Expand gas the right way

Mexico

Enagás general director Alberto Escofet talks to TOGY about the nature of Mexico’s midstream sector at a time of great change in the country’s energy industry. Escofet discusses steps that companies can take to reduce obstacles in the new operating environment, particularly with regards to bidding for projects, interacting with communities and collaborating with other institutions and companies.

What is the focus of Enagás’ operations in 2016?
At the end of last year, we commissioned the compression station in Soto La Marina, which is now on line. We finished the construction phase and have been operating the station since December 2015. The Morelos pipeline is finished and connected to the Pemex pipelines, and we are ready to service the Federal Electricity Commission [CFE]. Both were finished around the same time, so we are very pleased that we already have two infrastructure projects in commercial phases.
Besides that, we’ve been working on our participation in the TLA Altamira LNG Terminal to take advantage of that infrastructure regarding strategic or operational storage. This is something we will need in the future to have the best natural gas feasibility.
We signed a memorandum of understanding at the end of 2015 with the National Centre for Natural Gas Control [Cenagas] to work together to find a use for the regasification plant and its storage capacity to enhance the feasibility of the natural gas system. The memorandum of understanding with Cenagas is a collaboration in which we will be working together to find out how the natural gas system in Mexico can make better use of the storage capacity at Altamira.
Last year was very important, and we are starting 2016 with these three pieces of infrastructure and very good ideas for the near future.

Are you working with other partners in Mexico right now?
We built the Morelos pipeline and prepared bid offers for the Ojinaga-El Encino, El Encino-La Laguna and Tuxpan-Tula pipelines with Elecnor.
Elecnor has been a key player in the success of the Morelos pipeline. It has been here for many years and has a very deep knowledge of Mexico and lots of expertise in local matters. Specifically for Morelos, the company was key to being successful. Right now we are working on our own.

How would you characterise the Mexican market?
The market is becoming very competitive, and that is for the good of the market, the CFE, and the offtakers, as they can achieve better prices for the transport of natural gas. For us, the challenge is bigger because the market is more competitive. We need to be more competitive.
There are different matters in which you need to be clearer, such as technical solutions that you need to do better engineering jobs. One of the reasons for this is because you are entering interconnected systems, not just an isolated pipeline. You need to visualise the specific project as part of a whole system. That means the engineering and design of the technical solutions need to be more precise. You also need to take some commercial risks.

What should companies do to become more competitive in this market?
The added demand for natural gas in the area of influence of the pipelines can give you some points that will make you more or less competitive. It’s not just about the specifications or needs specified by the CFE, which is the anchor of the pipeline. It’s also about what more you can do if you already have the infrastructure to develop the areas of influence.
That is something that has been happening in the last bidding process, which makes the whole process more competitive. These last two issues are becoming more important to meet the competitive field requirements.
In the past, three or five years ago, things were different because projects were more about developing isolated pipelines. It was more straightforward with regards to decision-making.
Now you need to go deeper in the engineering and commercial analysis, as well as market studies. Companies have to do their homework to be competitive. This is positive because you have competitors in an open market and this benefits offtakers and users of natural gas.
If you optimise, you can achieve better prices. That’s the idea. Efficiency in the operation of the infrastructure is another point to take into account. The optimisation of technical solutions, plus the commercial scope of the infrastructure gives you lower rates.
In each bid, the present value has been decreasing. That means if you don’t want to lose profitability in your investment, you need to become more efficient or optimise capital expenditure to maintain the same profitability at a lower rate.
This is what has been happening with the market the last few years. It’s more competitive, and you need to be more precise and think more about optimisation than before.

Has the growing level of interconnection between US and Mexican pipeline infrastructure increased efficiencies?
Most of the natural gas comes from the USA, besides what can be produced in Mexico, but most of it comes from the border. That will differentiate the rates of transport from one corridor to the other. The pipelines are different.
Optimisation has to do with the pipeline routes, avoiding problems in the compression stations and optimising that to be more efficient. That depends on the origin of the natural gas that is being transported.
If you think of this as a system, there are other variables to take into account, because you are not working alone. There may be several inputs in your pipelines, so you need to visualise this more as an integrated system than a stand-alone project.

One of the biggest issues raised by companies building pipelines, as well as firms that help transportation companies build them, is the issue of the right of way. What are your thoughts on this issue?
That’s something that needs to be worked out. The new law makes it clearer, but some things may be seen as complex. From my point of view, it is much clearer, and there are more resources to solve problems.
If you do your homework, if you start working on time and doing the things that are supposed to be done, the regulation and the law can support you in avoiding problems. It is all about planning, using specialised resources that have the expertise to do all that paperwork, talking to communities and socialising the process of the project.
You need to take into account the intrinsic characteristics of Mexico. It is a big country and it is not the same everywhere. There are communities that still have their own customs and habits, and you need to be respectful of them. People are trying to make money from their land, and their land is very important to them. You have to weight each side to avoid entering into any dispute as much as you can.
That doesn’t mean you won’t have some troubles, but at least you have the legal resources to help you solve those problems. Of course, at the end of the day, there will be some cases – only a few, in my opinion – that will be force majeure situations.

