Mexico Seeks Consolidation as LNG Export Hub

In an effort to exploit the globally rising gas demand, Mexico seeks to consolidate as an LNG export hub to Asian and European markets. However, challenges remain as the country is deeply dependent on natural gas imports from the US.

Mexico has set a target: to become one of the few LNG export hubs worldwide, even though its gas exports are currently non-existent. In reality, the country only produces roughly 30 percent of its natural gas demand domestically; the other 70 percent is obtained through US imports.

The strategy centers on using the country's physical proximity to the US’ abundant reserves to supply US gas to hungry buyers in Europe and Asia, reports Bloomberg. Considering the US shale supply, eight LNG export projects have been proposed on Mexican territory, boasting an annual combined capacity of 50.2 million tons. What is more, some of these projects aim to start operations as soon as 2023.

If all LNG export projects come to life, Mexico would join the US, Australia, and Qatar as an LNG shipping nation, becoming the only member in the club that is not a consolidated gas producer itself.

The economic opportunity is attractive, as natural gas’ demand is soaring globally. The fuel gained popularity because it has a cleaner carbon footprint compared to other fossil fuels like coal or oil. However, geopolitical tensions brought on by the Russian invasion of Ukraine drastically shortened the supply even though demand began ramping up.

According to the International Group of Liquefied Natural Gas Importers, the market for LNG imports has doubled in size within a decade, with Asia as the main destination. With its energy security jeopardized, Europe has been moving fast to diversify its gas supply away from Russian imports, leading to US LNG cargoes gaining relevance. With limited liquefaction and export capacity available, varied buyers are competing fiercely to secure their gas supply.

“Mexico is set to become an exporter of US-produced natural gas and this is mostly driven by market dynamics that are taking place globally, especially those in Asia, but not precisely due to Mexico’s policies,” said Adrian Duhalt, the Baker Institute’s Center for US and Mexico, Rice University.

Nevertheless, there is no guarantee that Mexico's strategy will work out or that all proposed projects will be completed on time to take advantage of the current demand opportunity.

Concerning pipeline infrastructure and capacity, Mexico has the needed infrastructure already in place. Thanks to former President Enrique Peña Nieto's policies, more than a dozen cross-border pipelines are currently operating to import US gas. The total combined capacity stands at nearly 14bcf/d. So far, Mexico imports an average of 6.7bcf/d, leaving more than 7 billion cubic feet per day available for increased gas flow.

To finance the cross-border pipeline projects, the previous government signed long-term take-or-pay contracts that forced it to pay for full capacity, whether it was being used or not. With Mexico paying the full fee for underused capacity, increasing imports to power its LNG export strategy represents tangible benefits .

Mexico's geographic position certainly plays in its favor. Six of the eight proposed LNG projects are located along the Pacific Coast, where cargoes can be shipped to multiple destinations in Asia without passing through the busy Panama Canal. Save for one offshore project in Veracruz, all of the gas for the liquefaction plants would come from the US. Moreover, Mexico is taking advantage of local opposition in the US pushing back against new LNG projects.

Out of the eight projects on the horizon, so far only one project is under construction. The Sempra Energy-owned Energia Costa Azul export terminal along the Pacific Coast is currently under its first phase of development. The other projects are still on the drawing board but have gained market momentum.

In July, New Fortress Energy signed a pair of deals to develop offshore LNG export projects off the coasts of Tamaulipas and Veracruz, which could potentially address European LNG demand. Meanwhile, Sempra Energy signed an agreement with CFE to develop LNG export terminals in the states of Sinaloa and Oaxaca through a joint venture. If approval and permitting evolve smoothly, most LNG projects can begin exports approximately in four years.