Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
CFE International (CFEi), based in Houston, operates as a natural gas marketer and is an affiliated company of the Mexican state-owned electric utility, Comisión Federal de Electricidad (CFE). For nine years, it has operated to maximize value by trading energy and fuels in international marketplaces and providing a crucial role in marketing the natural gas delivered to most of the power generation plants in Mexico.
Its current business model still aims to secure natural gas supply to CFE's power generation plants and industry in Mexico at competitive prices. Instead of tendering new transportation service agreements, CFE promotes the development of "strategic alliances" to utilize excess capacity and develop new infrastructure.
At the end of February, CFEi issued a Request for Proposal (RFP) for a natural gas storage facility in the South Texas region on its website. The interested parties would be obliged to design, construct, operate, and maintain a facility with a minimum working gas capacity of 10,000,000 MMBtu. No technical solution is specified, but its size is typical for a salt cavern and seems relatively small for a depleted field. The company is seeking between 150,000 and 300,000 MMBtu/day for injection and 300,000 and 500,000 MMBtu/day for withdrawal.
The project would be for 20 years and interconnect with major South Texas facilities, ensuring compatibility with existing infrastructure. It explicitly mandates connections with the Nueces Header, Brownsville Pipeline, Texas Eastern Transmission (TETCO), Tennessee Gas Pipeline (TGP), NET Mexico Pipeline, and the Impulsora Pipeline. These pipelines are both under interstate and intrastate jurisdiction. Consequently, the Federal Energy Regulatory Commission rules would apply to the storage facility.
CFEi is not only seeking a service provider with the most convenient terms. It wants to hold an equity stake in this project and more. The RFP terms aim for up to 49% equity participation or equivalent profits alongside tariff rate discounts. This development approach emulates a public-private partnership with complex financial arrangements resulting from a quid pro quo logic where the public entity does not directly invest capital but commits to different forms of support, like guaranteeing usage or providing land rights, which helps attract private investors.
Although seemingly skewed towards the benefits of CFEi, this scheme offers some theoretical advantages for the developer that can make the project attractive. Having CFEi as an anchor shipper provides a guaranteed demand for storage capacity, which can significantly de-risk the project. This assurance is crucial for securing financing as it gives a clear revenue stream, making the project more bankable.
The presence of a high-profile anchor client like CFEi can make it easier for developers to secure financing. Lenders and investors are more likely to support projects with a committed customer, especially one with a strong credit rating or market presence, reducing the cost of capital. The potential overture for future collaboration is likely the most valuable intangible asset in the current political context. Successfully delivering a project for CFEi can pave the way for future collaborations and a stable business relationship in Texas and Mexico.
Mexico has relied heavily on natural gas imports from the United States for over a decade, so the CFEi RFP would be an essential part of its larger plan to improve its energy security through storage capacity. In March 2018, the Energy Ministry (Sener) announced a public policy to build underground storage facilities for strategic gas inventories in Mexico. This policy aimed to develop infrastructure capable of holding 45 Bcf of working gas by 2026. In that context, CFE's intentions to acquire capacity as a shipper and owner deserve analysis as a commercial decision and a piece of Mexico's public energy policy.
Despite its location, a storage project's potential to enhance Mexico's energy security lies in its capacity to provide a reliable and flexible supply of natural gas to the maximum number of final users. Reliability is crucial for Mexico, where energy demand continues to rise, and continuity is an essential consideration when choosing the physical location of new industrial locations in the promising nearshoring trend. Consequently, a storage facility in Texas, which is entitled to the more prominent natural gas supplier, can significantly contribute to Mexico's energy security by providing a backup source, mitigating deliverability risks, and supporting the country's economic objectives.
However, the success of such a project will depend on careful planning, regulatory compliance, and the management of potential political and operational challenges, especially considering the timing to accomplish the RFP outcome and the execution time after the final investment decision. The most apparent weakness is physical. A logistical disruption in the connection from the future storage facility to the pipelines on the Texas-Mexico border could pose significant risks to the reliability of natural gas supplies to Mexico. Any disruptive situation downstream of the storage site could lead to immediate supply shortages, impacting electricity generation and industrial processes regardless of the supplier, including CFE.
There is no way to consider that capacity as a strategic reserve because it fails to mitigate political risk in dire situations. Under normal conditions, cooperation defines the bilateral relationship between Mexico and the United States. But Winter Storm Uri is an excellent example of momentary undesirable political actions. A temporary or lengthy export ban like the one Governor Abbott announced could cause supply disruptions that are only preventable by having inventories in Mexico. The urgency will surely subside, and trade will continue, but politicians will not compensate for the interruption losses. A domestic facility would eliminate cross-border logistical risks, ensuring more direct and reliable access to stored natural gas.
In contrast, while building the storage facility in Mexico could enhance energy security, the lack of technical experience, deficiencies in the regulatory framework, and prevailing security conditions that endanger project execution are sensitive considerations that give development in Texas an advantageous position. A balanced approach, potentially including domestic and cross-border storage solutions, might offer Mexico the most strategic path forward to secure its energy future.
CFEi’s scheme seems innovative, can attract financing resources, and acceptably distributes risks and rewards. However, the concern about potential conflicts of interest between shareholders and shippers in the context of unbundling regulations, such as FERC Order 636, is valid. This regulation aimed to increase competition within the natural gas industry by ensuring open access and non-discrimination in storage services. The goal was to prevent companies that owned logistics infrastructure from favoring their gas sales over those of competitors. The simple notion that the storage capacity to serve Mexican users is entitled to the same agent with almost 100% of firm capacity in private pipelines sounds uninviting for a more competitive market.
To mitigate potential conflicts of interest, the operation of the storage facility would need to be transparent, with clear rules for access and usage that apply equally to all users, including CFEi. Regulatory oversight can enforce fairness and good governance. Another solution is implementing "Chinese walls," or information barriers, within the organization to separate the shipping operations from the investment or ownership aspects.
The key to managing this potential conflict of interest lies in designing the project's governance and operational model, ensuring that it aligns with regulatory requirements and promotes fair access and competition. CFEi and the project developer must work closely with regulatory bodies to ensure that the project complies with all relevant laws and regulations, thus safeguarding against any conflicts of interest.
The announced scheme is not a standard procedure, and dealing with its design conveys high transaction costs. The money to pay CFEi will eventually come from the end users but needs up-front financing. The cost of service may be high because the project's adherence to regulations requires careful consideration to safeguard its success in the long run. The project's cost of service will not be cheap.
The geological risks are considerable when developing an underground storage project. The feasibility studies and simulation exercises to design the equipment, assess the size, and discard any possibility of geological fracture take several months or years. No developer is eager to rely upon third-party studies or old assessments. Estimating risks takes a lot of time. Investors preparing a formal proposal before May 3 might find this a tough turnaround.
Regardless of the reasoning behind the rushed timeline, meeting the May 3 deadline will be challenging for all parties involved. It is an exciting process and is a clear signal that the Mexican market needs storage capacity and that CFE must be engaged in one way or another in the commercial solution. But maybe it is also an excellent opportunity to fine tune the idea, and perhaps involve Cenagas as another committed customer.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