Is security still an issue for project execution in some places today?
At some sites, yes. Working in the state of Tamaulipas has been very complicated due to security problems, but there are other parts of the country where security is not an issue. It is definitely something to take into account, but in some places more than others.
The security issue is something that is not new. Companies can face difficult situations and draw from previous lessons to manage them. There are tools and entities that can help deal with security issues. One should be prepared for that.
It is a challenge to customise your solutions for specific regions of the country, not only with engineering, design or optics, but with what is all around: procurement, logistics and efficiencies, avoiding security problems and approaching communities to let them know that this is for the good of the community. Or if they have special requirements, they can let you know beforehand, and then you make your solution more adequate, taking into account their requirements.
Or you can skip that entirely, but we try to avoid that. If a situation arises once you are there, then it is too late, and that’s when things blow out. It is all about anticipating and using intelligent solutions for the whole project before you plan to start your operation.

Are the political and regulatory environments similar with regards to the risks and costs involved in executing projects across different geographical regions?
Each region of the country has its own particularities that you need to understand to create your approach and solutions to avoid problems. In general, it is 80% the same everywhere you go, but that 20% makes a difference from one project to another.
You need to have the ability to foresee and anticipate those situations. Nowadays, we have enough knowledge about what to do to avoid, at least, the problems of the past. Maybe we will find new problems. And all the new laws and regulations are supporting tools to solve many of the problems that complicated many projects in the past.

What has been the impact of the establishment of Cenagas on monitoring the transportation system?
We haven’t seen Cenagas in action yet. It is already working and it exists, but it’s not fully operational. Cenagas will be the system operator. It will assure the availability of natural gas, as well as open and close pipelines. It will give efficiency and certainty of the supply to the market.
Cenagas will not be an issue for transportation companies. They will continue operating pipelines as usual. The centre will be a kind of guardian. When problems arise, it will come in to open and close pipelines, as well as manage operations. It’s a good thing.
Cenagas is quite similar to what Enagás is in Spain, and it works perfectly. You have a Cenagas transport entity and you have the Cenagas system operator, each working separately. The system operator gives you certainty, efficiency and other advantages, but it is not the operator of the pipeline. The transportation companies will still operate the pipelines, much as they do today.

Given the increasing interconnectivity and availability of cheaper gas from the US market, what impact will sea access have on the Mexican market?
Once the pipelines under construction are finished, LNG will be used for specific purposes in isolated areas. Most of  the natural gas will come through pipelines. But the Altamira LNG Terminal will have a new and promising future as strategic storage facility and LNG hub.

Given the opportunities for building new pipelines and the changes in the market, what do you see as the role of Enagás in Mexico in the coming years?
We are working on pipeline proposals that will be presented at the end of February or March, Tula-Villa Reyes, and Villa Reyes-Guadalajara. We are also considering our participation in the South of Texas-Tuxpan pipeline, as well as in  future pipeline projects, such as those included in the five-year plan published by Cenagas.
Enagás is in Mexico for the long term and we will become a strategic player, that’s for sure. I don’t know whether we will be awarded upcoming pipeline projects, but we plan to be here for many years as part of the Mexican natural gas system.
In the short term, we expect to be successful with some of those projects. However, that is not the only thing that Enagás is looking for in Mexico. We have other possibilities.

What has been your experience working with the CFE as an operator?
The CFE is very institutional and transparent. It does its job and you can easily work things out with the commission. Overall, it has been a good experience and provides a lot of certainty, due to its sophisticated and strong decision-making processes.

Who are Enagás’ key competitors?
Other companies have been here for a long time ago. They are IEnova, TransCanada and Fermaca. There are not too many new players. Carso Energy is the new kid on the block.

How important is Mexico for Enagás’?
Outside of Spain, Mexico and Peru are the most important countries for Enagás. In Peru, we have big investments: Gasoducto Sur Peruano and Transportadora de Gas del Perú, which is going well. It is a very important investment.
Enagás has invested more into Peru than in Mexico up until now, but Mexico has the widest expansion. It’s a very strategic country, because it is right below the USA. It was important to enter into the LNG market, for example. Enagás is opening an office in Houston, so Mexico was important from many points of view. It’s a strategic position and the reason we want to be here in a long run. I don’t know if we will be awarded one, two or three more pipelines, but either way, Enagás has many things to work on.

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