South Texas-Tuxpan pipeline to boost US gas export capacity to Mexico by 40%

GlobalData Energy 6 September 2019 (Last Updated September 6th, 2019 11:28)

Mexico’s government, led by President Lopez Obrador, which came to power in December 2018, opted to review the contracts for some planned pipelines saying the terms were unfair.

South Texas-Tuxpan pipeline to boost US gas export capacity to Mexico by 40%
Mexico’s government, led by President Lopez Obrador, which came to power in December 2018, opted to review the contracts for some planned pipelines saying the terms were unfair.

Mexico’s imports of natural gas from the US have averaged approximately 5 bcfd during the last two years and, currently, accounts for about 60 per cent of domestic natural gas demand. 

Most of this gas is imported via pipelines from the US where the increase in unconventional oil production has also led to an increase in the availability of gas, in particular in the state of Texas. As a result, additional pipeline capacity has been planned to move the excess supply to the US Gulf Coast and into Mexico’s pipeline network so that it can be transported to the main hubs of consumption in the southern country. 

Mexico’s government, led by President Lopez Obrador, which came to power in December 2018, opted to review the contracts for some planned pipelines saying the terms were unfair, thereby ushering in a period of negotiation to amend some clauses. 

The effect of the government’s decision to stall and review existing contracts was to send worrisome signals to pipeline operators and foreign investors alike as the prospect of a long arbitration became a reality. 

However, after a few months of negotiations, a new agreement was reached and although the details of the new terms are not yet publicly available, it appears the main adjustments were related to the tariffs to be paid over the life of the contract and to an extension of the contract period. 

Specifically, instead of increasing the tariff level on an annual basis, the contracts will now consider an average tariff for an initial period with two future tariff increments as well as an increase from 25 to 30 years for the contract.

Mexico imported volumes from the US vs available gas processed

Source: GlobalData Oil and Gas and Secretaría de Energía © GlobalData

There were seven pipelines originally affected by the Mexican renegotiations and involved companies TC Energy, Carso Energy, Fermaca and IEonova, a subsidiary of Sempra Energy. 

However, it is the South Texas-Tuxpan pipeline built by TC Energy and IEnova, which is the most relevant since it is designed to transport 2.6 bcfd of natural gas from Texas and is ready for operation, this represents a 40% increase in the US natural gas export capacity to Mexico. 

This pipeline is also important since it aims to replace Mexico’s southeast gas production that has been flowing to the central part of the county.