Policy changes in Mexico boost turbomachinery orders

On February 2, 2016, Mexican President Enrique Peña Nieto received the lifetime energy achievement award at Houston’s 35th annual IHS CERAWeek, an event described as the Davos of energy policy worldwide. “No country has more profoundly modernized every aspect of its energy sector, from oil and gas, to power and renewable energy, to the sale of refined products, in such a short time,” said Daniel Yergin, conference chair and vice chairman of IHS. These changes are bringing lower electricity prices to the Mexican people, said Yergin, and promise to capture the best technologies to restore Mexico’s position as a world leader in oil and gas. “We honor President Enrique Peña Nieto for making this transformation real.”

The 49 year-old president took office on December 1, 2012 vowing to breakup the government-owned energy monopolies and introduce competitive markets. To many, these goals were met with skepticism. For one thing, changes to the Mexican energy policy require an amendment to the constitution. But in December 2013, a constitutional amendment was approved by the Mexican government, allowing major changes to the oil & gas sector and electricity markets unleashing a wave of capital investment. “With this reform,” said Peña Nieto, “the Mexican State maintains the ownership of the underground hydrocarbons and, at the same time, it allows private participation in the entire hydrocarbon value chain and practically all of the electricity industry.”

Integration of energy markets

Much of the change is linked to integration of the Mexican and Texan energy markets. This includes natural gas exported from Texas into Mexico via pipelines owned and operated by private investors. High-voltage DC interconnections with the Electric Reliability Council of Texas are also being developed along with a new 272-mile transmission line, privately funded at $1.2 billion. Mexico’s Secretary of Energy, Pedro Joaquin Coldwell, explained how the reforms have affected the hydrocarbon production and power generation sectors. “We had lost more than 1 million barrels per day of crude production over the last 10 years and our electricity rates were on average 75% higher than the U.S.,” he said. “Mexico could not continue with a system that gave exclusive investment rights in the energy sector to its own government.”

The reforms focus on transparent competitive bidding and contracting to show the finance community that production sharing contracts are competitive in the international context. This is resulting in surging gas turbine sales. According to McCoy Power Reports, last year more than 5,000 MW of gas turbine generator equipment was placed on order for job sites in Mexico (Figure).

Mexico has also embarked on a plan to build 10,000 km of natural gas pipeline infrastructure, more than twice as much pipeline capacity as has been built in the nation’s history. Six new pipelines are being connected to Texas and two more are authorized for construction. The change for Mexican consumers is marked. During 2013, natural gas was rationed. Today, there is plenty of economically priced gas available from Texas. This is enabling the acceleration of power plant conversion from oil-fired simple cycle to natural gas-fueled combined cycle.

Mexico is also increasing the electrical connectivity of its transmission system to Texas to facilitate the bi-directional flow of electricity between the countries. But U.S. export barriers (physical DC ties and political permits) will need to be tackled first to increase U.S. sales of electricity to Mexico during periods of ample supply in Texas. Peña Nieto also announced that during the first week of December 2016, Mexico will call for bids relating to production sharing of the deep water oil and gas deposits in the Gulf of Mexico. These activities promise to make Mexico a vibrant market for gas turbine power generation and compressor drive equipment.

(Mark Axford is a consultant to the turbomachinery industry.)