Production of Hydrogen and Carbon Capture and Storage (CCS) in Mexico: A Regulatory Analysis

As discussed in the article that was previously published by the Mexico City Office, the regulation in Mexico for the Generation and Use of Hydrogen for production of electricity is scarce.

However, the potential of the Country to create blue and green hydrogen is undeniable, due to the vast coastlines, solar and wind power generation potential, as well as the vast reserves of natural gas (a lot of which remain unexploited).

This article will focus on Blue Hydrogen production (i.e., hydrogen that is generated via natural gas by way of a Steam Methane Reformer, for example, which also outputs CO2: the latter is then geologically captured) and more specifically the regulation in Mexico regarding Carbon Capture and Storage.

Regulation of Generation of Hydrogen in Mexico

As discussed in the previous article, Mexican Legislation only considers the use of Hydrogen for Generation of electricity, however one of the greatest virtues of Hydrogen is the possibility of using it as fuel. Hence, if natural gas is used in order to create Hydrogen as fuel or mixed with nitrate in order to create Ammonia which can also be used as fuel, it will be necessary to Capture the CO2 generated by said process.

It is important to consider that the main components for the generation of hydrogen is water and heat; hence large quantities of energy are required in order to heat up water to separate the hydrogen molecules. For offshore operations carrying out the separation of molecules, capturing the CO2 close to the reservoir and using sea water located directly at the well where the gas has been extracted and creating blue hydrogen

Carbon Capture and Storage

There are no specific provisions in Mexico that regulate carbon capture and storage, however; there has been some early attempts to regulate storage of gas in abandoned reservoirs that can shed some light on how carbon capture and storage can be regulated in Mexico. Said regulations and policy will be explained below.

On November 26, 2018, the “Public policy in energy matters applicable to the constitution of Natural Gas Storage” was published, which refers to the storage of natural gas in reservoirs that are economically unviable for hydrocarbon extraction, as well as the development of the storage infrastructure. In this regard, the CNH issued, at the request of the Ministry of Energy (SENER, for its Spanish acronym), a report certifying the quality of reservoirs that are not viable for the extraction of hydrocarbons, so that the National Control Center for Natural Gas (CENEGAS, for its Spanish acronym) could carry out the storage service bidding process.   

Additionally in 2018, the CENEGAS published the preliminary version of the “Bidding Terms and Conditions for the award of the contract for the provision of the service of reception, storage, and delivery of natural gas. International Public Bidding CENAGAS-ALM-001-2018” (the “Bidding Terms and Conditions”), which aim to award the mentioned contract in the field “Jaf”, located in Veracruz, Mexico, to Mexican and/or foreign legal entities that demonstrate experience, technical capacity, and economic solvency. The Bidding Terms and Conditions indicate that the bidding process will include visit to the site; clarification rounds; submission of technical and economic proposals; resolution; formalization of the contract; among others.

It is noteworthy that at this stage, the Bidder shall grant CENAGAS a Bid Bond through a letter of credit to guarantee the support of its Bid and, if the Bidder is awarded the contract, to guarantee the signing of the Contract, under the terms and conditions established in the Bidding Terms and Conditions; otherwise, its proposal will be rejected.

Likewise, the Bidding Terms and Conditions state that the service provider will be responsible for the design, construction, operation, and maintenance of the facilities for the storage, delivery, and reception of Natural Gas, as required by CENAGAS. Regarding storage, the Bidding Terms and Conditions specify that the (i) the space in the field Jaf to store a quantity of working gas is 10 Billion Cubic Feet (BCF); (ii) the infrastructure shall guarantee a storage delivery capacity of 500 million cubic feet per day (MMPCD) for a minimum consecutive period of 5 days; (iii) the maximum delivery response time following CENAGAS' indication to make use of the working gas shall be 8 hours; and (iv) the restitution time of the working gas used shall be in a time interval of no more than 2 times such period of use.

On the other hand, CENEGAS published the "Model Contract for the reception, storage and delivery of natural gas", which provides that the execution of the services is the absolute and exclusive responsibility of the service provider, who shall guarantee through standby letters of credit the compliance in the construction stage of the works for an amount of USD 24,000,000.00 (Twenty-Four Million Dollars 00/100); the operational compliance, for an amount of USD 500,000.00 (Five Hundred Thousand Dollars 00/100); and a guarantee of quality or hidden defects for an amount of USD 5,000,000 (Five Million Dollars).

Likewise, the Model Contract indicates that it will have a term of 30 years, and includes clauses related to the obligations of the service provider, obligations of CENEGAS (including monthly payment of the consideration), ownership and delivery of natural gas, assignment, termination, arbitration, indemnification, insurance against risks, civil liability insurance, among others. Despite the above, the current administration has not carried out the bidding process.

Additionally the Institute of Administration and Appraisals of National Assets (INDAABIN, for its Spanish acronym) published the “Criterion No. 01/2017 CPIFP of general application in matters of administration of federal real estate assets, corresponding to the best use and exploitation of hydrocarbon reservoirs determined as economically unviable for extraction”, by virtue of which it is determined that the aforementioned reservoirs may be used for the storage of natural gas or other hydrocarbons, in compliance with applicable regulations.

All this provisions and the obligations under the tender can be seen as an example of the terms that could be used for Carbon Capture and Storage in Mexico, however the tender that is mentioned above was never carried out and no other regulation has been issued in order to establish Carbon Capture and Storage or storage of natural gas on reservoirs in Mexico. Hence this is a significantly underdeveloped area in Mexican Legislation.

In conclusion and according to the above, generation of Blue Hydrogen in Mexico still has some areas of opportunity, and it is still pending to be regulated. Hence, we anticipate that companies that will look to invest and carry out blue hydrogen projects in Mexico will face the following challenges:

1. Lack of regulation on Carbon Capture and Storage.
2. Lack of regulation on use of hydrogen as fuel.
3. Lack of clarity on permits and contracts that will be applicable for these type of projects.

We will explore in our following article, which current permits that are used for transport and storge of Hydrocarbons could be adapted to Hydrogen.