As Mexico privatizes its oil and gas industry, the country has entered one of the largest periods of pipeline buildout in its history.

Still to be built are 13 natural gas pipelines costing an estimated $10.5 billion, several of which are planned for Mexico’s northwestern area, which currently lacks sufficient access to domestic gas production.

The largest of these planned gas pipelines is Los Ramones Pipeline, which will extend about 650 miles from the South Texas border to northeastern Mexico. Asset manager BlackRock Inc. and U.S. private equity firm First Reserve have taken a joint stake worth around $900 million in the second phase of the project, a March 26 release said. The private investment is a major departure from Mexico’s previous energy policy, which was controlled by state-owned Petróleos Mexicanos’ (Pemex) 76-year monopoly.

The change comes in response to consistent declines in Mexico’s oil and gas production during the past decade. As a way to reinvigorate the country’s energy industry, Mexico’s President Enrique Peña Nieto moved to reform the constitution in late 2013 to allow for private investment in the energy value chain. The reforms were implemented the following year.

In addition to the significant changes in the E&P sector, the reform is expected to impact Mexico’s energy infrastructure through new projects opening to outside investment and current systems that are leaving Pemex’s control, according to the report “Mexico’s New Energy Landscape” from Platts’ Bentek Energy.

While Pemex formerly operated Mexico’s largest gas transportation system—the Sistema Nacional de Gasoductos, which has a nameplate capacity of 5 billion cubic feet per day (Bcf/d) and is made up of about 5,400 miles of pipeline—Centro Nacional de Control de Gas Natural (CENEGAS) will operate the system after the reforms. Pemex will also transfer other operations to CENEGAS, including operations of Sistema Naco Hermosillo, a 212-mile, 1,054 million cubic feet per day (MMcf/d) system, which receives its gas supply from Kinder Morgan Inc.’s (NYSE: KMI) El Paso Natural Gas in Arizona.

The increased development is a result of Mexico’s National Infrastructure Program 2014-2018.

Major aims of the program include the development of “infrastructure for generating electricity using efficient, low cost and low environmental impact fuels,” as well as “the development of fuel transportation and storage projects,” according to analysis from PricewaterhouseCoopers S.C. Mexico’s plan to reach those stated goals is to move “toward a gas-based economy under its National Infrastructure Program,” a recent Tudor, Pickering, Holt & Co. note said.

The Comisión Federal de Electricidad (CFE), Mexico’s only electric utility, estimates that gas demand in northwestern Mexico will necessitate 2.2 Bcf/d of incremental supply between now and 2028, the Bentek report said. Imports from the U.S. via pipeline have increased steadily during the past few years, peaking at 2.2 Bcf/d during September 2014.

To help reach those goals, CFE awarded five tenders for the construction of new pipelines since October, the Bentek report said. Combined, the pipelines will make up an investment of more than $2.2 billion and a nameplate capacity of 5.7 Bcf/d. The CFE is expected to award five more tenders for gas pipelines before the end of the summer.

Tudor said that those upcoming tenders will play an important role in Sempra Energy’s (NYSE: SRE) story, as the company’s subsidiary IEnova will be bidding on the remaining planned gas pipeline projects through 2017. This will give Sempra “the potential to earn about 9.5% ROC as Mexico moves toward a gas-based economy under its National Infrastructure Program,” the note said.

Upcoming Mexico Project Bids From Sempra Subsidiary IEnova

Get Cracking

Current ethylene production supports cracking demand, but more is on the way. Mexico’s first greenfield cracker to enter service since the North American shale boom began is scheduled to come online in late 2015.

The cracker, called the Etileno XXI complex, will have a production capacity of 2.310 billion pounds per year and will house one ethane cracker and two polyethylene facilities, Bentek said. To support the increased production needs, Pemex will increase ethane recovery capabilities in its Ciudad Pemex processing complex, which currently does not produce NGL. Gasoductos de Chihuahua, a 50:50 joint venture (JV) between Pemex and IEnova, will also develop a 140-mile ethane pipeline to connect the Cactus, Nuevo Pemex and Ciudad Pemex complexes to Coatzacoalcos.

Pemex also operates three ethane crackers at petrochemical complexes of La Cangrejera, Morelos and Pajaritos in Veracruz. Combined, the crackers have a nameplate capacity of 3.045 billion pounds per year. The report estimated that the three crackers would need about 80,000 bbl/d of ethane to operate at 95% utilization, though current demand from the crackers is about 60,000 bbl/d, down from peak demand of 84% in 2009 as ethylene production from Pajaritos declines.

Mexico’s gas processing operations have remained fairly steady during the past few years, while NGL recovery has actually declined along with the declines in crude oil production, the report said. Most of the country’s gas processing plants were built by Pemex from the 1950s through the 1970s, with capacity additions at only three plants during the past decade. The nine plants operated by Pemex have a combined capacity of 4.5 Bcf/d of sour gas and 5.9 Bcf/d of cryogenic processing capacity, according to Bentek.

Pemex separates y-grade into purity NGL products in nine fractionators, most of which are located at the same sites as the processing plants. Fractionation also takes place at Pemex’s Madero refinery and its three petrochemical complexes. Combined, Mexico’s fractionators have a combined ethane capacity of 587,000 barrels per day (bbl/d) and produced 360,000 bbl/d on average in 2014.

Adios To LNG?

Though pipeline constraints led Mexico to increase its LNG imports—accounting for 38% of its 2010 total gas imports at more than 0.5 Bcf/d, according to the U.S. Energy Information Administration—imports from the U.S. via pipeline are expected to eventually displace LNG as more pipelines enter service.

Mexico imports LNG at Costa Azul in Baja Cali., Manzanillo on the West Coast of central Mexico and Altamira on the Gulf Coast. The facilities have a combined regasification capacity of 16.1 million tons per annum, Bentek said.

However, pipeline expansion plans have prompted market participants to consider the possibility of LNG exports from Mexico. To that end, in November Pemex announced plans to develop a $6 billion LNG liquefaction plant that would begin operations in 2020.

Mexico gas imports

The plant would likely be a JV with Pemex and third-party investors, Bentek said. No site for the project has been selected, though it is expected to be near to Pemex’s Salina Cruz refinery on southern Mexico’s West Coast.

However, that area is already running at capacity and an export facility would require significant growth in gas production for Mexico, as well as increased connectivity to U.S. gas supplies, making it unlikely any LNG would leave the terminal until well into the next decade. Further, the drop in global oil prices means the project will encounter reduced global capex budgets, severely limiting new LNG export projects.

Contact the author, Caryn Livingston, at clivingston@hartenergy.com.