Mexico seen relying more on imports, notably LNG, for gas supply needs

Nov. 6, 2002
Mexico will be increasingly reliant on imports to meet its natural gas supply needs, despite its best efforts to boost domestic gas production, says a top executive with that country's state oil company.

Bob Williams
Executive Editor

HOUSTON, Nov. 6 -- Mexico will be increasingly reliant on imports to meet its natural gas supply needs, despite its best efforts to boost domestic gas production, says a top executive with that country's state oil company.

LNG supplies are likely to play a key and growing role in that import stream, and foreign players are continuing to jockey for position to promote their proposed regasification terminals to serve this burgeoning new market.

Those outlooks formed the basis of presentations by a panel of speakers late last month at a Mexican energy conference organized by Center for Business Intelligence, Woburn, Mass. The official acknowledgement of the outlook for growing gas imports correlates with state oil company Petroleos Mexicanos' campaign to promote the controversial proposed multiple service contracts (MSCs) with foreign companies that are intended to bolster domestic supplies. MSC tender bidding is expected early next year.

But the panelists left little doubt of their conviction that LNG will be coming to Mexico.

In fact, establishing an LNG terminal in Mexico is the "major infrastructure project of the (President Vicente) Fox administration," said George Baker, principal of Houston energy consultants Baker & Associates and publisher of the Mexican Energy Intelligence information service. "Fox wants to have at least one of these plants in operation by the end of his term (in 2006)."

Pemex view
Forecasting that Mexican gas demand will at least double by the end of the decade from the current level of 4.5 bcfd, a top Pemex executive noted that imports will play an increasingly important role in meeting that future demand. Mexico's gas demand is projected to increase at a rate of 14%/year this decade, mostly to feed a flurry of new electric power plants.

While Mexico exported small volumes of natural gas during the early 1990s and importing generally less than 200 MMcfd—falling just short of net export status in 1999—the country currently is exporting 6 MMcfd while importing 550 MMcfd, said Guillermo C. Dominguez Vargas, vice-president of technology and professional development at Pemex E&P.

Meeting the country's explosive gas demand growth this decade will require new supplies resulting from exploration in new areas of Mexico, new technology, and the contribution from MSCs, the Pemex executive said. Reaching that goal also calls for "increasing imports during the next few years" via pipeline from the US and Canada and as LNG, Dominguez Vargas said.

Pemex production
Pemex "is shooting for (production of) 5 bcfd in the next 2 years," Dominguez Vargas said.

Pemex gas production for 2002 through August was 4.439 bcfd, up from around 3.5 bcfd for much of the 1990s. The state firm currently produces 4.6 bcfd of gas and has set its sights on output of 6.8 bcfd in 2006 and 9 bcfd in 2010—the latter figures incorporating contributions from MSCs.

To bolster domestic gas production, Pemex initiated its strategic gas program (PEG) in 2001 that comprises 22 projects targeting mostly nonassociated gas. PEG entails extensive exploration, development, production, and pipeline work that will entail capital expenditures of $8.1 billion during 2001-09, with $1.574 billion of that total slated for 2001-02.

The state company has notched some early successes under PEG. Among them is a discovery on the Lankahuasa prospect in shallow waters off Vera Cruz.

"Lankahuasa is a very promising area that could have 2-3 tcf of gas," Dominguez Vargas said. A second well at Lankahuasa reportedly was noncommercial, says an industry specialist knowledgeable about Mexico's petroleum sector.

At the same time, Pemex is venturing into deeper waters in the Gulf of Mexico, a big leap for a company whose offshore production is primarily in less than 100 m of water. Towards that end, Pemex is negotiating agreements covering deepwater technology transfer with a number of undisclosed foreign major oil companies.

Dominguez Vargas said Pemex is eyeing some locations in more than 2,000 m of water in the Gulf of Mexico near the US border.

