The administration of Mexican President Andrés Manuel López Obrador has reached a preliminary deal with four private pipeline companies to resolve a conflict over natural gas line contracts, people familiar with the talks told The Wall Street Journal.
Under the terms of the agreement, which could be announced as early as today, Mexico will pay higher fees to ship gas through the pipelines for the next 10 years, but ultimately will realize nominal savings of roughly $600 million, according to an analysis of the draft agreement by The Journal.
If approved, the agreement would allow the South Texas-Tuxpan marine pipeline, which was completed in June and would increase Mexico’s natural-gas capacity by 40%, to begin operations, Kallanish Energy learns.
Test of business environment
The conflict has been seen as a test of the business environment under López Obrador’s nationalist government. Investors have been concerned the dispute suggests the administration might not respect existing contracts with the private sector.
In July, Mexico’s Federal Electricity Commission, aka, CFE, began negotiating with the four companies over contracts López Obrador said were unfair to the government.
The CFE declined to comment on the potential deal.
Billionaire Slim proposes solution
In a mid-August meeting, Mexican billionaire Carlos Slim proposed a solution to the conflict directly to the president, people familiar with the matter told the Journal. A unit of Slim’s Grupo Carso is one of the four pipeline companies involved.
Between them the quartet have built or are building seven natural gas lines across Mexico. A spokesman for Slim declined comment.
The other companies involved include Canada’s TC Energy Corp. (formerly TransCanada), Sempra Energy’s Mexico unit Ienova and Mexican firm Fermaca.
Original vs. proposal
The original pipeline contracts called for the Mexican government to pay fees that rose each year for 25 years. Under the terms of the deal Slim proposed, those fees would be reset to their average across the length of the contracts, then discounted by between 5% and 10% a pipeline.
That means for the first half of the contract length, the fees would be higher than under the previous agreement. The contracts would also be extended by five years, according to the analysis of the deal.
If finished, the deal will likely avoid arbitration that could have dragged on years.
“This is the best solution to an ugly situation,” Gonzalo Monroy, an independent energy industry analyst in Mexico City, told the Journal. “These companies could have taken CFE to trial, and it seems they’re going to avoid that. The companies will be protected, but the government can claim a political win by lowering the fees.”
Even if a deal is reached, however, the conflict has created concerns over the president’s nationalistic impulses in key areas like energy or the Mexican economy, Monroy said.
This post appeared first on Kallanish Energy News.