Thu, Jul 18 2024 18 July, 2024

Mexico LNG terminal set to ship first cargo, others remain in limbo

A potential Mexico LNG export boom awaits. But while two small projects move forward, much larger proposals face financial and regulatory risk.

A ship of in the Gulf of Mexico, off Tamaulipas. (Photo: Adobe Stock/Alex Borderline)

An LNG terminal on Mexico’s coast will soon begin operations, while a half-dozen other Mexican LNG projects remain on the drawing board.

Altamira LNG is a floating terminal in the Gulf of Mexico off the coast of Tamaulipas, backed by New Fortress Energy. It will export gas that originates in Texas, shipped via a marine pipeline along the Gulf Coast into Mexico. From Altamira’s floating LNG terminal, the gas will be liquefied and exported to Puerto Rico to supply the island with gas.

The company said that its first cargo will ship in July.

On the other side of the country is Energia Costa Azul, another modest LNG export terminal, located in Baja California. Originally an import terminal, Energia Costa Azul is under construction and will soon ship gas to Asia — gas that also originates in the U.S.

In fact, a half-dozen LNG projects are proposed on Mexico’s Pacific and Gulf Coasts, which could turn Mexico into a major gas exporter. If all are completed, Mexico could eventually export as much as 60 million tonnes of LNG per year (mtpa), making it the fourth largest LNG exporter in the world.

But while the gas will leave Mexican shores, the rush to build and export gas is largely an extension of the American LNG bonanza. That is, many of the developers are U.S. companies, exporting American gas, relieving oversupply pressure from Texas shale. Some of the buyers are even American oil firms hoping to turn themselves into big LNG traders, gambling that they will profit from what they believe will be long-term demand growth in Asia. Mexico just happens to be the easiest and most convenient off ramp for drillers in the U.S. with too much gas on their hands. 

“Gas from the Permian is going to be overflowing to Asia and to Europe, but now through pipelines that are coming to Mexico,” Pablo Montaño, general coordinator at the Mexican-based NGO Conexiones Climáticas, told Gas Outlook. “These are not Mexican projects.”

While Altamira LNG and Energia Costa Azul are smaller facilities that are moving forward, there are several other, much larger, LNG projects that remain on the drawing board. One of the largest and most contentious is the Saguaro Energia LNG, a proposed three-phase LNG project that could eventually reach 28 mtpa. As of now, Mexico Pacific, the company behind the project, is prioritising the first two phases, totalling 15 mtpa.

Positioned on the Pacific coast of the state of Sonora, the terminal would receive gas from a yet-to-be constructed 850 km pipeline that would bring gas from Texas’ Permian basin to Mexico.

“The facility will create a bridge between the lowest-cost gas basin in the world, and the world’s largest energy markets in Asia,” Mexico Pacific says in a promotional video on its website.

One of the selling points is that gas shipped from Mexico’s Pacific Coast offers a shorter route to Asia, avoiding the increasingly congested Panama Canal through which U.S. Gulf Coast LNG must pass.

However, despite these advantages, Saguaro Energia LNG, as well as a few others that are further behind in development, still face considerable uncertainty and financial risk.

President Biden’s LNG “pause” has ensnared several LNG projects, putting on hold new American gas export proposals, including those terminals that are to be constructed in Mexico.

“The only region more impacted by the permitting pause than the Gulf Coast, is the Pacific Coast of Mexico,” Lukas Ross, a deputy director of climate and energy justice at Friends of the Earth, told Gas Outlook.

Saguaro Energia does have its permits for its first two trains, but not for the third. However, the project faces a conundrum. Its export license expires at the end of December 2025. It cannot build the terminal in that short amount of time, which raises questions about its viability. It could conceivably obtain an extension, but the U.S. Department of Energy issued a policy change in 2023 that foreclosed on extensions unless LNG projects were already under construction and could prove that delays were outside of their control.

