Mexico's CFE weighing gas storage development as import shortfall leads to blackout

Mexico City — Mexican state utility CFE is considering construction of natural gas storage infrastructure after the interruption of supplies from Texas, due to the severe winter weather there, led to a massive power blackout in northern Mexican states.

"CFE will include storage in its commercial and operating strategy as a strategic short-term action to minimize the negative impacts of abrupt price fluctuations and drastic variations in requested volumes," CFE said in a statement late Feb. 15.

The lack of gas storage infrastructure in the country had been identified before. A couple of projects had actually being discussed by the previous administration of President Enrique Pena Nieto, but these were scrapped by the current government when it came into office in December 2018, observers told S&P Global Platts.

The Pena Nieto administration, which was in favor of foreign direct investment in Mexico's energy sector, had considered a floating regasification unit in the port of Pajaritos and an underground gas storage facility using a depleted salt cavern, said Victor Ramirez Cabrera, a former advisor on energy to the Mexican Senate, on Feb. 16.

"Both of the projects were cancelled by this administration [of current President Andres Manuel Lopez Obrador]," said Ramirez Cabrera, now executive director at Mexico's National Solar Energy Association. This shows serious mistakes in the government's vision because Mexico's short-term power infrastructure plan is based on gas, he said.

While not discussing CFE's consideration of gas storage facilities, Lopez Obrador Feb. 16 said Mexico intends to design a public policy to increase production to eventually become self-sufficient.

"The bet of previous administrations was to buy the gas abroad and Mexico stopped producing; there was corruption involved in these decisions," Lopez Obrador said during his daily press conference. Power outages in the north of Mexico will be fully resolved in the next couple of days, he added.

In December, state Pemex's gas output averaged 4.85 Bcf/d, according to data from the Energy Secretariat. Pemex's peak gas production, in January 2009, averaged 7.36 Bcf/d, according to the secretariat, or SENER.

Pemex decided to reduce its investments in gas production more than 10 years ago as costs for gas sourced from the US began to come down with the advent of supply from shale plays, Daniel Sanchez, a partner specialized in Mexico's energy industry at law firm Baker Mckenzie, told Platts.

"It made more sense for the company's management at the time to invest in pipelines to import the gas," Sanchez said.

No permanent impact on fuels market

Provided production in the US resumes in the next weeks and prices come down to normal levels, gas will again flow into Mexico and there will be no need to burn fuel oil or diesel in its place, observers said.

"Consumption of diesel, and fuel oil to a lesser extent, might see an increase during the [weather] event, but as the market normalizes gas prices will continue to be lower than diesel or fuel oil," said Rodrigo Rosas Isunza, senior research analyst at Wood Mackenzie.

The effect might take some time to be reflected in the market, Sanchez said, as Mexican law forces all gas-fired power plants built in the country in recent years to have alternative fuels, such as diesel or fuel oil, stored on site to support seven days of operation.