CFE wants to alter gas supply contracts with U.S. pipeline developers

Monday, 04 March 2019
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Mexico’s state-run electric utility Comisión Federal de Electricidad (CFE) is aiming to renegotiate take-or-pay clauses it had agreed with North American gas pipeline developers, including TransCanada and Sempra’s IEnova. CFE is the anchor customer for most new pipelines under construction but the company's new CEO Manuel Bartlett wants to focus on hydropower, diesel and coal instead of gas-fired generation. 

The expansion of the U.S. cross-border pipeline network into Mexico had been spurred by the country’s 2013 energy reform with subsequent strong gas demand growth in the power sector, and the lower prices of U.S. pipeline gas compared with more expensive LNG imports.

However, the Mexican President Andrés Manuel López Obrador, who took office December 1, used a press conference this week to openly criticized the restructuring of CFE under the previous government. Mexico’s 2013 energy reform had ended the state’s monopoly over the energy sector, and CFEnergia had been created to import natural gas from the United States for use in the Mexican power sector.

Both the Mexican President and CFE head Manuel Bartelett criticized that CFEnergia has agreed to offtake a fixed gas capacity and make force majeure payments to pipeline developers like TransCanada, Sempra Energy subsidiary Infraestructura Energética Nova (IEnova) and Carso Energy.

Pipeline projects beset by delays

Projects of these three developers are facing delays amid legal disputes over land rights: TransCanada, for example, has postponed the targeted completion date of its Tuxpan-Tula and Tula-Villa de Reyes gas pipeline projects amid a dispute with local authorities in Hidalgo State over the routes. TransCanada confirmed that the two pipeline projects have exceeded the estimated construction time by over 56 months, and there are costs associated to these delays.

The Mexican conglomerate Carso Energy, another developer, has just pushed back the planned in-service date of its 472 MMcf/d Samalayuca-Sasabe pipeline from December 2018 to May 2019. Caro Energy is awaiting a court ruling on a right-of-way dispute over the pipeline in Chihuahua and Sonora states.

“If the pipelines can’t be built, as is happening with seven large gas pipelines, we have to pay the [developers], even though there is no gas,” the Mexican President said. “There are seven delayed gas pipelines that will mean an outlay over the medium term of $21 billion by the CFE.”

If the take-or-pay contracts continue, especially with the agreed force-majeure penalties, “CFE would truly be in a situation of collapse,” Bartlett said. The CFE chief executive stressed these gas import and transmission contracts need to be renegotiated, to “allows the transmission of [U.S. shale] gas to our country, but without these prices and these sanctions that are absolutely absurd.” 

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