Competition to export Mexican LNG using US shale gas faces test in current market

Houston — During any other market cycle, Mexico Pacific Limited's proposal to build an up to 12 million mt/year liquefaction terminal would seem a no-brainer.

Its proposed location on Mexico's West Coast allows for a shorter shipping route to Asia than from the US Gulf Coast and the ability for tankers to avoid the congested Panama Canal. Existing pipeline infrastructure in the region can access cheap Texas shale gas. And in February it tapped for its helm an industry veteran that helped guide Cheniere Energy when the US LNG pioneer started up its flagship Sabine Pass facility.

But this is not a normal market cycle.

Low international prices, a continuing global supply glut and a coronavirus pandemic further weakening LNG demand have put North American developers in a bind. Because of delays in advancing other export projects that should have been under construction by now, there is more competition for buyers of supplies to be delivered around the middle of the decade when the forecast had long called for a shortage.

"I think there's enough space in the market for everybody," CEO Douglas Shanda said in an interview Wednesday with S&P Global Platts. "It's just a matter of timing, and when it comes on."

Backed by venture capital firm Avio Capital and infrastructure developer DKRW Energy, MPL is now targeting a final investment decision in 2021 on its 4 million mt/year first phase. The greenfield project, at the site of what was previously supposed to be an import facility, would utilize modular liquefaction trains that are smaller than the units used by most of the first wave of US exporters.

MPL has preliminary agreements with offtakers covering its first phase, but those deals must be finalized. It faces competition from Sempra's Energia Costa Azul, also proposed for Mexico's West Coast, and Pembina's Jordan Cove, proposed in Oregon, for business from Asian utilities.

Front-end engineering has been assigned, although MPL has yet to secure a lump-sum turnkey contract with a builder. It has most of its Mexican permits in hand, although it still needs an export permit. Timing there could be tricky, with ECA ahead of it in the queue. Sempra delayed Tuesday its target for making an final investment decision on ECA to the second quarter of this year, from Q1 previously. There's also uncertainty over the speed with which Mexico is further opening up its energy markets to outside investment.

MPL is looking to index its contracts to the US Henry Hub or Waha, and it is open to agreements under which the offtaker would procure its own feedgas or MPL would procure the gas for the offtaker.

"What we're trying to do is make sure the framework, the commercial offering, is something that meets their needs," Shanda said.

If Shanda and his team can pull the pieces together and move forward on their current schedule, that would put MPL's startup potentially in late 2024.

The project would be welcomed by the midstream sector in Mexico and producers in Texas.

The northwest region of Mexico — comprising the Sonora and Sinaloa states — has significant potential for large consumers of natural gas. The current level of natural gas inflow capacity stands at 670 MMcf/d but may double by the end of the year, Platts Analytics data show. However, it is likely there will be future opportunities for midstream expansions considering the two proposed LNG export projects in Baja California (ECA) and Northwest Mexico (MPL) may compete for upstream capacity from the Permian Basin.

The Northwest region receives gas from IEnova's 770 MMcf/d Sasabe-Guaymas pipeline and TC Energy's 450 MMcf/d Topolobampo system. But Kinder Morgan's 200 MMcf/d Sierrita Lateral is the only upstream supplier to Sasabe-Guaymas (Sonora North) and is currently 570 MMcf/d below downstream levels.

The mismatch in capacity will be short-lived as Kinder Morgan plans to complete an expansion project on the Sierrita Lateral that will boost capacity to 523 MMcf/d from 200 MMcf/d by next month. Mexico's CFE has contracted 230 MMcf/d out of the 323 MMcf/d of incremental capacity.

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Additionally, Grupo Carso's 472 MMcf/d Samalayuca-Sasabe pipeline is expected to be in commercial operations by the end Q3 this year and may raise upstream supply access to 1.2 Bcf/d — now limited to the 770 MMcf/d of Sonora North.

At full 12 million mt/year, or 1.6 Bcf/d, capacity, MPL would push Northwest Mexico gas demand to 2.4 Bcf/d, or double the inflow capacity to the region. Considering that the El Paso Natural Gas pipeline could be affected by both ECA and MPL's LNG export projects, various expansion opportunities will likely occur if both projects reach FID.

While travel restrictions and trade flow disruptions from the coronavirus outbreak have made commercial talks more challenging, Shanda said he is confident deals for the right projects can get done in the current environment.

"It's been an interesting last few weeks for everyone," he said. "The buyers we are talking to — it's a West Coast project. It's sort of that black pearl."