet.
Natural gas imports to double in five years
CENAGAS has a five-year plan to encourage the development of pipeline capacity to areas not now served by natural gas and to bring in more natural gas from the US, which is expected to roughly double its exports from about 3 Bcf/d now to about 6 to 7 Bcf/d, Madero said.
“We’re hoping companies will build and operate their own transportation,” Madero said. “CENAGAS is just starting up, so we have very little capitalization.”
One challenge cited by Smitherman for US companies considering expanding in Mexico’s natural gas market is that US companies are accustomed to independent system operators for electricity, but not for natural gas, which was a model drawn from Spanish and French market designs.
Madero said pipeline developers would benefit by the reduced uncertainty about payment for operating their facilities.
Mexico hopes to develop its own shale gas reserves, which are estimated to be the fourth largest in the world, another speaker, Bob Gibb, an associate director of Navigant, said.
“Even though geologically it’s similar, that doesn’t mean it’s the same mix of technology to get it out of the ground,” Gibb said. “There’s going to be a learning curve, and there are costs that are going to be considered with that.”
Another speaker, Carlos Garcia, international business development manager at Lewis Energy Group, a San Antonio, Texas-based oil-and-gas company, said, “Long term, we are bullish on drilling in Mexico.”
However, Mexico’s natural gas demand growth has been so “dramatic” that it makes more sense to pipe it in over the next five years, Garcia said.
James Fowler, ICIS Mexico Energy Report editor, said the national electricity independent system operator, the Centro Nacional de Control de Energia (CENACE), has projected that natural gas demand would grow from about 7 Bcf/d in 2015 to about 9 Bcf/d in 2017 and about 10 Bcf/d by 2029.
Competing with Texas drilling opportunities
Garcia said his company is active in Mexico, but Mexico would have to ensure incentives were sufficient to entice US oil and gas companies to switch their focus from Texas, for example, where there are about 20,000 potential well sites, and where developers already understand the markets and incentives and have few security issues.
Norma de la Salud Alvarez Girard, director of the clean energy credits program at the Comision Reguladora de Energia, expressed confidence that her program would entice investment in clean energy, because the minimum price has been administratively set at an attractive level of about $20 per CEC, which is equivalent to about $20/MWh return for clean energy.
The Secretaria de Energia has set a goal of 25% clean energy by 2018, 35% by 2024 and 60% by 2050, Alvarez said. “The consumption side” has the obligation to prove compliance, Alvarez said, and the penalty is a fine plus the cost of a clean energy credit.
“We’re expecting a lot of investment on wind and solar,” Alvarez said.
Peter Nance, an energy market consulting principal at the ICF International, said companies from European nations, such as Spain’s Iberdrola and Abengoa, have been investing in generation in Mexico in anticipation of return percentages in the high single digits to the midteens, but US companies have been expecting higher returns.
“If you look out globally, there are very few good growth stories,” Nance said. “Mexico is the exception.”
As opportunities have diminished in what have been the faster growing economies in China and India, Nance indicated that Mexico’s attraction is likely to grow for US companies.
“I think the bottom line is that you will see more US participation in the coming years,” Nance said.