Pitts: Is the Permian-Mexico-Asia Gas Route at Risk?

Five natural gas liquefaction projects planned on Mexico’s Pacific Coast present vast opportunity for Mexico, as well as the potential for U.S. producers to boost gas exports to Asian buyers who represent enormous growing demand.

Mexico currently takes on Texas piped-gas to the tune of around 6 Bcf/d. In the future, the plan is to also take on Permian Basin feedgas to liquefy and export, particularly to Asia, which leads global LNG demand and will drive long-term growth.

The advantages would be game-changing. LNG cargoes from the U.S. Gulf Coast must traverse an arduous route through the Panama Canal to reach Asia. Exports from Mexico’s Pacific Coast, however, offer a clear competitive advantage because they take a direct route to key Asian markets. Securing those markets clears the way forward for proposed liquefaction projects, which would add processing capacity of 7.8 Bcf/d to the global market.

But there are several hurdles for project developers, and only a fraction of the new capacity is coming to near-term fruition.

So far, the sole final investment decision was made by Sempra Infrastructure for first-phase development of its Energía Costa Azul (ECA) project in Ensenada, Baja California. Capacity of the first phase is 0.4 Bcf/d. No other plants are under construction.

Projects that remain uncertain include ECA’s 1.6 Bcf/d second phase; Mexico Pacific’s 4 Bcf/d Saguaro Energia LNG project in Sonora (Puerto Libertad); LNG Alliance’s 1 Bcf/d Amigo LNG (Epcilon LNG) project in Sonora (Guaymas); Sempra Infrastructure’s 0.4 Bcf/d Vista Pacifico LNG project in Sinaloa (Topolobampo); and Sempra Infrastructure and Mexico’s Federal Electric Commission’s 0.4 Bcf/d Salina Cruz LNG project in Oaxaca (Salina Cruz).

Asian buyers are especially keen to see Mexico’s projects come online. Growing populations translate to growing demand, and Asian buyers subject to price inflation in recent years are serious about diversifying the source of their suppliers.

Many Asian buyers were priced out of the market in 2022, following Russia’s spring invasion of Ukraine. When Europe’s LNG buyers realized the peril of depending on Russian natural gas, they sought supply elsewhere in a buying spree that lifted the price of LNG beyond what some Asian customers could afford. For now, LNG prices at the Title Transfer in Europe and the Japan Korea Marker in in Asia have stabilized as piped-gas and LNG supply security risks have all but ceased.

Asian countries in general have moved to lock in long-term LNG volumes from a diverse base of suppliers including Australia, the U.S. and Qatar to avoid a repeat of the summer of 2022. Those buying tendencies were somewhat amplified when the Biden administration enacted a pause in permitting for LNG facilities in January that raised uncertainties around U.S. LNG projects post-2030.

The future build-out of these Mexican LNG projects is mired in uncertainty tied to recent elections in Mexico, which saw Claudia Sheinbaum Pardo win the presidency.

In Mexico, developers of Mexican liquefaction projects have to deal with inherent issues such as security risks, a slow regulatory process and overlay of U.S. regulation for gas exports. They also have to contend with potential changes related to Mexico’s national security or energy security, as well as land disputes or environmental and social impact permit challenges. Mexico is also lagging on pipeline transport.

Asian LNG buyers have reason to be concerned about future Mexico LNG cargoes. Will that push them into the welcoming arms of the Qataris, the Aussies, the Canadians or other LNG exporters? Most likely, but to what extent, only time will tell.