Policy doubts risk narrowing Mexican pathway for U.S. gas exports

In recent years, U.S. companies have proposed up to a dozen projects to re-export shale gas from the vast Permian basin in Texas through Mexico. These LNG projects leverage existing infrastructure to bypass opposition to construction of new export terminals on U.S. soil. For Pacific Coast projects in particular, gas sellers can reach Asia without having to cross the delay-prone Panama Canal.

On paper, the U.S.-derived LNG projects in Mexico represent 50 million tonnes per year of LNG export capacity. Even though Asian buyers have already committed to some of the off-take, the full volume “would make Mexico somewhere close to the world’s fourth largest LNG exporter,” said Diego Rivera, a senior energy researcher at Columbia University. “That’s extremely unlikely to happen.”

In a pattern that played out earlier in the U.S., political and regulatory uncertainties are tempering initial exuberance over Mexican gas re-export projects. Longer term, experts are warning that Mexico’s own lopsided reliance on U.S. gas could complicate the re-export model.

Gas gap

Mexico depends on U.S. gas to meet close to 80% of its demand. Driven mainly by power generation, the trend shows no sign of letting up, according to Norwegian consultancy Rystad Energy. Mexico’s “domestic production will not come close to being able to meet even the incremental additional gas volumes that will be needed from now to 2030, even 2040,” Rystad Latin America vice president Schreiner Parker told Gas Outlook.

Over the past two decades, Mexico’s galloping gas demand and rising associated U.S. gas production drove development of more than two dozen cross-border gas pipelines. U.S. companies are now tapping into some of that infrastructure, building out more, and converting legacy LNG import terminals in Mexico to reach markets in Asia as well as the Pacific Coast of South America.

Mexico’s domestic politics have cemented its reliance on U.S. gas. Most private investment in oil and gas exploration and production dried up after Mexico’s nationalist outgoing president, Andrés Manuel López Obrador, reversed energy reforms, gutted regulatory bodies, scrapped tenders, and restored the market dominance of financially distressed national oil company Pemex and its electricity counterpart, CFE.

Neither state-owned firm has the capital or technical capacity to revive Mexico’s hydrocarbons industry. Even if they did, it would be tough for Mexico to compete. “There is some Mexican gas associated with oil that’s competitive even under these conditions, but in the short term Mexico will continue to rely on U.S. gas, because impressive economies of scale there make costs very low,” former Mexican energy regulator Francisco Xavier Salazar told Gas Outlook. “Mexico should take advantage of that, but without neglecting its own potential.”

Such council is aimed at President-elect Claudia Scheinbaum, the former Mexico City mayor and López Obrador protégé who will take office on October 1st. Investors see Scheinbaum as “more pragmatic” than her mentor and, as a climate scientist by training, inclined to address Mexico’s profound lag in renewable energy. Scheinbaum’s recent appointment of economist Luz Elena González as Mexico’s next energy secretary signals a more “evidence-based” approach, Rice University energy expert Francisco Monaldi told Gas Outlook. He highlights Scheinbaum’s pledge to invest in power transmission to unleash more renewable energy.

Scheinbaum will start her tenure just as gas re-exports get underway. After several months’ delay caused by the April 2024 rupture of an internal pipeline, frontrunner New Fortress Energy is about to launch the first phase of its Altamira “Fast LNG” floating terminal on Mexico’s Gulf Coast. The project will liquefy Texas gas that crosses into Veracruz through the Sur de Texas-Tuxpan subsea pipeline, and deliver it to the energy-starved U.S. territory Puerto Rico

Larger projects are afoot on Mexico’s Pacific side. San Diego-based Sempra is completing construction on the $2 billion first phase of its Costa Azul project in Baja California. The initial  phase, boasting three million tonnes per year of LNG capacity, will be supplied through the Rosarito expansion pipeline, which is scheduled to start operating by December. Upon announcing a final investment decision (FID) in 2020, Sempra said Japan’s Mitsui and France’s TotalEnergies committed to buying 2.5 million t/yr of the supply for 20 years. The company is now hammering out commercial deals for the next Costa Azul phase.

Both New Fortress and Sempra are converting Mexican LNG import terminals. In contrast, Houston-based Mexico Pacific is developing the more capital intensive 15 million t/yr Saguaro Energía greenfield project in Sonora. FID on the first two phases is said to be “imminent.”

Although Saguaro holds U.S. Department of Energy permits to supply free trade and non-free trade countries, a new lawsuit illustrates potential regulatory challenges. Environmental groups recently sued U.S. regulator FERC for failing to consider the complete impact of Saguaro’s associated gas pipeline project. “Developing these LNG terminals is locking us into reliance on fossil fuels for decades into the future when we need to shift away from fossil fuels as rapidly as possible,” says attorney Doug Hayes of California-based Sierra Club, one of the plaintiffs. “And when it comes to agencies, we believe they need to take a more holistic view of the impacts.” A final ruling will take months.

Elsewhere in Sonora, Singapore-based LNG Alliance has also secured permits for its Amigo LNG project but has yet to take FID. The company says it plans to launch a first 3.9 million t/yr train in early 2027 while it works on a second train. Further south, Sempra hasn’t taken FID on its Vista Pacifico LNG project either.

The companies are laying low amid shifting regulatory and political conditions. Last January, the Biden administration instituted a “pause” on new LNG export applications, a move that pleased climate activists just as President Joe Biden’s re-election campaign was kicking into gear. The pause boosted the outlook for the Mexican projects. But then in early July, a federal judge in Louisiana overturned the pause. Although the ruling won’t open the export floodgates, it adds uncertainty to the investment climate. So does a controversial new decision by the U.S. Supreme Court that ends a decades-old doctrine of deference to administrative agencies in interpreting legal issues.

Yellow light

All eyes are now on the U.S. elections in November. The return of Donald Trump to the White House could pave the way for more U.S. LNG terminals to the detriment of the Mexican route. If Biden, or a potential successor, prevails, the trend could lean the other way.

Security threats to infrastructure along Mexico’s northern border pose another risk. Extreme weather does too. Further down the road, the re-export contracts that companies negotiated directly without competitive tenders could also draw scrutiny, especially if the exports drive up domestic gas prices.

Under those conditions, a future Mexican government could try to divert exports to domestic consumers. Or the U.S. could even restrict gas exports, as occurred briefly during a storm-related crisis in Texas in 2021. In the well-established trade framework between the U.S., Mexico, and Canada, such scenarios seem far-fetched. But experts say caution is warranted, pointing to the tumultuous record of Chile’s dependence on Argentinian gas and the EU’s reliance on Russia.

For now, gas imports are baked into the Mexican power sector, and there is room to grow in places where CFE still burns dirty fuel oil from Pemex, said  Jeremy Martin, vice president at the San Diego-based Institute of the Americas. He points to a New Fortress LNG project in environmentally sensitive Baja California Sur. Beyond gas, Martin is encouraged by the Scheinbaum team’s “openness” to “smaller scale distributed generation, which could bring a lot more solar.” Much will depend on her pick to lead  CFE.

Continuity of gas-focused policies under Scheinbaum raises a deeper question for Mexico. Rosanety Barrios, a Mexican energy expert who played a key role in her country’s ill-fated energy reform, says Mexico should coordinate energy policy with its northern neighbour to assess the costs and benefits of the re-export projects. “It’s no longer valid to talk only about investment and tax payments as benefits. It’s a reality that the projects require very few jobs once they start operating,” Barrios told Gas Outlook. Mexico should embrace a broader vision to include new technologies such as green hydrogen that imply technology transfer and long-term employment, “and not just be a transit country for LNG.”