Key takeaways:
- After an initial, severe shock to the system, Mexico’s Federal Electricity Commission was able to restore power to 99 percent of the 4.8 million people affected within 48 hours of the September 19 earthquake.
- Hurricane Harvey dropped U.S. natural gas exports to Mexico by roughly 450 MMcf/d, but exports quickly returned to normal levels given the high potential of reroutes in South Texas.
- The Laguna Verde Nuclear Power Plant weathered three Hurricanes within a month, all while refueling one out of two total units.
A concentration of natural disasters has plagued the globe over the course of the last two months. Hurricanes, flooding, earthquakes, and even wildfires have caused untold damage. Mexico has been particularly affected by these events, and the country’s energy sector has felt the effect. It seems almost trivial to discuss the impact of these events on natural gas and power markets, which pales in comparison to the loss of life livelihood. However, the impacts have been profound, they are relevant to participants in the industry, and it is Genscape’s job to analyze them.
We cannot cover the entire scope of these disasters’ impact in this blog post. Topics that we do not have the space to cover include a surprising drop-off in Oaxaca wind production during tropical storms, the shutdown of the country’s largest oil refinery following the Oaxaca earthquake, and the surprisingly minimal disruptions in natural gas service during the Mexico City earthquake. We encourage anyone interested in discussing these topics to reach out to Genscape's Power and Natural Gas teams, we are always happy to have follow-up discussions. For the purposes of this post we will highlight three topics. First, the Mexico City earthquake had a significant impact on electricity demand, and ultimately on wholesale power prices. Second, Hurricane Harvey’s disruption on natural gas flows from the U.S. to Mexico. Lastly, three hurricanes in the Gulf of Mexico affected production at the Laguna Verde power plant.
Mexico City earthquakes hit power sector while gas comes away relatively unscathed
The earthquake that originated in the state of Morelos and shook Mexico City on September 19, caused widespread power outages, but the gas sector escaped relatively unharmed. In one hour, power demand in the interconnected system dropped by over 3GW. Unsurprisingly, most of the loss came in the Central zone, where demand fell from its forecast level of 7,500MW down to 4,500MW. This weakness continued throughout the day. However, Genscape was impressed by the speed with which CFE (Federal Electricity Commission) was able to get power back online for much of the city. By the off-peak period, demand was back in line with forecasts, and demonstrated only slight weakness during the day on September 20.
This drop in demand had an expected impact on prices. Typically the best indicator of day-ahead (DA) versus real-time (RT) prices is where actual demand comes in relative to the ISO’s forecast. It is not the only factor, as unexpected changes in generation can also play a significant role. However, demand coming in above forecast will typically lead to a negative DA/RT spread, while weaker-than-expected demand tends to drive a positive DA/RT spread. The demand weakness caused by the earthquake was no exception to this rule. As demand dropped, RT prices crashed. Throughout the morning of September 19, RT prices in Central were coming in around $1,500MXN, about 400 pesos higher than where the DA had cleared. In the afternoon, the dynamic effectively flip-flopped. The DA had cleared around $1,400MXN for most of the afternoon hours, while the weakness in demand caused RT prices to plunge to $1,000MXN.
While the impact of weaker demand on RT prices was not surprising, a negative DA/RT spread is atypical for the Mexico system. For the first three weeks of September (1 to 20), the DA/RT spread averaged -$90MXN during the on-peak period. Typically these higher RT prices are a result of demand over-performing CENACE’s (the ISO in Mexico) forecast. On September 19 the DA/RT was $150MXN, a full $240MXN higher than the average. Along with demand, RT prices recovered on September 20. Both DA and RT prices cleared around $1,400MXN for the on-peak period that day.
While Mexico’s power sector was immediately impacted, the country’s gas sector emerged relatively unaffected. PEMEX and Gas Natural Fenosa, the largest distributors of gas in the area and country, both reported that their systems remained fully operational in the hours and days after the earthquake hit. Mexican imports of gas from the United States remained unchanged in the days surrounding the event.
