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Mexico to pay billions more than expected for gas pipelines

constructionreviewonline.com

2019 contract revisions achieved only short-term savings

- CFE will pay $6.836 billion of additional costs
- Four of five contracts extended by roughly 10 years

By Sheky Espejo/Platts

MEXICO CITY
Petroleumworld 11 05 2020

Mexican state power and natural gas utility CFE will pay almost $7 billion more than expected to private developers that built five gas pipelines and for associated gas transportation services because 2019 contract revisions achieved only short-term savings, the federal audit office, or ASF, has reported.

CFE will pay $6.836 billion more than originally planned after the contract revisions, ASF said in a report released over the weekend.

The renegotiations with Fermaca, TC Energy, IEnova and Grupo Carso were conducted in the first half of 2019 and were part of actions taken by the administration of President President Andres Manuel Lopez Obrador to put an end to corruption in the government. During 2019, his first year in office, the president repeatedly said companies had taken advantage of corrupt practices inside CFE in the previous administration of Enrique Pena Nieto and that the conditions set in the contracts were abusive.

The contracts are with Fermaca for the Villa de Reyes-Aguascalientes-Guadalajara and the Laguna-Aguascalientes pipelines; with IEnova for Guaymas-El Oro pipeline; with IEnova and TC Energy for the Sur de Texas-Tuxpan pipeline; and with Grupo Carso for the Samalayuca-Sasabe pipeline.

Pena Nieto has been accused of corruption and bribery by former Pemex CEO Emilio Lozoya, currently on trial in a US court on corruption charges.

In August 2019, Lopez Obrador announced it had reached agreements with the pipeline developers that would represent $4.5 billion in savings to Mexico. The renegotiated contracts did result in cost savings through the first 25 years, the ASF said. However, CFE extended the life of four of the contracts by roughly 10 years, thus resulting in additional costs that far exceeded the savings of the first 25 years, it said.

The four contracts that were extended were with Fermaca, IEnova and TC Energy, the report said. The contract with Grupo Carso, while renegotiated, was not extended.

The report concluded CFE's corporate governance had deficiencies as it was not clear the board of directors, who approved the modified contracts, were aware of the new conditions.

The ASF also said CFE was not doing enough to plan for profitable growth in operations and highlighted losses above $3 billion in subsidized electricity.

The Lopez Obrador administration has embarked on a quest to restore the market dominance of CFE to make it an engine for economic growth by restricting the participation of private players. The new policy, which has included several coordinated actions, has recently been blocked for a second time by the Supreme Court.

A CFE spokesperson did not respond to requests for comment.

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