TC Energy looks to Mexico for growth with US$4.5-billion pipeline

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TC Energy Corp., which is constructing the contentious $11.2-billion Coastal GasLink natural-gas pipeline in British Columbia, appears to be finding an easier path to success in Mexico than in Canada.

In August, the Canadian company and Mexico’s state-owned electricity producer Comision Federal de Electricidad (CFE) announced the launch of a US$4.5-billion pipeline that will deliver natural gas from the southwestern U.S. to southern Mexico.

TC Energy said the CFE’s decision to take a 15-per-cent stake in the project – the 715-kilometre, offshore Southeast Gateway pipeline – is a landmark transaction for the Mexican utility, as its first public-private partnership.

The Southeast Gateway pipeline is expected to be operational by 2025, and TC Energy said the project enjoys broad-based support from all levels of government, environmentalists and regulators. The project will allow the CFE to replace power plants currently fuelled by high-sulphur oil with natural gas-fired facilities that produce half the greenhouse-gas (GHG) emissions. Over the course of this decade, Mexico’s appetite for natural gas is expected to increase by 50 per cent.

Smooth sailing on Southeast Gateway stands in sharp contrast to the choppy waters at what TC Energy describes as its latest “nation-building” project in Canada, Coastal GasLink. The pipeline moves Western Canadian natural gas to Kitimat, B.C., for export, and is 70-per-cent complete. Again, this natural gas is meant to displace higher carbon-emitting fuels such as coal in Asian economies.

TC Energy projects Coastal GasLink will be operational by the end of 2023. However, the project’s history of protests and blockades beg the question of whether a brand new pipeline gets built in Mexico before a landmark piece of Canadian energy infrastructure is completed.

In the 1950s, the Calgary-based company, which changed its name from TransCanada Pipeline in 2019, fuelled Ontario and Quebec’s industrial expansion by constructing a 14,000-kilometre pipeline from Alberta.

The same nation-building spirit exists today, but it is directed more toward Mexico than Canada.

Since announcing their alliance, TC Energy and CFE executives have used every opportunity to highlight how unflagging support from Mexican President Andres Manuel Lopez Obrador brought the companies together behind two key policy goals, boosting the economy while lowering GHG emissions.

At an event in Mexico in late August, TC Energy chief executive François Poirier said: “I want to acknowledge and thank President Lopez Obrador for his solid support.“ In a translation from his remarks in Spanish, Mr. Poirier added: “This alliance has the prosperity of Mexico at its core and is focused on providing solutions and energy infrastructure that will benefit Mexico for several generations.”

At the same event, the head of the CFE said the pipeline will help Mexico address the ”regional disparity” between the industrialized north and more rural south of the country. According to the Mexican government, the pipeline agreement made Canada the second-largest foreign investor in the country, behind the U.S. but ahead of Spain.

The new pipeline has put a rosy glow on everything TC Energy is doing in Mexico. In signing on as a partner, the CFE agreed to end arbitration over fees TC Energy will earn from two other Mexican pipeline projects, where the Canadian company has invested a total of US$1.8-billion. Analysts said settling the dispute on good terms is a major win for the Canadian company. In a report, analyst Robert Kwan at RBC Capital Markets said: “We believe having the CFE as a partner should help improve investor sentiment with respect to the political risk“ of operating in Mexico.

When it was founded in the 1950s, all TC Energy did was move natural gas across Canada. Mr. Poirier and his predecessors spent the past few decades pivoting to a North American focus.

Last year, TC Energy generated $9.4-billion of earnings before interest, taxes depreciation and amortization (EBITDA) last year. The single largest contributor was the company’s U.S. natural-gas business, which accounted for 41 per cent of EBITDA. Moving natural gas in Canada brought in 29 per cent of the total. Mexico accounted for 7 per cent of TC Energy’s EBITDA, with that share expected to double once the Southeast Gateway project is complete.

Three years after it dropped the word “Canada” from its brand, a once-iconic domestic pipeline company is building its future outside its home country.