Mexico hopes transportation upgrades will accommodate expanded oil, gas supply

Nov. 4, 2015
The Mexican government is hoping a cash infusion from outside investors will bring the nation’s pipelines and transportation facilities into the 21st century, an absolute must considering the promise of increased production stemming from energy reform.

The Mexican government is hoping a cash infusion from outside investors will bring the nation’s pipelines and transportation facilities into the 21st century, an absolute must considering the promise of increased production stemming from energy reform.

Benjamin Torres-Barron, partner at multinational law firm Baker & McKenzie and leader of its energy, mining, and infrastructure practice group in Mexico, anticipates that awards from Round One bidding will “surely” offset declining fields, such as Cantarell, “considering that within those fields there are an estimated 3.8 [billion boe] 2P reserves and of 14.6 [billion boe] 3P reserves,” he said.

“This increase in the production, besides helping to satisfy constantly growing local demand, will most likely trigger the need for the construction of more infrastructure in the sector for transport, distribution, marketing, and retailing, but mainly for the storage, transportation, and refining of oil and oil byproducts as well as the transportation of natural gas,” he told OGJ last month.

According to a study by the Binational Center Library at Texas A&M International University, capital investment in Mexico’s midstream segment could total $17 billion over the next 5 years.

BlackRock’s role

US investment firms BlackRock Inc. and First Reserve Corp. took the opportunity to strike first among international companies, agreeing in March to acquire 45% interest in the Los Ramones Phase II North and Los Ramones Phase II South natural gas pipelines from PMI Comercio Internacional SA de CV, a wholly owned subsidiary of Petroleos Mexicanos (Pemex), for $900 million.

Collectively called the Los Ramones II projects, the 744 km of gas pipelines “will serve as critical energy infrastructure and part of a broader initiative to transport abundant, natural gas from the Eagle Ford shale in South Texas to meet central Mexico’s growing demand for natural gas,” the companies said in a news release announcing the deal.

BlackRock says it intends to establish a local infrastructure investment platform in Mexico. Over the summer, the firm and Pemex signed a memorandum of understanding whereby BlackRock will “provide industry expertise, risk management capabilities, and sources of financing” for oil and gas infrastructure projects in the country.

As part of that deal, BlackRock and Pemex recently reported plans to invest $700 million in the first phase of development of the Gulf Center project in the port of Tuxpan, Veracruz, a strategic location midway down the country’s eastern coast for importing gasoline and diesel.

Pemex says the project will reduce oil supply costs and complement production at its 315,000-b/d Miguel Hidalgo refinery in Tula, Hidalgo, and 245,000-b/d Antonio M. Amor refinery in Salamanca, Guanajuato. The initial phase involves the construction of two unloading docks, which will be connected to a 300,000-bbl storage and distribution terminal via a 318-km pipeline system.

“The opportunity for infrastructure in Mexico given recent reforms, positive demographics, and economic stability and resilience…has definitely drawn our attention and we look forward to exploring other opportunities in the near future,” Emilio Lozoya Austin, Pemex chief executive officer, said following the announcement in March.

E&Y Oil & Gas recently noted the several components that could make investing in Mexican oil and gas infrastructure attractive, including a growing and increasingly well-educated middle-class, the government’s plan to attract direct investment of $350 billion over the next 5 years from outside the country, and the Comision Federal de Electricidad’s (CFE) intention to expand gas import capacity substantially in the coming years.

Growing gas demand

Torres-Barron noted that gas demand in Mexico “has increased significantly in the last decade and it keeps growing at almost a 4% yearly rate,” which will result in transportation infrastructure being expanded in length by 84%.

Construction was recently completed on seven new pipeline projects, while six are currently under construction, five are slated to see construction begin soon, and seven more are under a bidding process, he said.

The estimated investment for all these new projects is $13 billion,” he said. Because “local natural gas production will surely increase as a result of the recent bids in Mexico, we can expect that more projects of this nature will be released in the following years.”

An overabundance of gas produced in the US by way of shale, including the Eagle Ford, provides an opportunity for Mexico to inexpensively import supply from across the border. “It is positive for the local natural gas users for Mexico to be able to import cheap natural gas from the US, as it is the only way in which the demand could be duly satisfied,” Torres-Barron said.

“These imports have triggered the expansion of natural gas importation and transportation infrastructure, which can also be deemed as a positive outcome. Mexico has added in the last several years 3.5 [bcfd] of import capacity, doubling its capacity to 7 [bcfd] so that it can take from the United States.”

He said the Mexican government is planning to add a further 5.8 bcfd of import capacity by 2018. “The expectations are that the amounts of US exports to Mexico [could] be doubled in the next 3 to 5 years. Although the ideal scenario would be for Mexico to be able to satisfy the local demand with its own resources, which is expected to be accomplished in [the] nondistant future,” said Torres-Barron.

Pemex and newly created transportation system operator National Center for Control of Natural Gas (Cenagas) recently signed a framework agreement for the transfer of assets comprising the national gas pipeline system and Naco-Hermosillo system.

The 9,000-km national gas pipeline system comprises 87 pipelines, with a capacity of 5 bcfd. The 300-km Naco-Hermosillo system has a capacity of 90 MMcfd.

While Torres-Barron also expects to see development of more infrastructure for storage, transportation, and refining of oil and oil byproducts, he believes another facilitator of further development is the opening of Mexico’s gasoline market, which will allow private firms to import and sell the product.

Buildout hurdles

As with investment in the upstream sector, directing money toward Mexico’s oil and gas infrastructure comes with plenty of risk to go along with opportunity. E&Y describes Mexico’s overall transportation and storage business as “fragmented and unsophisticated,” with aging crude infrastructure that leaves many parts of the country unserved. It also says that it sees little evidence that the government “would be amenable to a corporate-tax-free, master limited partnership structure.”

Torres-Barron noted the presence of legal hurdles faced by outside private investors, including access to and occupation of land. Even though “the Mexican hydrocarbons law provides preference to oil and gas infrastructure projects over any other activity on Mexican lands, it is common that the construction of [such] projects is stopped or delayed as a consequence of third parties submitting legal claims—‘amparos’—against such projects demanding [more] right over the lands,” he explained.

Clauses permitting administrative termination of production-sharing contracts awarded in the recent bid round are also seen as problematic, he said, because all investment—including in related infrastructure—is lost upon rescission.

In certain regions of Mexico, meanwhile, safety remains a major concern for outside investors, specifically in Tamaulipas and Nuevo Leon states in the northeast, where ongoing issues persist with drug dealing activity, he said.

“Lastly, with regard to the existing infrastructure in certain municipalities of Mexico, there are some issues related to fuel thievery—illegal taps—over which the Mexican government is already applying some strict policies,” Torres-Barron added.

Contact Matt Zborowski at [email protected].