The combination of low gas prices and a growing economy has boosted natural gas demand in Mexico, but in spite of the state’s best efforts to quench the nation’s ever growing thirst for energy through a mixture of LNG and natural gas imports, there is an urgent need for development and extension of pipeline networks. The lack of supply has led to critical alerts issued by Pemex, and the power failures suffered by industrial companies as a result of gas shortages has already cost the Mexican economy billions of dollars. The ambitious Los Ramones pipeline project, which is part of Pemex’s medium and long term strategy for natural gas supply, should go some way in relieving the pressure.

President and CEO of Fermaca Fernando Calvillo Alvarez says, “in the future, Mexico will import around 35-40% of its gas from the US, as there is no incentive for the Mexican government to produce this hydrocarbon if it can buy the cheapest natural gas in the world from the US”. He goes on to say that if Mexico wants to have more interconnections at the border to import more gas, the country needs to plan ahead, just as Pemex is doing with the Los Ramones pipeline. He points out that Mexico currently has around five or six interconnections at the border, without counting the Chihuahua pipeline, and all these interconnections are connected to El Paso Natural Gas System.

Domestic demand for natural gas grew at 4% per year over the past five years while production increased by only 1.2% annually. Pemex has put forward a strategy involving Los Ramones for natural gas supply for the Medium and long term to compensate for this imbalance: according to Pemex documents made public, “Pemex will increase transportation capacity of pipelines in the Southern region of the United States which interconnect at the Mexican border, in the states of Tamaulipas and Chihuahua through services agreements. It will participate in special purpose companies that will develop 4 pipelines with a combined length of 1,000 km and an estimated investment of 55,000 million pesos. Pemex will also sign 2 investment agreements for the construction of two compressor stations in the SNG in Altamira and Soto La Marina, with a capacity of over 80,000 HP and estimated startup by 2014”.

The Los Ramones project was created to respond to the natural gas demands of the nation over the next 15 years. Pemex has labeled this project its largest energy infrastructure investment in 40 years and it is intended to eventually provide a fifth of the country’s total natural gas demand. The project also includes compression, metering and regulation stations, as well as a new control center. Pemex says the project will increase natural gas import capacity from around 1.3 billion cubic feet per day (cf/d) to about 3.4 billion cf/d.

The contracts for Los Ramones should have been awarded in October 2012, but in January 2013 Pemex decided to split the project into two parts, with the first being constructed by TAG Pipelines. The announcement for the winning bids for the second phase are set to be announced on July 22, and the winning bidder must provide a system capable of delivering the required flow by December 1, 2015 (date of commercial operation). The first phase of the Los Ramones pipeline project is scheduled to be up running by the end of 2014 and runs from the US-Mexico border to the town of Los Ramones, about  120 kilometers east of Monterrey. The second phase of Los Ramones should be completed by 2015 and will cover 740 km, running through the states of Tamaulipas, Nuevo Leon, San Luis Potosí, Guanajuato, Queretaro and Zacatecas, and could be extended into the states of Jalisco and Aguascalientes.

Pemex Los Ramones and North-West Pipelines (picture courtesy of 2b1stconsulting.com)

Pemex Los Ramones and North-West Pipelines (picture courtesy of 2b1stconsulting.com)

The project has not gone unnoticed, and some of the biggest players in the field, such as San Diego based Sempra, publicly expressed an interest in participating in the bidding process. One potential obstacle for companies could be the safety aspect though. “Under Calderón’s  Administration, the war on drugs had an extremely negative impact on the energy industry”, says Jose Luis Gutiérrez-Azpe, partner at the law firm Capín, Calderón, Ramiréz y Gutiérrez-Azpe S.C.,  “several pipeline construction projects, as well as other infrastructure projects had to be stopped because of security issues and concerns. Some of our clients that work over there have also suffered from these security and safety hurdles.” It may be of some comfort to the bidders to know that the project will count with the participation of the Mexican Armed Forces.

In the short term, striking the right balance between LNG imports, which are easily accessible, and cheaper natural gas, which are in limited supply, will be tough.  The probability of the tap being switched off by the US as a result of a breakdown in the US-Mexico relationship, although unlikely, should not be dismissed. However, PAN’s fresh plans to present an energy bill seeking constitutional changes to open Pemex to more competition and reverse eight years of falling output has been perfectly timed; it is exactly the type of positive challenge the government requires to swiftly deliver the right reforms. If these are correctly implemented, Mexico could avoid large dependency on imports for its domestic energy demands. Fernando Calvillo Alvarez states that it is impressive that that Mexico has vast energy resources, and yet the country is still importing gasoline, gas, LPG and diesel. That is certainly one way of putting it.

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