"We are hammering out an agreement, but we have some disagreements," Dominguez Vargas said. "Because of restrictions (against foreign investment in Mexican upstream assets), we can't work out anything other than technology-sharing agreements.

"We hope to be able to work together with these companies in the future," he added, noting that Pemex has an "inadequate budget for fulfilling its E&D needs."

Dominguez Vargas also outlined progress to date on MSCs, which to date has mainly entailed overcoming fierce political opposition at home and developing a new form of service contract hitherto unknown in Mexico.

The Pemex official speculated that as many as "half a dozen MSC contracts are envisioned."

The first draft of an MSC contract is expected to be unveiled in January, with the tender for MSC bidding to get under way in February, he said.

"The aim is to double Burgos (basin) output with MSCs," Dominguez Vargas said. "(Foreign) companies will be working only in areas where Pemex has already certified reserves—it's very low risk."

In essence, the MSCs will be structured as long-term (field life) contractor agreements in which the MSC contractor will be paid a "unitized price for services and work performed," the Pemex executive said.

Recognizing Pemex's own average domestic natural gas supply cost of $1.70/Mcf and a projected 2006 gas import cost of $3.69/Mcf., Dominguez Vargas pegged that future MSC supply cost threshold at $2.46/Mcf.

"The winner (of the MSC tender) would be the lowest off the ($2.46/Mcf threshold)," he said.

He acknowledged that there "might not be much attractiveness" for the MSC terms, but "doing more might not be possible right now because of congressional opposition."

Given that Mexico's gas demand is expected to top 9 bcfd by 2010, Dominguez Vargas said, "Even with the MSCs, we will still have to find more gas; we will still have to rely on imports."

LNG prospects
Mexico is looking increasingly like the gateway to North America for stepped-up imports of LNG, according to Keith M. Meyer, vice-president, business development, LNG & supply, CMS Panhandle Cos., a unit of CMS Energy Corp.

Of the new LNG receipt capacity proposed for North America, more than 75% is slated for Mexico.

Establishing an LNG infrastructure in Mexico will help advance the regional integration of gas markets in the Americas, Meyer noted.

He contends that LNG can compete with existing continental sources of major new gas supplies, such as gas from Alaska and Canada's arctic and from the Canadian eastern offshore. To support an LNG project of 1 bcfd takeaway capacity, an investment of $6 billion would be needed, including 12 LNG carriers and exploration and production investments.

What's needed to fulfill this potential are multilateral trade agreements to provide long-term sanctity of contracts—perhaps even a free trade agreement of the Americas—and long-term gas prices sufficient to support capital investment, Meyer said.

LNG must be considered part of the gas supply puzzle for "any place in North America," said Rob Bryngelson, managing director of business development, El Paso Global LNG, a unit of El Paso Corp.

That is increasingly apparent for Mexico, he said, noting that the country's projected gas demand growth of 350 MMcfd/year this decade is making it increasingly dependent on gas imports from South Texas. Bryngelson warned of Mexico's overreliance on South Texas gas, where production is declining and demand is rising.

What is helping to clear the path for Mexican LNG imports is the shift among LNG suppliers toward accepting market-based indexed pricing, he said: "LNG suppliers are willing to take this risk."

The explosion of interest in Mexican LNG projects is likely to lead to a shakeout, said Brian D. Knezeak, director, global structured finance, ANZ Investment Bank.

He noted that, in theory, there could be as many as 20 Mexican LNG terminals, "if all the proposals came about," adding that Mexico is currently reviewing 18 project proposals.

A more realistic outlook would entail the installation of 4 LNG terminals in Mexico over the next 20 years, Knezeak said.

The ANZ executive also voiced concern over a suitable price threshold for LNG being sustained beyond the ideal current price environment. While $2-3/Mcf would be a problem because LNG imports would be uneconomic at that price, ". . . $4-5/Mcf would also be a problem because of the additional supply that would come on, which would lower prices again."

Contact Bob Williams at [email protected].