TRP TC Energy Corporation

By Robbie Whelan 

MEXICO CITY -- Mexico's president announced a deal to end a standoff with several natural-gas pipeline operators over contract prices, allowing them to avoid international arbitration and begin increasing gas deliveries across the country.

Appearing at news conference with pipeline company leaders including Carlos Slim, Mexico's richest person, President Andrés Manuel López Obrador said the agreement proves that "through dialogue we can arrive at deals that are good for our nation."

Although terms of the deal weren't immediately made public, the president and Manuel Bartlett, head of Mexico's state-run power utility, the CFE, said Tuesday that the service fees paid by the CFE will be reduced and set to a fixed rate, rather than escalating each year, as planned before. The terms of the contracts will be also extended, they said.

"The relevant part is that instead of having growing fees, we have equalized fees," said Mr. Slim, who controls pipeline operator Carso Energy. "This ensures that the CFE will pay less at the end of the day and be able to take advantage of today's low interest rates."

Mr. López Obrador said the new deal will eventually result in savings of $4.5 billion for the government, or more than 30% of what the government was obliged to pay under the original contracts. Several pipelines, including the important South Texas-Tuxpan submarine pipeline, which was completed in June, could begin operations within weeks.

Privately, people with direct knowledge of the talks pushed back against the numbers given by Mr. López Obrador, saying that the nominal savings realized by the government would be about $600 million, much lower than the president's estimates.

Since early July, the Mexican government has been renegotiating contracts for seven natural-gas pipelines in various stages of completion with four different companies: Canada's TC Energy, Mexico's Carso Energy and Fermaca, and Ienova, the Mexico unit of San Diego's Sempra Energy. Tuesday's deal didn't include Fermaca, which operates two of the seven pipelines in question.

"This deal guarantees the supply of gas for the electric industry for many years, so that we won't have outages, and for the development of national industry," the president said. "We're going to have sufficient gas in Mexico."

Messrs. López Obrador and Bartlett both said that Carso Energy was the first of the four to reach a deal with the government. Mr. Slim, whose company has only one of the seven contracts being renegotiated, proposed the terms of the deal directly to the president in mid-August, according to people involved in the talks.

Mexican companies have complained for years that natural gas and electricity prices are too high. Under the previous administration of Enrique Peña Nieto, Mexico sought to attract more private drillers, rig operators and pipeline builders into the market to try to increase production and efficiency.

But the CFE has struggled to make the country's power grid more reliable, partly because of the lack of a consistent supply of natural gas, and partly because of the utility's aging power generation infrastructure, much of which is badly in need of an upgrade.

This year, power outages have plagued the country, especially in the tourism-heavy state of Baja California Sur, a manufacturing hub in the northwest, and the mostly rural Yucatán Peninsula in Mexico's south.

Private-sector associations, which have been advising the pipeline companies in their negotiations with the government, applauded Tuesday's deal, saying it was a "win-win" for all parties.

"This is a memorable day because it reflects the government's willingness to give us certainty," said Carlos Salazar, president of the Business Coordinating Council, a private-sector chamber that was advising on the negotiations. "Today, Mexico gets cheaper energy than Europe, cheaper energy than Asia, and this is a huge advantage to compete to grow ... This marks the beginning of a process of important investment for our country."

Write to Robbie Whelan at robbie.whelan@wsj.com

(END) Dow Jones Newswires

August 27, 2019 14:41 ET (18:41 GMT)

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