Market skepticism surrounds Mexico's ambitious plans to boost natural gas supply

Mexico's Pemex is reportedly working on a handful of projects aimed at supplying natural gas to the Southeast of the country to support its industrial development, including a couple of small liquefaction projects. While observers and experts believe that increased gas delivery from Pemex could unlock significant opportunities in this historically underdeveloped area, these projects face numerous challenges.

More gas in the south

The Mexican government has a strategy to industrialize the Southeast of the country by supplying natural gas through Pemex, said Rosa Elena Torres Ortiz, an advisor to chief executive officer of the state oil and gas company.

The strategy envisions Pemex serving as an anchor user to develop gas infrastructure, rather than merely acting as a producer or marketer of gas, according to Torres Ortiz. As part of this plan, the company is assessing two LNG terminals: one in Coatzacoalcos, Veracruz, and another in Salina Cruz, Oaxaca.

"The government believes this type of plants can help provide storage," she said, and as the plants are scalable over time, they can generate more gas demand in the region.

The demand would not only come from Pemex, but also from the development hubs that the government is planning, she said.

The government of President Claudia Sheinbaum has announced plans to establish 12 development hubs strategically located throughout the country, each aligned with the primary economic activities of their respective regions. The hubs will be dedicated to nine main business lines: aerospace; textiles and shoes; semiconductors, automotive and electromobility; chemicals and petrochemicals; pharmaceutics and medical instruments; agroindustry and consumer goods. The hubs are meant to attract investments to the regions and foster their economic growth.

Both the Coatzacoalcos and the Salina Cruz LNG projects are located inside a development hub.

Availability and quality

Observers and market participants told S&P Global Commodity Insights they see plenty of business opportunities should gas be finally available for industrial users in the Southeast. However, they note that some of the projects have been proposed before, and much more needs to be done for them to come to fruition.

"Any project in the Coatzacoalcos area has two main problems: gas availability and quality of gas, said Santiago Arroyo, chief executive officer of Ursus Energy, a company that is building a 46 MMcf/d LNG terminal in the area.

"There is limited gas availability in the area, and the small amounts that are present are contaminated with nitrogen and require cleaning," Arroyo said.

The Coatzacoalcos region receives gas from Pemex facilities located in Cactus and Ciudad Pemex. According to S&P Global Commodity Insights, average production in the Cactus processing complex is almost 450 MMcf/d, while at Ciudad Pemex, it is 440 MMcfcf/d. 250 MMcf/d are sent to the Yucatán peninsula through the Mayakan system. Industrial demand in the broad southern region, which includes Oaxaca, Puebla, Guerrero, Chiapas, Tlaxcala and Veracruz, is roughly 280 MMcf/d.

The project in Salina Cruz faces even more hurdles, as it not only has to solve the issue of gas availability but also has to find a way to transport the gas across the Isthmus of Tehuantepec, said Arroyo.

"To do that, Pemex will need to build a new pipeline, as the existing one, Jaltipan, is used only for the refinery and does not have enough capacity," Arroyo said.

According to Commodity Insights, the Jaltipan-Salina Cruz pipe has a capacity of roughly 90 MMcf/d, and it is used solely for the demands of the Pemex Salina Cruz refinery.

Long-term vision

Although the projects might have a positive impact if implemented successfully, they are perceived as temporary fixes that may provide short-term relief, but the country desperately needs long-term planning, observers said.

"The reality is that there is no gas, and Pemex has no realistic plan to significantly increase its gas production over the long term," said Gonzalo Monroy, director of consultancy GMEC in Mexico City.

Pemex recently said it intends to increase its natural gas production by 1 Bcf/d to roughly 4.9 Bcf/d by reducing its venting practices and increasing its gas recovery. It also hopes to increase production at some key fields, such as Quesqui and Lakach.

"Pemex has no money, and it would need to attract investment to build those projects," Monroy said. "The only problem is that Pemex has a huge credibility problem: it owes money to its suppliers and it is surrounded by the perception of corruption," he said.

Norway's wealth fund recently announced it sold its fixed income investments in Pemex after its ethics council found multiple allegations or suspicions of corruption related to the company.

Mexico's brutal dependency on gas will not ease in the near future, but increase, said Rosanety Barrios, an independent consultant who served in the energy ministry under President Enrique Peña Nieto, who conducted a liberalization of the country's energy sector.

According to Commodity Insights estimates, total natural gas demand will continue to grow at an average compound annual rate of 1.9% throughout 2050. In 2024, total gas demand averaged 8.9 Bcf/d, with the power sector accounting for 60% of national demand and the industrial sector for 20%.

Pipeline imports averaged 6.4 Bcf/d in 2024 and are anticipated to reach 8.5 Bcf/d by 2030, increase to 9.5 Bcf/d by 2040, and conclude the outlook period at 11.3 Bcf/d in 2050.

The government should start making a profound analysis of the natural gas balance in the country for the next five to ten years, as the current infrastructure will be obsolete by 2030, Barrios said.

The financial conditions of the state companies are not what they once were, and the model that the government will use to finance those projects is still unclear, Barrios said.

"My only hope is that they do not lose more money on those projects," she said.