Small, Medium-Scale LNG the Natural Disruptor in Emerging Markets

Over the last 15 years, Mexico has been developing an expansion of strategic infrastructure within the energy sector, specifically within the natural gas sector (in all its ramifications). From the exponential growth in the exploitation of unconventional wells (Shale gas) in the Permian basin in Texas and in other basins with large reserves of natural gas and hydrocarbons in the United States, this derived from the technological advance in the exploitation of unconventional wells more than 15 years ago, the United States has gone from being an importer of hydrocarbons to a large exporter. More  than that, it has become a world power as a net producer. Our country, which at some point was one of the 10 largest exporters and producers of hydrocarbons, is now in 16th place. The exponential growth and exploitation of unconventional wells play a major role in the supply of energy nationally and internationally in the United States. Gradually, starting in 2007, oil fields for shale gas exploitation and the necessary infrastructure for its processing, storage, and distribution started to be developed. The United States, the developer of drilling technology (fracking), is and will be the great disruptor worldwide in the oil market. This technology led to the development of specific infrastructure: civil works, large wells, and water storage, construction of gas pipelines, modular refineries, development of technology, construction of gas and oil pipelines, storage and other components of vertical and horizontal integration. 

The great technological achievement goes hand in hand with the vertical development of the processes of exploitation of unconventional wells: identification and mapping of production areas, drilling, cementing, injection, fracking, separation, storage, and distribution. All this expansion and drilling increased the extraction of natural gas from the subsoil in exorbitant quantities, which was initially sent into the atmosphere or burned. Once the gas pipeline infrastructure in the United States increased and both countries (the United States and Mexico) started becoming interconnected, Mexico eventually became a relevant player and the biggest natural gas customer and importer from the United States. Taking into consideration that, derived from the large surplus of natural gas production in the United States, its price becomes the great driver in the equation, both for the United States and for Mexico. This consideration of large production and low price of natural gas eventually led us to reflect as a country and as a producer of natural gas on evaluating the cost benefit of importing cheap natural gas instead of investing in technology and infrastructure for domestic use. The great competitiveness in price led our country to rethink its internal strategy to take advantage of this circumstance. Understanding this opportunity and finding strategic niches to take advantage of demand, Mexico launched a strategic investment plan for the development of natural gas transportation infrastructure (gas pipelines), first with PEMEX (taking advantage of existing infrastructure) and then through private investments (through projects with the Federal Electricity Commission). 

This infrastructure development triggered over the years — and to this day — an extensive private and public network of natural gas transportation through pipelines in our country. To date, it is responsible for supplying competitive natural gas to the network of combined cycle plants for large electricity production in Mexico, as well as supplying large commercial and industrial hubs, which take advantage of the cost-benefit price of natural gas versus other fuels. It is relevant to put into context the importance of this fuel in the country’s energy transition. Therefore, the increasing capacity and need for natural gas supply is relevant, derived from the growing energy demand in our country. Although today we have a large extension of gas pipelines, branches, interconnections, and other infrastructure, we continue to require much greater infrastructure development and investment in the construction of gas pipelines and branches that can bring natural gas to more interconnection points and end-customers. It is important to emphasize that although we are gradually expanding the supply of natural gas, it will be necessary to use other means than gas pipelines to bring gas to larger regions where there will be no investment projects for the development of infrastructure (either gas pipelines or branches) within the next 10 years. Therefore, the only viable market options will be conventional liquefied natural gas terminals, small and medium-scale unconventional liquefied natural gas production plants, natural gas compression plants, satellite stations, decompression, among others. 

Currently in Mexico there are already around 20 CNG plants, three conventional LNG terminals, and about three small and medium-scale production plants. If we look at the context of the Asian LNG market, specifically China, we realize the great potential that this type of project can have. As a reference, China operates around 250 LNG plants and more than 4,000 service stations for public transport; in Mexico, we have only three plants — with others under development for the future.and those that are under construction development of construction in future stages. The United States has 100 LNG plants.

It is extremely relevant to look at what is being done in other countries, and what we can do as an emerging country to take advantage of the technologies, expertise, technical capacity, competitive price of natural gas, and other positive drivers that put liquefied natural gas in a position of strategic evaluation for potential development in Mexico. It should be noted that there are significant barriers that prevent strategic natural gas projects from reaching Mexico with the speed at which the national market demands. One of the most important barriers is the standardization of regulation so that necessary measures can be adopted, making the regulatory entities that authorize the operation of these types of projects more agile, and the development time of a project can be matched with the granting of the corresponding permits so that the start-up times of a plant can be improved. Currently the approval time plus construction and delivery of equipment is around 1.5 to two years. This overcomplicates market prospecting and potential end-user closure, as LNG distributors are dependent on the LNG producer, further complicating the equation because for any small-scale LNG project to be economically feasible, it must be hung on commercial anchors (strategic off-takers), without leaving aside the cost that these types of projects entail (plus or minus US$30 million per plant). Thus, it is very difficult to start bankable and financially viable LNG greenfield projects in Mexico. Although the statistics indicate the great demand and need that exists to bring competitive energy (liquefied natural gas) to replace polluting energy sources such as diesel and LP Gas, in Mexico, we are taking very slow steps in terms of developing such projects.

In Mexico, we have access to the cheapest natural gas in the world, we have the necessary infrastructure for interconnection to the natural gas transportation grid, potential market and demand, technologists and strategic features. Therefore, it is essential to ask ourselves what drivers are necessary to implement these types of projects, and eventually reach the necessary maturity to go from greenfield to brownfield projects, starting with the standardization and updating of the regulatory framework, clear understanding of the responsible entities, clear communication between the parties, openness for integration between regulatory entities, technologists, EPC members, producers, and distributors. This to understand the entire context in general: national demand, areas of opportunity and strengths (both government and private industry), understanding of the market (transportation, mining, and electricity generation), and strategic development plans between the parties. I firmly believe that the conditions are there. We need to further look at the need for small-scale unconventional liquefied natural gas projects. In Mexico, as an emerging country, we require greater infrastructure development, greater accessibility to less polluting energy sources such as natural gas, economic and competitive energy, and accessibility to strategic distribution projects. This will probably lead us to rethink our national energy supply strategy and direct investments in the field of natural gas infrastructure given that liquefied natural gas is the natural course for evaluation, analysis, and execution in the short, medium, and long term. Our expectation is positive in this regard.  There are the economic, technical and commercial conditions to explore the development of such  projects in Mexico. Surely, the regulatory and responsible entities also agree. I assume that it will take expansion and coordination, and greater involvement between both parties (public and private) to eliminate the potential barriers that prevent a greater push in this regard. Uncertainty often kills good intentions; therefore, we must generate trust, assume certain risks, open communication channels, and act as a strategic pole that directs the necessary efforts to achieve clear goals and long-term objectives. 

In the next 10 years, Mexico should consolidate itself as a benchmark for investment and development in strategic infrastructure in natural gas projects and small-scale unconventional liquefied natural gas. It surely will be a benchmark not only regionally but internationally.