Abbott urges Mexico to halt gas flap
Texas Gov. Greg Abbott issued a letter asking Mexican President Andres Manuel Lopez-Obrador to end a political stalemate that has left at least $3 billion of payments and contracts for several natural gas pipelines in limbo.
Lopez-Obrador has launched a review and requested international arbitration proceedings to undo the payments and strike force majeure clauses on contracts for seven natural gas pipelines that were built by four companies across Mexico. The pipelines, either idle or incomplete, are not delivering gas, but the clauses allowed the companies to collect full payment due to delays and circumstances beyond their control.
Under Lopez-Obrador’s predecessor Enrique Peña-Nieto, Mexico’s Federal Electricity Commission awarded multibillion dollar pipeline contracts to Canadian pipeline operator TC Energy, a Mexican subsidiary of San Diego utility company Sempra Energy and Mexican construction firms Grupo Carso and Fermaca.
The goal was to switch Mexico’s coal and oil-fired power plants to cleaner-burning natural gas, but the seven projects faced various delays ranging from the weather and landowner issues to hostility from indigenous groups — and even alleged acts of extortion at the hands of local government officials.
In a two-page letter, Abbott urged Lopez-Obrador to quickly wrap up his administration’s review of the projects and allow the pipelines to start moving surplus natural gas from Texas to power plants and factories in south of the
border.
“Lingering questions about Mexico-U.S.-Canada project delays and longstanding contracts and business commitments could negatively impact our economies for years to come,” Abbott wrote. “As you know, the United States–Mexico–Canada Agreement, or USMCA, has yet to be ratified by all three nations. NAFTA violations or the failure to honor longstanding contracts could jeopardize the USMCA.”
Three of the seven projects were built to move natural gas from Texas to power plants and other destinations in Mexico.
Operating under the name TransCanada at the time, TC Energy entered into a joint venture with IEnova, the Mexican subsidiary of Sempra Energy, to build the underwater Sur de Texas-Tuxpan Pipeline in the Gulf of Mexico to move natural gas from the U.S.-Mexico border near Brownsville to the Gulf state of Veracruz. TransCanada built two more pipelines to move the natural gas further into the interior of Mexico.
“These pipelines can be
an excellent example of how cross-border trade works when our countries collaborate,” Abbott wrote. “Cross-border energy projects will provide important environmental, economic and security benefits for all of North America. They can be a shining example of North American economic empowerment and neighbors helping neighbors.”
Costs, corruption
But amid numerous delays, runaway costs and alleged acts of extortion by local officials, TransCanada halted construction on its two inland pipelines in November and invoked the force majeure clauses that allowed the company to get paid due to circumstance beyond their control.
TC Energy officials did not reply for comment. In a statement, Sempra said, “We appreciate that Governor Abbott recognizes the criticality of a collaborative partnership with Mexico and the importance of honoring longstanding contracts. At Sempra, we understand the value of strong trading relationships like that of Texas and Mexico, especially as it pertains to energy market.”
The Texas Governor’s Office said it has not received a
reply from the Lopez-Orbrador administration. But the Mexican president made his thoughts on the issue known during a June 27 press conference when he said the contracts, as they were written, would ruin the Federal Electricity Commission.
“We believe those contracts made were an abuse of public finances,” LopezObrador said. “We want an agreement where the public is not harmed. That is what we are looking for.”
Abbott’s letter and the contracts controversy are happening when Mexico is consuming more than 8 billion cubic feet of natural gas per day, but only produces 2.6 billion cubic feet per day — meaning that the rest needs to be imported.
Roughly two-thirds of those imports come from the United States via pipeline to the tune of 4.8 billion cubic feet per day, according to the global energy research firm Wood Mackenzie. Another 700 million cubic feet per day arrive via liquefied natural gas tankers, mostly from the United States.
The Lopez-Obrador administration is trying to lessen dependence on foreign imports of natural gas. Rodrigo Rosas, a Wood Mackenzie analyst based in Mexico City, said that’s not realistic amid the poor performance by Mexico’s national oil company Petroleos Mexicanos, or Pemex.
“It’s our view that domestic production is not going up any time soon,” Rosas said. “That means that this controversy surrounding the pipelines is a big issue considering that Mexico’s near-term, medium-term and long-term natural gas supplies rely on the United States.”
Met four times
The Mexican government has met with the companies at least four times. Building pipelines through land owned by indigenous people remains a thorny issue, but Rosas said all parties involved are hoping to reach a resolution by the end of the year.
“I’m sure all these companies would prefer to reach an agreement with the government, resolve the issues surrounding indigenous communities, starting flowing gas and begin operations,” Rosa said. “There’s a lot of uncertainty but the good news is that the government is working to negotiate.”