IEnova, CFE suspend Guaymas-Oro pipeline deal

Mexican energy contractor IEnova, a subsidiary of Sempra Energy, has signed an agreement with state power utility CFE to temporarily suspend its Guaymas-El Oro natural gas pipeline contract rather than have it canceled.

According to a statement sent to the Mexican stock exchange (BMV), the company took the action because the original contract signed in 2012 specifies that if an event prevents the carrier from providing the natural gas transportation service to CFE for more than two years it would be understood that the contract has ended.

"To avoid termination of the contract, CFE and IEnova signed the suspension agreement so that within a period of four months the parties carry out all necessary actions and within their reach to restart the operation of the pipeline. The signing of the agreement of suspension does not imply any waiver of the rights that the parties have under the contract,” said IEnova in the BMV statement Monday.

The firm added that the suspension agreement reflects "IEnova's commitment" to maintain a dialogue with the Mexican government and CFE to reach a satisfactory agreement.

Guaymas-El Oro has been inactive since 2017 amid a dispute with a faction of the Yaqui indigenous tribe. The community says it never agreed to the construction of a nine-mile segment of the pipeline across tribal territory in Sonora state.

The 320km natural gas pipeline has a carrying capacity of 5.3Bf3/y, or 510Mf3/d. IEnova, owns 14 pipeline projects, including Guaymas-Oro and the Sur de Texas-Tuxpan marine pipeline.

The latter is set to provide capacity to transport 2.6Bf3/d of gas from Texas to Mexico. It was ready for commercial operation in mid-June but was held up after CFE said it would seek arbitration on the contract with IEnova and its partner, TC Energy Corp.

At the heart of the legal battle are contract clauses related to force majeure instances, which require the government to continue paying for pipelines where construction has been halted and which are not yet operational.

Early last month, CFE CEO Manuel Bartlett (pictured) said the company would seek international arbitration over US$899mn in damages, and even though chances of success remain unclear, the issue will create a significant holdup in natural gas exports to Mexico.

IENOVA SIGNALS READINESS

The suspension agreement follows statements from IEnova and Sempra executives in their respective 2Q19 conference calls suggesting they are displeased with the Mexico situation but eager to resolve IT and all other disputes with CFE as quickly as possible.

IEnova CEO Tania Ortiz Mena, said CFE wants to conclude talks on both the Sonora and the Sur de Texas-Tuxpan natural gas pipelines “soon, and, of course, so do we.”

She said discussions would probably not “drag on into next year.”

Ortiz added, “The tone at the dialogue table has been intense to reach a solution quickly.”

In June, IEnova said the US$2.5bn project was expected to deliver a 40% increase in Mexico's current import capacity for natural gas.

Sempra COO Joe Householder told an investors call that regarding Mexico “we are not pleased with the recent developments.”

Householder added that Sempra is confident of its ability to resolve the dispute in a timely manner.

"We think there's a timeline in front of us where we can move through this fairly quickly and I think all the signals have been from the government that they share our interest in resolving this quickly," added Sempra CEO Jeffrey Martin.

The company, in the presentation, added that it is also looking to add an export component to an LNG import facility in Mexico operated by IEnova. A final investment decision on the expansion is expected for the end of the year. 

CONSEQUENCES

Speaking at a recent event, former US ambassador to Mexico Carlos Pascual stressed that Mexico is the top export market for US production and warned that the main effect of not reaching agreements is that energy costs will skyrocket for final consumer.