March 25, 2021

ERCOT Crisis Impacts Mexico

ERCOT Crisis Impacts in Mexico

During the week of February 14, a supply/demand imbalance in the Electric Reliability Council of Texas (ERCOT) resulted in a sharp decline in natural gas exports to Mexico. Due to the polar vortex, approximately 20% of United States’ natural gas wellheads experienced freeze-offs, reducing already declining natural gas production by 18.7 Bcf/day. Compounding the supply/demand imbalance, unexpected heating load exceeded ERCOT’s forecasted peak demand increasing the need for natural gas to fuel power generation. As the prices for natural gas skyrocketed, ERCOT became short of power due in part to unavailable backup generation which was down for routine maintenance. Typically, these units go down for planned maintenance in mild Texas winter months in preparation for usually higher demand summer months.

  • Under normal operating conditions, ERCOT’s February demand is approximately 55 GW. During this unprecedented weather event, demand increased to over 70 GW. Market prices in ERCOT climbed to $9,000/MWh, the highest price allowed.
  • Almost half of the ERCOT generation was forced offline during the week of February 14th. This extreme weather event left millions without electricity for days, putting those individuals in life-threatening conditions, according to new data released by the grid operator.
  • At its highest point, approximately 48.6% of ERCOT’s power generation — 52,277 MW of the grid operator’s 107,514 MW in installed capacity — was forced out due to the extreme weather conditions. This caused a critical supply shortage just as demand ramped up resulting in emergency operating conditions early on the morning of February 15th that forced the grid operator to initiate rolling outages throughout the week.
  • These events in Texas caused a sudden and unexpected shortage of natural gas available for power generation for Mexico, leading the Comisión Federal de Electricidad (CFE) to curtail electricity power to the north of Mexico. Most of the thermic power generation in Mexico depends on natural gas imported from Texas.
  • To mitigate the impact of the natural gas shortage and its price increase, Mexico initially relied on fuel oil generation. CFE purchased this fuel oil from PEMEX, Mexico’s state-owned oil company. Because this fuel oil contains a sulfur content inconsistent with international carbon standards, CFE is PEMEX’s sole market for this crude oil byproduct.
  • CFE also immediately purchased four LNG cargoes to deliver natural gas into Manzanillo and Altamira ports, supplying natural gas for power plants unable to switch from natural gas to alternative fuels.
  • For most Mexican industrial consumers, weathering these types of physical and financial storms is expensive and requires in-depth energy expertise to navigate. During this event, gas prices rose to historic prices with Houston Ship Channel (HSC) posting at $400 USD/MMBtu. Before February 11, 2021, HSC’s highest settle was $25 USD/MMBtu.
  • Industry experts point to the lack of storage infrastructure in México as a weakness of the natural gas grid, enabling natural gas shortages for industrial users. Mexican industrial consumers are calculating losses resulting from the power blackout and natural gas shortages while considering backup fuel supplies to be better prepared for potential future natural gas outages.
    • It is important to evaluate contract language and pricing structures to surface contractual and price risk.
  • On February 17, Texas Governor Greg Abbott ordered a suspension of all producer exports out of the state through Monday, February 21, allocating all gas produced to local power generation. As 70% of Mexico’s Natural gas comes from Texas, this decision led to many industrial outages. A portion of natural gas production was still exported in where transport routes were only directed to Mexico.
  • The system restored normal operations on February 21, 2021.  Mexico’s natural gas pipeline system “SISTRANGAS” recovered to normal pressure and allowed to resume normal operations in Mexico, allowing nearly all-natural gas consumers to resume operations at full capacity.
  • HSC price spikes from February 12th through February 21st broke previous settlement records. The graph below shows the variance of HSC daily price for the previous 5 years.

 

 

 

Reach out to Edison today to learn how we can evaluate contract language and pricing structures, identify risk, provide advice regarding alternative or backup fuels and more!

 


 

Looking for the latest market trends and insights on the Mexico market? Sign up here to have our Mexico Monthly Market Report delivered straight to your inbox.

Loading