The problem for Saguaro Energia is that it cannot obtain financing and greenlight construction if there’s a risk that it will lose its permit. So, the project will continue to remain on the drawing board, as the clock ticks away on its permit.

A handful of other Mexican LNG projects are further behind, and will have to wait until the conclusion of the permitting “pause.”

Of course, a lot could change after the U.S. presidential election. If Donald Trump wins, he has promised to immediately end the pause. A change in leadership at the Department of Energy could also revise the policy framework on license extensions.

Risks to Mexico

The development of several LNG projects in Mexico would be a boon for American gas drillers. U.S. natural gas prices plunged earlier this year, well below $2/MMBtu for Henry Hub. But in the Permian basin, where the glut was more pronounced, prices dropped so low that they even dipped into negative territory.

At the end of June, gas prices in the Permian, at the so-called Waha hub, traded as low as $0.02/MMBtu. In other words, Permian gas is essentially worthless — there is way too much supply and nowhere for it to go.

If West Texas can link up with Mexico’s Pacific Coast for export, that would relieve a huge volume of gas, lifting prices and providing a windfall for Texas drillers.

Meanwhile, non-Mexican oil companies are also hoping to profit from the LNG trade. ExxonMobil and Shell are two key buyers of LNG capacity from Saguaro Energia LNG. Shell is already one of the world’s largest LNG traders and ExxonMobil is increasingly becoming one as well.

They view LNG as a market with long-term growth prospects. The risk is that the perceived endless demand growth in Asia turns out to be a mirage. Forecasters are increasingly questioning the robust demand growth projections put out by LNG companies and industry analysts. Gas consumption in Japan and South Korea is already in decline. LNG may only play a limited role in China’s electricity sector. In India, LNG is viewed as a costly option — demand is growing, but it’s not clear that LNG will ever become a core part of the energy mix.

The gamble to build LNG terminals on Mexico’s Pacific Coast is a bet that Asian demand will pan out. The looming supply glut, widely expected in the second half of this decade, may pose serious financial challenges to the industry. Still, one silver lining for LNG traders is that falling prices may spur Asian buyers to scoop up additional cargoes.

“I think what the Pacific Coast boom helps clarify is the industry’s vision for the future of North American LNG, which is massive amounts of supply creating demand in Asia-Pacific region,” Ross said.

There is some excitement for new investment in regions of Mexico that see too little of it, such as Sonora and Sinaloa, Montaño said. But much of the profits will accrue to American companies, while the costs, both economic and environmental, will be borne by Mexico.

“This is not gas for Mexico. This is basically gas for Asia and for Europe, coming through Mexico, with consequences on the local ecosystems,” Montaño said. “There is actually going to be quite little, if any, benefit to Mexico.”

He pointed to the Gulf of California, a sea rich in biodiversity. LNG tankers will threaten the whales, dolphins, sharks, sea turtles, and other marine life.

“Right now, the Gulf of California does not have heavy traffic, or big ships,” Montaño said. LNG terminals will “create a very significant amount of traffic in one of the biggest biodiversity hotspots for ocean wildlife in the world.”

One question is what incoming Mexican President Claudia Sheinbaum might do. She is a climate scientist, but is also expected to carry on similar policies to current President Andrés Manuel López Obrador, who favoured oil and gas development.

“It all depends on which Claudi we are going to get. Are we going to get the climate scientist?” Montaño said. “Because the climate scientist should see this as a huge climate bomb. It’s one of the largest climate bombs in the world.” He said Sheinbaum would have the ability to revisit the environmental review process for LNG projects if she wanted to.

He also warned that exporting enormous volumes of gas will expose Mexico to greater market risk. Mexico is already highly dependent on the U.S. for its gas needs, a dependency that is deepening as domestic production declines. If more gas is diverted overseas, prices could rise.

“We’re going to be exporting gas while we’re still dependent on gas from Texas. This will actually hurt Mexican families and the economy,” Montaño said.

“This has no benefits from Mexico. We’re only carrying the cost.”