(Bloomberg) -- Under the crystalline waters off southeast Mexico, workers are laying a pipeline that President Claudia Sheinbaum is counting on to underpin an economic boom and lift millions from poverty.
The $4.5 billion Southeast Gateway Project will deliver up to 1.3 billion cubic feet natural gas per day from Texas to the Yucatan Peninsula when it’s completed next year, fueling power plants and a proposed trans-continental rail corridor intended to rival the Panama Canal.
But the project Sheinbaum inherited from her predecessor, Andres Manuel Lopez Obrador, also threatens to undercut one of her other key goals: cutting Mexico’s greenhouse gas emissions.
The 715 kilometer (444 mile) pipeline being developed by TC Energy Corp. of Canada along with Mexico’s state utility is the lynchpin to Sheinbaum’s ambitious plan to diversify the Yucatan’s economy. While powdery white beaches and luxury resorts of Cancun and Playa del Carmen draw wealthy tourists, more than half the residents in the rest of the region live on less than about $16 a day.
The conduit, which runs near a fragile coral reef zone and will also feed both an oil refinery and Lopez Obrador’s Maya train project, will make the country reliant on fossil fuels for years to come. That poses a challenge to Mexico’s commitment under the Paris Agreement to slash carbon emissions by 35% before 2030 and its goal under the Global Methane Pledge to cut methane emissions by 30% over the same period.
It’s a tension at the heart of Sheinbaum’s vision for Mexico — and indeed, for any country looking to grow economically while also reducing its carbon footprint. It’s all the more acute because of the new president’s past work with the United Nations Intergovernmental Panel on Climate Change, which in a recent report was explicit about the need for deep emissions cuts in coming decades.
"One of the most critical issues in Southeastern Mexico is access to reliable energy, and this pipeline can start bridging that gap," said Oscar Ocampo, an energy analyst at the nonprofit Mexican Institute for Competition. “It locks Mexico into fossil fuels for a generation. But Sheinbaum’s credibility on the climate will depend on her ability to increase development of renewable projects.”
Her plan hinges on an aggressive campaign to add enough solar, wind and other forms of clean energy for Mexico to generate 45% of its electricity from emission-free sources by 2030, up from 24% today. It will require dramatically overhauling power grids already suffering from seasonal blackouts after years of underinvestment. The effort could cost as much as $50 billion, making it the largest buildout of energy infrastructure in a single presidential term in Mexico’s history and leading some analysts to deride the plan as a “pipe dream.”
Even if Sheinbaum succeeds in adding all that clean power, the new pipeline and gas-power plants are likely to be in use for decades, driving up Mexico's emissions.
Mexico contributed 1.3% of total global emissions in 2022, the second highest in Latin America after Brazil. Alongside Argentina, it’s one of just two countries in the hemisphere that get a “critically insufficient” rating from the Climate Action Tracker. And while its share of global emissions is relatively stable, Mexico’s emissions from fuel combustion are up 6% since 2000.
That makes Sheinbaum, an environmental engineer who co-authored IPCC reports in 2007 and 2014, crucial to watch in the years ahead as she tries to cut emissions while also raising living standards by attracting more business and industry.
Representatives for Sheinbaum and Mexico’s utility, Comision Federal de Electricidad, declined to comment. Her administration, however, is considering more ambitious climate targets ahead of COP30 next year in Brazil, according to a person familiar with the matter.
The pipeline, nicknamed SGP, may be Mexico's only viable option to jumpstart the Yucatan's economy. Just look to other states, like in the Bajío region northwest of Mexico City, where access to gas has been a boon.
Pipelines have helped drive the recent “nearshoring” campaign to encourage businesses to move to Mexico so they can be closer to customers in the US. That includes Queretaro state, which has seen an influx of planned data centers from Alphabet Inc.’s Google, Amazon.com Inc. and others. San Luis Potosi, home to General Motors Co. and BMW AG plants, grew a whopping 8% in the first half of this year from 2023 as automotive companies rush to set up operations.
In the Yucatan, energy demand is already surging around 7% per year, compared with an average of around 3% nationwide, according to data from Comision Federal de Electricidad. Levy Abraham Macari, the president of the Canaco business and tourism chamber in Merida, the Yucatan state capital, says the new pipeline could boost the region’s gross domestic product by as much as 3% in its first years of operation. It would also bring thousands more jobs that promise to reduce poverty in the state, which at 39% is about three points higher than the national average.
