Texas Freeze Tests Mexican Gas Strategy

The deadly storm that blanketed Texas in snow last week, knocking out power to millions of people across the region, has triggered a huge blame game in the US (related). South of the border in Mexico, it has prompted questions about the wisdom of an energy strategy based on growing reliance on piped gas imports from the US -- and could potentially lead to greater use of indigenous oil and coal at a time when most countries are looking to a lower-carbon future. Gas supply in Texas crashed as wellheads froze in subzero temperatures. That affected cross-border shipments to Mexico, sending the country on a hunt for emergency supplies of LNG. The country issued its first two LNG tenders of the year, each for one cargo. Mexican imports of Texas gas have increased as domestic production and LNG imports have fallen (WGI Jun.17'20). Imports from Texas averaged 5.5 billion cubic feet per day in November 2020, according to the US-based Energy Information Administration, versus an average of 5.1 Bcf/d in 2019. As US supply dried up last week -- Mexican state-run utility CFEnergia said shipments halted completely on Feb. 16 -- homes, commercial and industrial users in Mexico were affected, and the country had to turn to diesel, fuel oil and coal (WGI Apr.1'20). CFE also used controlled power cuts to avoid mass blackouts. Around 64% of Mexico’s electric generation is gas-fired, compared to 38% in the US, 21% in Japan and 8% in China, according to CFE Director Miguel Reyes Hernandez. Despite this, the country lacks storage capacity. CFE now says it is looking to build storage to minimize the negative impacts of "abrupt pricing movements and drastic variations in the volumes requested in Mexico to generate electricity." Energy Intelligence understands that the strategy being drawn up by the energy secretariat Sener envisages building capacity to meet two to three days' worth of demand. CFE also wants to ensure LNG imports are purchased at "competitive prices." Mexico favors cheap US piped gas over LNG imports, but it turns to the LNG spot market if necessary. Kpler data shows LNG imports totaled 1.88 million tons in 2020, 4.91 million tons in 2019 and 5.27 million tons in 2018. Given the lack of storage, this strategy will likely continue. "What happened in Texas was a very unprecedented event,” managing partner at consultancy Gas Energy Latin America Alvaro Rios Roca says. “I think the LNG terminals will serve as a backup for now and future similar events.” Building more storage would "be a low-cost approach to addressing reliability," says Ken Medlock, director of the center for energy studies at Rice University's Baker Institute for Public Policy. “Weather-driven demand anomalies don’t last a long time, so if you have enough in inventory to weather a storm for a week and a half you usually have more than enough.” But "developing new storage becomes an issue of logistics and takes time. Identifying suitable locations can be straightforward, but then you need to develop injection and withdrawal wells for underground facilities." Aboveground micro-storage would be quicker to construct, but more expensive on a unit cost basis. Energy firms remain cautious about investing under Andres Manuel Lopez Obrador, the left-wing populist president. Given falling domestic gas production, there are concerns the crisis could prompt greater reliance on less environmentally-friendly alternatives. “We can’t depend on one fuel [gas] for the generation of electric energy, we need to use all of them,” Obrador said last week. “For reasons of self-sufficiency and sovereignty, we still believe it’s important to strengthen state companies like CFE and Pemex. It's evident that it’s not possible to grant equal treatment to foreign private companies, given the example of the shortage that occurred in Texas.” Mexico plans to start exporting LNG via Sempra's Pacific Coast Energia Costa Azul project, sanctioned last year (WGI Dec.2'20). Sources say the shortages should not affect the project, whose feedstock will come from the Permian Basin in Texas. According to Medlock, Costa Azul “will provide a value proposition for the Permian gas that will help address flaring by providing a market outlet and so developers will still opt to push forward" (WGI Nov.18'20). Alexandra Chapman, London, and Pietro Pitts, Houston