Hurricane Harvey impact on natural gas markets
Although it did not make landfall on Mexico’s coasts, Hurricane Harvey also took its toll on the domestic energy sector. Mexican imports of U.S. gas were sharply curtailed due to massive disruptions to U.S. supplies. During the hurricane as much as 2.4 Bcf/d of Texas production was knocked offline, including more than 1 Bcf/d from the Eagle Ford producing areas, which supply South Texas exports to northeastern Mexico. Numerous Texas inter- and intra-state pipelines experienced operational issues, some severe enough to warrant the declaration of Forces Majeure on both the Texas and corresponding Mexican Pipelines. Genscape’s proprietary estimate of NET Mexico pipeline flows fell to a low of 1,452 MMcf/d on August 26, but showed a fairly rapid recovery to 1,903 MMcf/d by August 28. Prior to the storm, Genscape had NET flowing close to capacity around 2 Bcf/d, having reached as high as 2.2 Bcf/d on gas day August 13.
Tennessee Gas Pipeline (TGP) exports to Mexico’s Reynosa market were also severely impacted due to Forces Majeure at TGP Stations 1 & 9 in South Texas. Prior to the storm, TGP had been exporting about 475 MMcf/d to Gasoducto del Rio at Rio Bravo and PEMEX at Hidalgo. On August 25, total TGP exports had fallen about 75 percent, and by August 28 had dropped to as low as 97 MMcf/d. Some of the TGP declines were offset by flows on TETCO. TETCO only exports to PEMEX via Reynosa very sporadically and never for a notably sustained period. The last time TETCO reported flows there was in February at 97 MMcf/d for one day. However, on August 25, TETCO began reporting about 50 MMcf/d, and continued about 140 MMcf/d through August 30, partially offsetting the TGP declines to PEMEX.
Elsewhere, exports remained relatively unchanged. West Texas production was fairly untouched, which enabled the El Paso Natural Gas Pipeline (EPNG) to export slightly higher volumes across its system as a result of high temperatures in Central and Western Mexico lifting power loads.
Towards the tail end of Harvey, PEMEX announced it would temporarily curtail crude production for platform maintenance. The work shut in about 330 Mbpd of crude through September 11, which equated to roughly 17 percent of national output. PEMEX originally planned to shut in production for maintenance at three Gulf of Mexico platforms in November, but decided to begin the work immediately since U.S. ports that would receive the crude were closed from the hurricane.
These impacts on the natural gas market are in sharp contrast to what happened as a result of tropical storms in 2016, when the effects were miniscule. CENAGAS’ (National Control Center for Natural Gas) historical data shows that natural gas demand increased ever so slightly while production decreased slightly. Tropical Storm Danielle occurred from June 19 to 21, 2016, and hit the southern Gulf Coast of Mexico. During that event, natural gas demand increased +0.09 MMcf/d relative to the pre-storm 14-day average. Danielle minimally reduced natural gas production by about -0.03 MMcf/d in the region relative to the pre-storm 14-day. Hurricane Earl occurred from August 2 to 6, 2016, and hit roughly the same area as Tropical Storm Danielle. Here, natural gas demand increased within the region by about +0.13 MMcf/d relative to the pre-storm 14-day average while production declined by about -0.03 MMcf/d relative to pre-storm levels.
Hurricane impact on nuclear output
In addition to impacting the natural gas sector, hurricanes had an impact on power generation in Mexico, and in particular on nuclear output. Nuclear power plants are especially sensitive to natural disasters; 2011 brought a harsh reminder of this with the Fukushima disaster in Japan. Consequently, the treatment of nuclear power in Mexico during the events of the last two months was interesting to observe. Mexico has one nuclear power plant, the Laguna Verde Nuclear Power Station. The two-unit plant is located in the state of Veracruz on the Gulf of Mexico, with an operational capacity of 1,600MW. Genscape was able to learn about its operation during three hurricanes through the PowerRT platform, with the plant’s output shown in the chart below.
