TC Energy plans $ 5 billion to $ 6 billion investment in natural gas in Mexico by 2025, citing strong fundamentals

TC Energy Corp. sees “a wealth of untapped demand” for natural gas in Mexico to unlock over the next decade, Stanley Chapman III, company president for US and Mexican pipelines said Wednesday.

“As demand on our backbone network in the heart of Mexico continues to emerge, future corridor expansions will be driven by the construction of new branch lines and interconnections to industrial and commercial end users, by the extension of our existing pipelines. to meet demand and by debottlenecking our existing infrastructure, ”Chapman told shareholders at the Canadian pipeline giant’s annual investor day. These three sets of opportunities could generate between $ 1 billion and $ 2 billion in new capital investment by 2025.

“The greatest opportunity, however, lies in the possibility of building a new offshore gas pipeline to currently undersupplied regions of Mexico such as Yucatán, which faces increasing demand for gas, and which the Mexican president has expressed. the wish for a new pipeline to be built, “Chapman said. This project” could be a capital investment of over $ 4 billion in itself.

The offshore gas pipeline would be developed with the national electricity company Comisión Federal de Electricidad (CFE). CFE is the primary shipper for TC’s five wholly-owned pipelines currently operating in Mexico, and for the 2.6 Bcf / d Texas-Tuxpan Sur offshore pipeline, which TC co-owns with San Diego-based Sempra, in California.

CFE also presented plans this week for the offshore pipeline, which would operate essentially as an extension of the Texas-Tuxpan Sur system.

If ignited, the pipeline “would provide desperately needed natural gas for power generation in southeastern Mexico,” Chapman said. The region faces chronic gas shortages, especially due to declining production from state-owned oil company Petróleos Mexicos, aka Pemex.

Altogether, “we expect economic growth and increased connectivity to new regions to trigger opportunities to expand our existing systems, as well as to build and operate additional infrastructure that could represent a 5 to 5 business opportunity. $ 6 billion by 2025, ”Chapman said. .

The five pipelines 100% owned by TC transport around 25% of the natural gas consumed in the country and are all supported by firm transport agreements with CFE.

The pipelines provide “a critical link between US gas supplies and key demand markets across Mexico,” Chapman said.

In addition, Texas-Tuxpan’s Sur now supplies 15% of Mexico’s gas imports, Chapman said. The submarine conduit “supports growing demand both in the industrial heartland and in southeastern Mexico,” Chapman said.

Strong fundamentals

Chapman said that, “perhaps even more than in the United States, our operations in Mexico are bolstered by strong fundamentals, which indicate the need for additional midstream infrastructure.

“We continue to play an important role in the development of this infrastructure… as highlighted by the start of the phased commissioning of our Villa de Reyes project at the end of this month. “

Mexico is the 15th largest economy in the world, “and demand for natural gas across the country is expected to increase by 65%, from 8 Bcf / d to 12 Bcf / d by the end of the decade, mainly due to the need more natural gas power plants. power generation, ”Chapman added.

He cited plans announced by CFE to build 10 new combined cycle power plants with a combined capacity of 6 GW by 2024. Natural gas is already the main source of electricity in Mexico, providing around 55% of production. total, and is expected to maintain this share until 2050, said Chapman.

“Given Mexico’s limited production base, a large portion of its requirements will continue to come from the United States, as imports are expected to increase nearly 50% to 9 billion cubic feet by the end of the year. decade, ”he said.

Chapman explained that TC takes “a comprehensive, long-term view of Mexico’s macroeconomic and energy fundamentals to guide our decisions for our business.

“This involves being honest about the risks associated with investing in the country, but also understanding this in the specific context of our Mexican assets.”

Despite investor concerns about the state-oriented energy policies of the current government of Mexico, Chapman said that “policies that aim to strengthen its public energy companies are not having the same impact on our business as they might have.” for the others.

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“We attribute this to the fact that our model is in sync with CFE’s priorities, in that we are not competing with them, but instead we are building the critical energy infrastructure that they so desperately need.

He said that while the risks associated with permits and access to land in Mexico “are very real, we believe they are manageable and ultimately not that different in magnitude than the types of risks encountered in our other geographies. “.

“Breakthrough” on blocked pipelines

Chapman told investors that in 2021, “we had a breakthrough in arbitration discussions related to our Villa de Reyes and Tula projects with CFE.”

Completion of the 886 million cubic feet per day pipelines was delayed due to negotiations with CFE over the terms of the underlying firm transmission capacity contracts signed under the previous government; permit and right-of-way issues with local authorities; and opposition from local indigenous groups.

Chapman noted a July 30 memorandum of understanding “to create a strategic alliance with CFE that encompasses several value propositions.” Most importantly, the MOU sets out a set of principles for resolving outstanding arbitration proceedings.

The MOU calls for “full recognition and recovery [of] all of the capital has been invested in the Villa de Reyes and Tula projects as these projects come on stream, ”Chapman said. The agreement would also consolidate all transport contracts for these projects into a single tariff agreement with a level toll, and another right-of-way and joint development agreement to complete the final section of the Tula project.

In addition, the memorandum of understanding lays the groundwork for the joint development of the new pipeline to the Yucatán.

Chapman said that “these principles are the springboards for a strategic alliance with CFE in which they would play a more active role in helping to resolve right-of-way and permitting issues related to our Tula pipeline in particular.”

TC and CFE are working to execute definitive agreements that will underpin the alliance, Chapman said, adding that TC presented CFE with “a win-win proposition and the ball is in their court.”

TC is working to bring the Villa de Reyes into full service by mid-2022, “provided we can continue to make progress in accessing the final sections of land,” Chapman said.

As a result of the MOU, “we continue to work in parallel with the utility company to resolve our pending arbitration proceeding, to assess rerouting alternatives to complete our Tuxpan-Tula project, and to improve competitiveness. commercial and operational of our main pipeline system in central Mexico. ,” he added.

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