Three new pipeline projects linking the United States and Mexico are expected to come online over the next three years, and the projects could prove a boon for Mexican industries. When completed, the pipelines will double the United States' natural gas export capacity to Mexico, possibly improving the cost competitiveness of Mexico's industrial, electricity and broader energy sectors by mitigating natural gas shortages and reining in spiking electricity prices. The pipelines will buy the Mexican government time until the country starts tapping its own shale gas reserves — development that is not expected to begin for several years, even if a comprehensive reform of the Mexican energy sector occurs. Until then, Mexico will be increasingly reliant on external sources, primarily the United States, for natural gas.
Over the past five years, a new energy dynamic has emerged between the United States and Mexico. Unable to keep production at pace with domestic consumption, Mexico has increasingly had to rely on imported natural gas. This trend has coincided with a shale gas boom in the United States, which has boosted U.S. natural gas production by 22 percent in just 15 years — from 534 billion cubic meters to 649 billion cubic meters — and made the United States a natural gas exporter for its North American neighbors.
This dynamic has allowed energy trade between Mexico and the United States to flourish. Between 2001 and 2011, Mexico's natural gas imports increased from 3.85 billion cubic meters to 18.07 billion cubic meters per year. Of this, roughly 80 percent has come from the United States via pipeline, while the remaining 20 percent has arrived as liquefied natural gas from Qatar, Nigeria and Peru. Over the same time period, the value of U.S. natural gas exports to Mexico has increased from $20 million to $1.7 billion annually.
To address Mexico's immediate needs for additional natural gas supplies, Mexican energy officials have delayed new liquefied natural gas projects and the plans to develop the country's significant shale gas reserves. Instead, the government is focusing on building the three major natural gas pipelines, which will bring relatively cheap U.S. natural gas to undersupplied parts of Mexico, especially the northern and central states. The pipelines will be linked together and integrated with existing natural gas pipeline networks. With greater access to cheap natural gas, the country is also pivoting away from traditional fuel/diesel thermoelectric power generation and focusing instead on natural gas-powered facilities. Many of these new natural gas projects will be located along the paths of the new pipelines.
Planned Pipelines
The three major natural gas projects currently being built in northern Mexico include the Northwest pipeline, servicing Sonora and Sinaloa states; the Chihuahua pipeline, servicing Chihuahua, Durango and Coahuila states; and the Los Ramones pipeline, servicing Tamaulipas, Nuevo Leon, San Luis Potosi, Aguascalientes, Guanajuato and Queretaro states.
The Northwest pipeline system will cover about 2,000 kilometers (1,250 miles) and transport some 21.5 million cubic meters of natural gas per day from near Tucson, Ariz., down Mexico's western coast to Mazatlan. The expanded Chihuahua pipeline will transport roughly 24 million cubic meters of natural gas per day 400 kilometers from the U.S. border to El Encino in central Chihuahua state, where another 530-kilometer-long pipeline will connect the system to the Northwest pipeline system at the Sinaloa city of Topolobampo. Lastly, the 1,200-kilometer-long Los Ramones pipeline will bring some 59.5 million cubic meters of natural gas per day from Texas and Louisiana to Mexico's emerging manufacturing zone in the central states. Total investment in these projects is expected to be around $8 billion, and the pipelines will increase annual import capacity by more than 36.5 billion cubic meters.
Unlike Mexico's upstream energy sector, which is closed off to competition and private ownership, the Mexican government opened the downstream and midstream natural gas sectors to private operators in 1995. This has allowed foreign companies such as U.S.-based Sempra Energy and Canada-based TransCanada to participate in the pipeline projects.
Status of the Projects
The first phase of the Northwest pipeline project, which stretches from the U.S.-Mexico border town of Sasabe, Ariz., to the Sonora state towns of Puerto Libertad and Guaymas, has also already begun and is expected to be operational by the end of 2015. The second phase, from Guaymas to El Oro, Sinaloa state, is also underway and expected to come online by the end of 2016. Sempra owns the rights to construct, own and operate both pipelines for 25 years. In November 2012, a subsidiary of TransCanada won the rights to build the final stretch of the pipeline from El Oro to Mazatlan, which is expected to come online by the end of 2016. While there has been some concern about U.S. firm Kinder Morgan clearing regulatory hurdles to build a connecting natural gas pipeline on the U.S. side of the border, the energy company is on schedule to attain permission from the Federal Energy Regulatory Commission to begin construction in the first quarter of 2014.
The expansion of the Chihuahua pipeline system began in December 2011, when a subsidiary of Mexican firm Fermaca won the rights to construct the first stretch from Ciudad Juarez to El Encino. It is slated for completion by mid-2013. In November 2012, a subsidiary of TransCanada won the rights to build, own and operate the Topolobampo-El Encino pipeline, which will connect the Northwest system with the more central Chihuahua pipelines. This is expected to come online by the end of 2016.
Meanwhile, the final phase of the Los Ramones project, which stretches from the U.S.-Mexico border to the Nuevo Leon city of Los Ramones, has already begun and is expected to be operational by the end of 2014. It is being built by a subsidiary of Mexican state-owned oil company Petroleos Mexicanos, or Pemex, called TAG Pipelines. On May 13, Pemex announced a call for bids for the second phase of the project, which stretches from Los Ramones to Aguascalientes. The full Los Ramones project is expected to be finished by 2015.
As with all major infrastructure projects, delays are almost certain to occur, but the deals have been signed and money has been apportioned, so it appears the pipelines will be completed relatively soon.
Effect on Mexican Industries
Natural gas shortages have compelled Mexico to purchase liquefied natural gas at rates nearly five times higher than the U.S. pipelined alternative. This, combined with reduced government subsidies, has led to considerable price hikes for electricity. Between 2002 and 2012, electricity prices, particularly for industry, have been on the rise. These increases were particularly steep in regions where the new pipelines are now being built. In Sonora, for example, average electricity costs increased from $0.05 to $0.50 per kilowatt hour. In Chihuahua, prices increased from $0.05 to $0.30 per kilowatt hour. And in Nuevo Leon, they increased from $0.05 to $1.04 per kilowatt hour. With greater access to cheap natural gas, electricity prices are likely to fall or at least hold steady, which would improve the bottom line of Mexico's two largest consumers of natural gas: the manufacturing sector and Pemex.
With access to cheap natural gas from the United States, the commodity will continue to replace fuel oil and diesel as a feedstock for electricity generation. Indeed, natural gas replaced fuel oil as the country's main feedstock for electricity generation in 2011. Mexico's Federal Electricity Commission has called for the construction of natural gas-fired power plants by 2024 to generate an additional 14,235 megawatts. Since Mexico's current capacity is 52,211 megawatts, this would represent a significant jump that would require an additional 100 million cubic meters of natural gas per day to operate, conveniently provided by the new pipelines.
Once operational, the three pipelines will reduce pressure on Pemex to increase natural gas production, freeing the company to focus attention on boosting upstream oil production. Even if Mexico makes progress in reforming its energy sector, it would be years before the country could provide enough natural gas domestically to satisfy growing demand. Barring a massive technological development or a glut in global liquefied natural gas supplies that leads to a significant drop in the price of liquefied natural gas, Mexico will continue to look to the north to meet its growing demand for cheap, pipelined energy.
Editor's note: An earlier version of this analysis misstated the electricity rates in Sonora, Chihuahua and Nuevo Leon.