Throughout the majority of August and September, Laguna Verde had one unit offline for refueling, so it was the operation of the second unit that was of consequence. Hurricane Franklin was the first storm to disrupt output of this second unit. Around noon on August 9 the unit began to ramp down, and was completely offline eight hours later. Franklin made landfall in Veracruz that evening, with the strongest impact coming the following morning. The storm began to dissipate, and in the PowerIQ commentary on August 11, Genscape analysts wrote that “As weather conditions improve on the Mexican gulf coast, the Laguna Verde (ORI) nuclear power plant is likely to turn one unit back on over the weekend.” Indeed, the unit was back to full capacity by Midday on Sunday, August 13.
Ten days later, on August 23, Hurricane Harvey moved into the Gulf of Mexico. The Hurricane did not make landfall along the eastern coast of Mexico, and instead turned north. Nonetheless, the same Laguna Verde unit ramped offline in the afternoon on the 23. This was possibly just a precaution against the Hurricane turning towards Veracruz, but another theory is that the wave height was great enough to force the unit down. Laguna Verde uses sea water for cooling, and likely has emergency shut-down procedures in place for when storm surge is high.
The most surprising storm of the three, however, was Katia. It was surprising in that the Laguna Verde unit actually stayed online during the storm, which made landfall just a little to the north of the plant. Genscape expected it to be forced offline, just like with the storms that preceded it. While the storm had wind speeds that rivaled those of Franklin, Katia made landfall further north than the earlier storm. Laguna Verde was directly hit by hurricane force winds during Franklin, but the plant was only on the edge of the tropical storm force wind field during Katia. This is shown in the maps below (Laguna Verde sits on the coast, just below the 20◦ north latitude line). This small geographical difference may have been enough to eliminate the need to bring the unit offline. The earthquakes that impacted the country were far enough away from Laguna Verde that they did not have any impact on output at the nuclear plant.
All of these natural disasters, and others, have been trying experiences, with consequences that are far more important than the impacts on the energy sector. But one major takeaway from the energy side of things is the speed with which the markets and infrastructure were able to recover. As mentioned above, CFE was able to restore electrical power to consumers relatively rapidly following the September 19 earthquake. Natural gas flows and nuclear power production also quickly returned to normal operational levels, following disruptions caused by hurricanes. This is testament to the hard work and resilience of organizations like CFE and CENACE. While some have lamented the slow pace at which energy markets in the country have developed, this is an encouraging sign for the continued progress of the energy reform in Mexico.
Genscape in Mexico
The Genscape Power Team offers solutions for current and future participants in the Mexico power market, focusing on both short-term and long-term analysis. In the short-term, Genscape’s PowerRT platform allows users to see real-time generation from 35GW of installed capacity in Mexico, while the PowerIQ service provides daily market forecasts, commentary, and customized strategies for participating in the market. For those looking out longer-term, Genscape’s EPSI modelling platform allows users to run their own power market scenarios, anywhere from a day out to forty years. Genscape recently co-authored and published a comprehensive study of the Mexico power markets, forecasting conditions out through 2035. To learn more about the study, please click here.
On the natural gas side, Genscape provides timely and granular estimates for daily exports of gas from the U.S. to Mexico, as well as intra-Mexico flows. Genscape’s daily export estimate supplements publicly-reported exports on U.S. interstate pipelines with Genscape proprietary monitored flows on the NET Mexico pipeline, which moves roughly 50 percent of total U.S. exports to Mexico, but does not report flows. Genscape has also made data available for 13 Mexican pipelines, two LNG terminals, and two and a half years of historic flows on the Mexican national gas grid, SISTRANGAS. These datasets also include pipeline notices and maintenance events. Genscape’s Mexico NatGas product also offers infrastructure updates regarding pipelines, power plants, exploration, production, refining, processing, pricing, industrial demand, and more. This information should be regarded as a critical component for those seeking to participate in Mexican energy markets as well as U.S.-focused market participants seeking to derive the best estimate of US exports to Mexico in their U.S. supply/demand balances. To learn more, or to request a trial of Genscape’s Daily Mexico Exports Monitor, please click here.