Mexico City — Mexico said it will begin construction of a 16-kilometer (10-mile) pipeline that will supply natural gas to the Yucatan Peninsula to produce electricity more cheaply. But experts told S&P Global Platts that prices in the Maya region will remain high for the foreseeable future, as more infrastructure is still needed.
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The Mexican president announced over the weekend a $25 million project called Cuxtal I, which will be built out by French utility Engie and will be completed by August.
The Yucatan region, which includes the states of Campeche, Yucatan and Quintana Roo, generates its electricity at five plants with natural gas from Nuevo Pemex, a processing center in neighboring Tabasco owned by the State oil company. However, gas production has declined since 2010 forcing CFE, the State utility, to use fuel oil instead, increasing costs.
Platts Analytics data shows that while processing plant deliveries to the Mayakan Pipeline have increased to 90 MMcf/d in 2020 so far - nearly double from levels seen in 2018 and 2019 – the decline in power prices is also attributed to a collapse in global LNG prices.
The Yucatan region has registered the second highest average prices in the country since 2017, only second to those in the Baja California Sur CENACE control region, according to data compiled by S&P Global Platts Analytics.
SENER data shows that Mexico LNG prices averaged $5.02/MMBtu in 2019, a significant decline from the 2018 average of $9.49/MMBtu.
Less LNG supply and lower import volumes have reduced the marginal cost of energy in Mexico's power markets but the Peninsula region may continue to set the highest power price level across mainland Mexico.
Data presented by the government during the announcement shows that only two of the five plants at the Peninsula received gas during 2019. Merida III got 10 MMcf/d out of the 80 MMcf/d per day it needs. Valladolid III got 42 out of 90 MMcf/d. Merida II, Campeche CC and Valladolid FCP did not get any at all.
"A drop in prices will likely take at least a couple of years" said Ramses Pech, an independent consultant in Mexico City. "The first phase of the project will likely only replace the gas that Pemex has not been providing."
Platts Analytics data shows that the Peninsula region has received roughly half of it's electricity supply via a single electricity transmission line, increasing power price LMP congestion and loss charges.
With more gas supply allowing the Peninsula to generate more electricity locally, a reduction in transmission constraints may significantly lower power prices.
As a first phase, Cuxtal I will connect Sistrangas, the national system, with the Mayakan pipeline, a 780-kilometer pipeline also owned by Engie that takes gas from a Pemex processing center. Engie owns Mayakan in partnership with GE Capital and EXI CKD, a specialist energy investment fund.
Late in 2019, Mexico began importing cheap gas from Texas via a 2.6 Bcf/d marine pipeline built by Canada´s TC Energy and IEnova, the Mexico unit of Sempra Energy. The gas is delivered at a terminal in the port of Tuxpan, which is connected to Sistrangas.
"In order to be able to take the cheap gas that the marine pipeline brings from Texas, the government will first have to build compression plants from Veracruz," said David Madero, who directs Aclaim Energy, a consultancy in Mexico City.
For the second phase, the plan is to further extend the pipeline another 158 kilometers to take gas to the Cancun area.
Cuxtal I, 36 inches in diameter, will initially provide CFE with 240 MMcf/d, but it is expected to ramp up supply to 500 MMcf/d to meet the demand of two combined-cycle power plants to be built in the coming years.
According to official data from national grid administrator CENACE, Yucatan has an electricity deficit of as much as 1,500 MW during the summer, when demand peaks.