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Mexico Sur de Texas-Tuxpan natural gas line faces further delay as CFE seeks arbitration

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Mexico Sur de Texas-Tuxpan natural gas line faces further delay as CFE seeks arbitration

Houston — It is unlikely the Sur de Texas-Tuxpan natural gas pipeline offshore Mexico will begin operating if state power utility CFE proceeds with arbitration over capacity payments made while the already-delayed project was not operating, sources said.

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The 2.6 Bcf/d pipeline is being developed by TC Energy and IEnova through their Marina de Golfo joint venture. Marina de Golfo had declared a force majeure during construction and asserted the right to charge CFE for capacity based on the pipeline's original in-service date.

"As long as the arbitration is sub judice -- under process -- it is unlikely the pipeline will operate until negotiations end," said a source with legal knowledge of the situation.

Analysis: Sur de Texas-Tuxpan pipeline delays pressure Texas gas supply, prices

CFE sent Marina del Golfo the arbitration request Monday, requesting the nullification of the parties' responsibilities for force majeure clauses, as well as related reimbursement of fixed capacity payments applied under such events, IEnova said Tuesday in a statement.

CFE initially recognized capacity payments during the delayed start of the pipeline, according to the contract, but it now considers these improper, said IEnova, the Mexican subsidiary of US' Sempra Energy.

Queries Wednesday to CFE and IEnova for comment were not returned.

This is going to become one of the biggest arbitrage cases in the history of Mexico's gas market, as the project is worth $2.5 billion, the source said.

"It is unlikely [either] of the two sides [are] going to recede on the issue of capacity payments under force majeure circumstances," he said.

Sur de Texas-Tuxpan, also known as STTP, was initially scheduled to begin operations on October 2018. The contract was awarded in the summer of 2016.

The source agreed that one of CFE's biggest sources of discontent is the financial weight of all the capacity contracts it has signed, worth over $70 billion in the long term, compared with the cost of building these pipelines, at over $8 billion.

"There is the possibility of an amicable resolution where the [arbitration] is done in the shortest time," said the source. This is considering that the pipeline is a crucial asset to supply gas to regions with deficits, such as the Yucatan Peninsula, he added.

NEGOTIATING POWER

Edgar de Leon, an independent energy analyst in Mexico City, said it was unclear if CFE will lose negotiating power during the arbitration if it allows Sur de Texas-Tuxpan to begin operating. An ideal situation would be for the parties to agree that startup of the pipeline should not be an impediment to the arbitration, he said.

"Starting up the pipeline depends entirely on CFE's will," said de Leon, former the regulatory head of Mexico's gas system operator Cenagas.

Sur de Texas-Tuxpan is already completed, but under contractual requirements, CFE must issue a proof of acceptance of the in-service date informed by Marina de Golfo, IEnova said in the statement.

IEnova said that CFE set the terms of the transportation contracts and the contract for Sur de Texas-Tuxpan was awarded under a public auction.

"The arbitration request in no way precludes CFE from issuing the proof of acceptance for [Marina de Golfo] to render services to CFE," the company said.

A potential outcome is that the capacity contracts CFE held on new pipelines like Sur de Texas-Tuxpan could be transferred to Cenagas, allowing the power utility to offload this financial burden while the contractual costs are shared among all gas users in Mexico, de Leon said. Under the energy reform, CFE awarded the construction of these pipelines under transportation service contracts while Cenagas was being created, he added.

"The government has already signaled that Cenagas should manage a united national pipeline system, which would mean integrating these pipelines," de Leon said.

Sur de Texas-Tuxpan is one of Mexico's most significant infrastructure projects in recent years, increasing the country's import capacity for US gas by nearly 40%. The marine pipeline is a vital asset to ensure gas supply to regions that currently suffer from a supply deficit, IEnova has said.

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com