“Several hundred million pesos are likely to flow into energy intensive sectors like manufacturing and industry,” Abraham said. “All the elements are in place for Yucatan to become an extremely attractive state for doing business.”
Mexico’s reliance on cheap gas from Texas is nothing new. Around 60% of energy generated in the country depends on gas, and more than 70% of that comes from the US state, according to Fitch Ratings.
US gas pipeline exports to Mexico grew 8% last year, according to the US Energy Information Administration and are surging at a record pace. Mexico imported about 6.8 billion cubic feet of gas per day in June, according to data compiled by Bloomberg.
“We see the abundant supply of low-cost gas in South Texas as an opportunity for Mexico, Canada and the US to develop industry, and grow together as a bloc,” Leonardo Robles, vice president and chief commercial officer for Mexico natural gas pipelines at TC Energy, said in an interview. Once construction is completed this year and gas begins flowing in May, “growth in terms of jobs, economic and social development to the Yucatan will be significant.”
Counterintuitively, the pipeline may actually help drive down carbon dioxide emissions in the Yucatan in the short term.
It will enable Mexico’s state utility to convert two major power plants in Merida and Valladolid to burn gas instead of oil and diesel, which emit more CO2 when burned. CFE estimates the move will reduce emissions in the region by 27%, save nearly $3 billion over the next 30 years on fuel costs, reduce bills for consumers and add 1.5 gigawatts of generation capacity to the grid.
The SGP will feed those facilities via an expansion of the Mayakan pipeline, also scheduled to be completed next year.
Environmentalists are nonetheless pushing back against the pipeline. In the long run, they warn, it will raise Mexico’s emissions. While gas releases less CO2 than diesel or coal when burned, it’s far more damaging to the climate when it leaks from wells or pipes. When released unburned, the main component of natural gas, methane, is about 80 times more potent than carbon dioxide at trapping heat during its first two decades in the atmosphere.
“Methane emissions from natural gas projects are much trickier to track than conventional greenhouse gas emissions because of leakage from pipes and other storage and transport equipment,” Daniel Zavala, a scientist who tracks methane emissions at the Environmental Defense Fund, said in an interview.
To be sure, Sheinbaum’s energy plan shows she sees gas as a key part of Mexico’s broader power matrix, which she’s pushing to shift to greener sources amid an overhaul of Mexico’s energy laws that would increase state control of the sector. She’s promised to put a stop to gas flaring by state oil company Petroleos Mexicanos and pledged that all new energy demand in Mexico will be met by renewables after current projects — including the $13.6 billion she’s earmarked for new gas, solar and wind plants — are complete.
In addition to its proximity to a fragile reef ecosystem off the coast of Veracruz state, environmentalists argue the pipeline disrupts the livelihood of Indigenous and fishing communities, and threatens endangered sea turtle hatching sites. They also say it was split into two separate projects on paper to rush through environmental impact studies and speed up the permitting process.
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“This project has systematically violated the procedures for environmental impact and public consultation,” said Pablo Ramirez, an activist at Greenpeace Mexico. “There are so many other alternatives to bringing clean, accessible energy to the Yucatan.”
Environmental groups say they are evaluating their legal options to block the project’s completion, but prospects appear slim.
TC Energy says it has taken steps in the design and construction of the pipeline to tightly control methane emissions, and that it spent more than $50 million on environmental studies, which included public consultations, to analyze over 11,000 kilometers of seabed to ensure the pipeline would not impact the reef. The pipeline’s route is also more than a kilometer from the nearest perimeter of the protected reef zone, Robles said.
The project was split into two phases to account for different considerations in building the land and marine sections of the pipeline, according to a company spokesman. Environmental studies included a holistic analysis of its impacts, and the study was submitted to align with all the regulatory requirements in Mexico and with international standards, the spokesman said.
For Robles, the pipeline will allow the Yucatan Peninsula to address what’s known as the “energy trilemma.”
“As energy demand grows, solutions need to be cost competitive to drive social and economic growth, and also meet sustainability goals to help reduce emissions,” Robles said. “The solution we have at hand right now is natural gas.”
--With assistance from Ruth Liao, Elizabeth Elkin and Dave Merrill.
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