Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
At the end of August, Cenagas will celebrate its 10th anniversary. Its creation was based around it becoming the central player in the Mexican natural gas market. It would be a firm-based capacity manager for the strategic pipeline network, the Sistrangas, an economic agent capable of financing the expansion and reinforcement of Mexico's energy infrastructure. With dual functions as technical manager and transporter, Cenagas still has legal authority to take charge of the coordination and development of cross-border pipelines, that is, to optimize the entry of U.S. natural gas into the country through open access connectivity.
The Reynosa bypass pipeline project is an important technical initiative to improve redundancy in natural gas imports, since the aggregate capacity of the cross-border pipelines in the area is underutilized. Maximum daily quantities cannot be increased, and it is only possible to see injection peaks into the system with interruptible contracts. This inefficiency is in turn transferred to the 48-inch diameter trunk line that continues along the Gulf Coast, where the Soto la Marina and Altamira compression stations are only occasionally utilized. This is because of Reynosa’s irregular urban development, which has impacted the layout of the Sistrangas line in the area. This prevents the older pipeline from operating in higher pressure ranges needed according to Cenagas rules.
The Reynosa bypass project is essentially a pipeline with a new route from the reception point at the southern tip of Texas Eastern Transmission LP’s (Tetco) and Tennessee Gas Pipeline Co. LLC’s systems that will decongest gas flow and allow it to reach Station 19, just before the start of the Tamaulipas Pipelines, part of the Sistrangas system.
Given the relevance of the pressure issue, the security conditions of the area and the density of existing infrastructure, the Reynosa bypass project is very complex. It will require that the execution of work, the design and the procurement of materials occur under demanding circumstances and during restricted hours. Building pipelines in the border area in Mexican territory, however, is not unprecedented. The Ramones Phase I project, Gasoductos del Río, Gasoducto Nueva Era and even Kinder Morgan Monterrey have all been successfully accomplished. But they were private experiences and, therefore, outside the public works scheme traditionally used by the state-owned companies Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE).
Cenagas put out to tender the engineering, procurement and construction works for the Reynosa project under an open international scheme, but the expressed interest in participating materialized in only two offers from national companies. The resulting contract runs from September 19, 2023, to July 31, 2025, and is for an amount of $145 million for the 56-kilometer (34-mile), 24-inch diameter pipeline. The financing of these resources comes from Cenagas.
The construction of this natural gas pipeline would significantly improve the connectivity and efficiency of the entire Sistrangas, which contributes to national energy security.
However, it is important to contrast this decision with other possible technical solutions that were considered in the past. One of the revised versions of the first five-year Sistrangas expansion plan included a Reynosa bypass project with a more ambitious scope. This plan sought not only to improve connectivity with the Tetco system, owned by Enbridge Inc., but would also have served as a starting point to improve the physical integrity of the pipeline further west of Station 19. It would have, therefore, increased flows to the Ramones compression station and the city of Monterrey. Its implementation was planned in a manner analogous to the schemes that served to anchor the private pipelines that are part of the integrated system. That is, with a long-term transportation contract whose capacity would be allocated by Cenagas.
The comparison between these approaches reveals the differences in energy policy and economic model between the administration pre-2018 and today. And for this reason, the Reynosa bypass project can also serve as a reference model for what is to come for the agents of the natural gas industry. The present approach reflects a position of centralization of decisions regarding the development of energy infrastructure, with priority given to state ownership of the assets and their direct management. It is not clear whether this idea will achieve greater efficiency.
However, this approach implies a significant opportunity cost.
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When the Reynosa bypass project was included in the Sistrangas expansion project portfolio, there were several companies in the industry willing to allocate resources on a scale that could exceed the potential of the current scope of the project – in a context of a government with limited resources. In turn, Cenagas, and the treasury, could be used to develop pipelines in less attractive areas, such as in the south of the country. There is more room for the state to correct the market’s failure where there is a palpable need for infrastructure and private investment is less likely. But prioritizing the use of public resources for projects in economically more attractive areas could be seen as a regressive stance, given that regions with critical development needs are then left unattended. For example, despite the countless mentions of the trans-isthmus pipeline, it seems that this project has not convinced private investors and will have a more limited scope, with a compression adjustment, and not a new pipeline.
Furthermore, as it is a public works contract, Cenagas assumes considerable risks due to the thoroughness of the technical specifications required. Such interventionism limits the responsibility of the construction company, which makes risk management difficult if the contract fails to achieve guarantees to encourage efficient and transparent execution. For its part, since contractors must comply with multiple standards – which are sometimes unjustified – their risks can only be minimized by increasing costs or neglecting resources in aspects not explicitly required.
Ultimately, the success or failure of the Reynosa bypass project will decide whether Cenagas will gain any relevance in the coming years, given that CFE, with emblematic projects, has presented itself to the eyes of authorities as the champion of the state.
Cenagas has worked on conceptualizing operational storage projects based on liquefied natural gas. Its directors and technical officers have expressed their intention to build storage facilities, particularly in the southeast. If strategic planning based on cost-benefit analysis occurs, it is in the interest of the industry and the country in general that it is Cenagas and not CFE that is in charge of the effective execution of storage facilities. But for natural gas infrastructure to develop in a sustainable and beneficial manner, the “cash surpluses from previous years” are not enough to anchor it. It is necessary to return to the conceptualization of the technical manager as a guarantor of investments through the expansion of the user base. That is what open access was for. That is why Cenagas was invented. It was not given resources and powers to end up imitating Pemex.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
