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TC Energy faces Mexico gas project headwinds amid strong demand for its services

TC Energy Corp. began to see strong demand in Canada and the U.S. for capacity on its natural gas pipelines amid plans for further expansions, even as it continues to face challenges with three projects in Mexico, one of which has seen completion delayed for a year, executives said Aug. 1.

The company, formerly known as TransCanada, reported a 43% jump in second-quarter profit on overall revenue and transportation volume gains and said it sees further growth ahead driven by U.S. liquefaction terminal additions.

To meet its growth goals, TC has been shedding billions of dollars in noncore assets, including some midstream facilities in the Appalachian Basin. Moreover, it has been trying to seize the opportunities associated with increasing natural gas pipeline flows from Texas to Mexico by adding more capacity south of the border.

"Demand for our systems has never been greater," CEO Russ Girling said during a conference call with analysts to discuss the earnings report.

Problems with construction and regulatory issues have created some challenges in Mexico, however, providing perhaps the only headwind in TC's outlook.

The company repeated what it said in May, that construction for the central segment of the Tula project has been delayed due to a lack of movement from Mexican energy officials in advancing indigenous consultations related to the project. But this time, it said project completion has been revised to the end of 2021, a full year later than what it said in May.

Meanwhile, construction of the Villa de Reyes project continues, but the project has experienced force majeure events that have delayed the schedule, TC said. A phased in-service sequence is expected to begin late this year, similar to expectations the company stated in May.

As for the third project in Mexico, TC completed construction and commissioning activities in June for the 482-mile Sur de Texas pipeline, which has the capacity to provide up to 2.6 Bcf/d of natural gas supply to Mexico directly from the U.S. TC said it has communicated the pipeline's readiness for operation to both the regulator, Comisión Reguladora de Energía, and its customer, Comisión Federal de Electricidad, or CFE.

But as of Aug. 1, it was still waiting for CFE's acknowledgment before it can begin service. Separately, TC said it was addressing requests for arbitration filed by CFE in June under the Sur de Texas, Villa de Reyes and Tula contracts, seeking nullification of clauses that govern the parties' responsibilities in instances of force majeure and require reimbursement of fixed capacity payments.

"In our view, the contracts were properly established in accordance with all original bid and regulatory requirements and remain valid and enforceable," TC said in a statement accompanying its earnings release. "We will defend them as necessary through the arbitration proceedings."

Spanning more than 155 miles, the Tula pipeline will transport natural gas from Tuxpan in the state of Veracruz to Puebla and Hidalgo, supplying the central and west regions of Mexico. The Villa de Reyes pipeline will run 261 miles from Tula to Villa de Reyes, San Luis Potosí, moving natural gas to power generation facilities in Central Mexico.

Cross-border flows

The challenges for TC in Mexico come as total U.S. pipeline exports to Mexico rose to nearly 5.3 Bcf/d in July, an 8% increase over 2018, hitting a single-day all-time high of 5.5 Bcf/d on July 25, S&P Global Platts Analytics data showed.

Despite this increase, Mexico's gas pipeline network remains fundamentally constrained in the Southern and Peninsular regions, which will continue to limit total pipeline import growth and keep Mexico reliant on LNG imports. Platts Analytics expects that U.S. pipeline exports to Mexico will peak at 5.4 Bcf/d in August before declining back to roughly 5.2 Bcf/d in November as the winter demand lull sets in.

In the U.S., TC in the second quarter approved the East Lateral XPress project, an expansion on the Columbia Gulf system that will connect supply to Gulf Coast LNG export markets. Subject to a positive customer final investment decision, the anticipated in-service is 2022. Elsewhere, TC's Louisiana XPress and Grand Chenier XPress projects will connect nearly 2 Bcf/d of supply to Gulf Coast LNG export facilities. Both projects have now obtained necessary customer approvals or waivers of conditions allowing the projects to move to the execution phase, TC said.

Louisiana XPress is expected in service in 2022, while Grand Chenier is targeted for in-service on a phased-in basis in 2021 and 2022.

Maya Weber and Ross Wyneo are reporters with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.