Editor’s Note: The Mexico Gas Price Index from NGI, a leader who tracks reform of the natural gas market in Mexico, features the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
Baja California is a very long peninsula, but in economic terms, especially at its southern end, the flow of goods and services makes it an island. Through the port of Pichilingue near La Paz, this region receives all kinds of basic supplies by sea, including fuels from Mazatlán, Topolobampo and Salina Cruz. From there, goods and fuels are distributed along the 621 mile strip that makes up Baja California Sur in Mexico.
The region’s production park provides energy which is still the most expensive in the country. When examining the typical values of the electricity market over the past year, during an average winter month, while in Monterrey, the nodal price is around 545 pesos / MWh ( around $ 26.5 / MWh) with maximums of 1,708 pesos / MWh, in La Paz prices are around 2,885 pesos / MWh in winter with maximum prices around 4,093 pesos / MWh. During peak hours during the summer, this ratio is similar. Electricity in La Paz is expensive even compared to areas where fuel supply conditions are critical. For example, the maximum price observed between January 2020 and June 2021 in Mérida was 7,302 pesos / MWh, a value lower than the maximum in La Paz of 8,571 pesos / MWh.
In addition, the fuel oil combustion at the Punta Prieta power station has been a source of complaints due to the effect of its emissions on the delicate desert environment around La Paz. As a result, for several years the Federal Electricity Commission (CFE) and the Department of Energy have attempted to extend the gasification strategy of the electricity sector to Baja California Sur. The difficulties are linked to the initial capital involved. The solutions explored included supplying electricity directly to the west coast of Mexico via an undersea cable, the construction of an undersea pipeline as a branch of the pipeline that connects Topolobampo to Mazatlán and liquefied natural gas (LNG) in boats.
For LNG, demand in the area does not justify a Manzanillo or Altamira scale project, which present considerable economic advantages. However, the price differential could well make a modest barge transport project profitable with a floating reception option. And that’s what happened.
Another example of its role as a leader in the natural gas industry, CFE acquired aero-derivative production equipment for a total capacity of 108 MW and requested a natural gas supply service for this equipment. It also converts existing plants to use natural gas. In March 2020, CFE opened a call for tenders for a natural gas supply service by any technology for delivery in Baja California Sur. CFE’s intention was to receive 50 MMcf / d in the first three years of operation and achieve 120 MMcf / d over the long term. His vision was to finance the project with his own resources. The pandemic has slowed things down, but these plans are now taking shape.
As defined in a contract signed at the end of March 2021, NFEnergía, a subsidiary of New Fortress Energy Inc., will be in charge of supplying natural gas for three years and six production units operated by CFE. The technological solution will consist of a supply chain that will include maritime and land elements. In its maritime reception segment, a cargo ship with a capacity of 135,000 m3 will transfer LNG to a floating storage unit. This offshore unit will bring operating flexibility, continuity and reliability to the supply plan in the face of fluctuations inherent in electrical dispatching. Land-based terminal units will supply gas to specialized vehicles which will transport the fuel to the production plants.
The complexity described here involves a list of environmental and technical permits that must be authorized by the Agencia de Seguridad, Energía y Ambiente (ASEA) and the Comision Reguladora de Energia (CRE). The project requires environmental impact statements and the preparation of industrial safety, operational safety and environmental protection management systems for the onshore terminal and for the regasification points of the production plants. Storage, regasification and distribution activities by means other than pipelines are activities that the Hydrocarbons Law determines as subject to CRE regulations and which require an authorization to operate. In recent days, CRE has granted authorizations for such activities, so the start of operations seems imminent.
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The delivery of gas according to this mode of production is unprecedented in the country and despite its complexity, can serve as a reference model for other projects. This is undoubtedly good news for the Baja California Sur region in economic and environmental terms. But its development also shows the immaturity of the Mexican electricity market. According to the theory that supported the opening of the energy sector in 2013, very high nodal prices are undeniable economic incentives for private investors to act in the production sector. But considerations linked to the resumption of investment over the long term have prevented a massive deployment of investment in the energy markets, which leaves CFE the only player able to ensure the scenario that brings economic certainty.
In its operational and development aspects, such a project may have economic merits but its expected value is uncertain given the structural risks that have appeared since 2018. In the electricity sector, CFE has an advantage over any other company. Regarding the granting of authorizations by CRE, it is important to note that the authorizations which were authorized to NFEnergía were remarkably rapid compared to the time generally observed today in the energy sector. There are stories of candidates who have not received answers regarding the procedures that began in the summer of 2020. The issue of permits is even more relevant today given the attempts to amend the law on hydrocarbons. .
The New Fortress project could well be an example of logistical imagination at the service of Yucatán, Guerrero, Chiapas or even Oaxaca. With a favorable environment, risk takers would not have to have ties to powerful state-owned enterprises. Users could take advantage of solutions that are not dependent on the national treasury. But for now, with the support of CFE, it is at least certain that Baja California will have access to a reliable supply of natural gas.
Prud’homme played a central role in the development of Cenagas, the national gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He started his career at the national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), becoming Chief Economist, and from July 2015 to February was ISO Director of Cenagas, where he oversaw the technical, commercial and economic management of the nascent integrated natural gas system (Sitrangas). Based in Mexico City, he heads the Mexican energy consultancy firm Gadex.
The opinions and positions expressed by Prud’homme do not necessarily reflect the opinions of NGI’s Mexican gas price index.