RETURN OF SIZABLE MEXICAN GAS IMPORTS POSSIBLE

Mexico will be a lucrative market for U.S. and Canadian gas companies in coming years even though it recently became a net gas exporter.

That's the view of several speakers at a conference in Mexico City sponsored by the American Gas Association, Canadian Gas Association, and Mexican Association of Gas Distributors.

Keith O. Rattie, Chevron Corp's manager of international gas coordination and business development, predicted Mexico will face a shortfall of at least 8 tcf of gas during 19942010.

This assumes a conservative base case of Mexican primary energy consumption growing an average 2.4%/year from the current 2.4 million b/d of oil equivalent (BOE/day) to 3.6 million BOE/day by 2010.

At the same time, Mexican gas consumption is expected to grow an average 3%/year from 2.9 bcfd in 1993 to 5.4 bcfd in 2010. That will hike the gas share of Mexico's total energy consumption to 25% from 21%.

But before that scenario can become reality, several bottlenecks in Mexico's gas industry and throughout the Mexican economy must be overcome.

STRUCTURAL IMPEDIMENTS

Rattle and other speakers noted there are structural impediments that could limit Mexican gas demand growth in years to come.

One is continued slow economic growth in Mexico. After averaging 3%/year growth in gross domestic product during 1989 92, the economy grew only about 1.5% in 1993. If that trend continues or worsens, it will limit the growth of overall energy demand, keep key gas consuming ammonia plants closed, lower investment in gas transportation systems and environmental technologies, and be an incentive for consumers to switch from natural gas to low cost high sulfur fuel oil (HSFO).

A strong recovery is not expected until second half 1994.

The almost unlimited supply of HSFO on the Mexican market is a major problem for gas to increase its market share, especially Ashen gas prices rise. Unable to export significant volumes of HSFO, state owned Petroleos Mexicanos often sells it on the Mexican market at cost.

Enforcement of environmental regulations in Mexico has not yet evolved to the point that industrial fuel users are dissuaded from using HSFO when there is a cost advantage to do so. That holds true even for the state owned utility Federal Electricity Commission (CFE).

In addition, the real as well as the perceived unreliability of gas supplies, which stems from an inadequate gas pipeline network and the fact that 85% of Mexican gas supplies are associated with crude production, also inhibit industrial users from making a permanent switch to natural gas.

Some contend many, of the intraindustry bottlenecks could be overcome and gas demand boosted by construction of gas fired electrical power and desulfurization and coking facilities.

The critical mass of gas demand needed to render economically viable new pipeline construction will not be reached, contends Bruce Stram, Enron vice president of corporate planning, without construction of gas fired power plants. Industrial consumers and gas suppliers in Baja California will not be able to reach profitable agreements until CFE's Rosarita power plant is converted to gas and an accompanying cross border pipeline laid.

Reducing the HSFO glut also is a priority, requiring more projects such as Valero Energy Corp's proposed resid upgrading/power plant at Nuevo Leon.

SUPPLY SHORTFALL

Once those obstacles are overcome, Mexico will face ways to meet its expected gas supply shortfall of 8 tcf during 1993 2010.

Chevron's Rattie came up with three options, for which he assigned costs for only two (see table), calling for Mexico to:

Import gas from the U.S. and Canada at an estimated cost of $20 billion, including new pipeline construction.
Increase domestic oil production by 10 billion bbl in that period and with it associated gas supplies at a cost of $65 billion.
Develop domestic nonassociated gas reserves estimated at 70 350 tcf. This option has never been fully evaluated by Pemex or others.

Reacting to Rattle's estimates, Pemex officials told Oil & Gas Journal their likely strategy will be a combination of all three options, with Mexico's top priority remaining the maintenance of current levels of crude exports while meeting growing domestic demand. Accordingly, associated gas production, while technically the more costly option, will be the major source of new domestic gas supplies in years to come.

That means Baja California and other northern border regions will see another surge in Mexican gas imports, especially when the huge power plants at Rosarita and Samalayuca come on stream.

Development of nonassociated gas supplies, especially in the rapidly growing industrial Northeast Mexico, will come on line only as new investment capital is forthcoming.