HOUSTON—Pristine white beaches, clear waters and sultry nights spent drenching your insides with perfect margaritas—that is how the Mexico Tourism Board promotes Cancún.

Sound like a dream? It might, for a tourist. For a Mexican utility trying to keep up with natural gas demand for power generation in the Yucatán Peninsula, it’s a nightmare.

“CFE’s [Mexico’s electrical utility] demand today [for Yucatán] is about 300 million cubic feet per day,” said Guillermo Turrent, CEO of CFE International at the recent CERAWeek by IHS Markit. “The amount of gas that we get on a good day is about 80 million cubic feet. The rest is all imported diesel.”

As a result of a set formula not designed to reflect market conditions, using diesel instead of gas for power generation translates to a price of $12 to $16 per million British thermal units (MMBtu). By contrast, the Henry Hub price for natural gas on March 10 was just shy of $3/MMBtu.

It is examples like the Yucatán that drive Mexico’s energy reform efforts. The country is in the process of working with private companies to build a system of 26 gas pipelines that extend almost 11,000 kilometers, basically doubling the country’s capacity.

Mexico is going to need it. Turrent cited two major drivers of demand in his country:

  • The whole power market that needs to grow by 67% between now and 2030; and
  • A slew of new industrial projects in the petrochemical, electric power and LNG sectors.

That is the current status.. Turrent believes that once the system is in place, other opportunities will appear.

“We think that this new pipeline network is going to really pump up the demand in Mexico,” he said.

The sources for natural gas are already lined up. A connection from the Agua Dulce hub in Nueces, Texas, moves gas to Brownsville, Texas, where it connects to an offshore pipeline that will move 2.6 billion cubic feet per day (Bcf/d) to the central region of Mexico. A new header system at the Waha hub in West Texas will provide 2.5 Bcf/d and an original Pemex project contributes another 2.1 Bcf/d.

The system being developed is the result of listening to industry players, Turrent said, and hammering out details with various government agencies including the antitrust commission, the Ministry of Energy and regulators.

“We knew that we had to resolve this issue because we were not going to be able to afford to keep paying $20 prices for LNG,” he said. “There was no way. We had to get access to cheaper sources of natural gas.”

Serendipitously, steel prices were very low in 2013 when CFE began lining up vendors. Interest rates were also very low and oil prices had collapsed, so people in the industry were looking for work.

The way things are now, getting a project like this started would be much tougher. Steel prices have jumped and interest rates have started to creep up. That could discourage potential developers because CFE insists that they accept the financial burden.

“We do not take any risk on the CFE side,” Turrent said. “Rights of way, permitting, financing, price of steel—everything is in their hands. We start paying on these transportation agreements once they are online.”

What the country’s energy reform is designed to provide, and what Turrent clearly looks forward to, is the power of the market. Supply bottlenecks in Texas are resolved because the market reads signals and responds with urgency, he said. That’s what Mexico needs.

“We need to have those market signals,” Turrent said. “We don’t have those market signals yet with natural gas, but it will happen. We should be able to close those gaps where supposedly, gas costs $2.50 and we have to pay $12 for it.”

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.