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Mexico Pacific is lining up deals for 'black pearl of North American LNG'

Mexico Pacific Ltd. LLC executives embraced the idea of a racehorse coming out of nowhere as a way to describe their proposed LNG project that would export Permian Basin natural gas from Mexico's West Coast.

"'Dark horse' is a good description, but this will be my third time I've been on a dark horse project," MPL President and CEO Douglas Shanda said in an interview.

Shanda is a former Cheniere Energy Inc. executive who also worked several years on the Peru LNG project in South America. "The fundamentals of this project are so strong, and the team is so strong," he said. "I feel good about our opportunity and our odds."

The private developer has been quietly building the commercial support it needs to advance to construction on the project, which would be capable of producing up to 12.9 million tonnes of LNG per year. Executives told S&P Global Market Intelligence in a recent interview that they expect to reach a final investment decision, or FID, on two gas liquefaction trains in late 2021 or early 2022 and to begin exports by 2025.

"We are trending towards FID'ing 8.6 million tonnes, and we do have a third phase of another 4.3 million tonnes that we have permitted," Shanda said. "We're already looking at what comes after that, because right now the commercial interest in our project is so strong."

MPL's reports of commercial progress came as more than a dozen LNG developers in North America compete to advance their projects to construction, following a year marked by a lack of FIDs. Just one LNG project was commercially sanctioned in 2020: Sempra Energy's 2.5-Mt/y Energía Costa Azul terminal, which is also on the West Coast of Mexico, in Baja California.

Other developers, especially those with greenfield projects that would be built from the ground up, have struggled to build the commercial support to get to the construction phase. But some project sponsors in recent months have cited an increasing interest among world LNG buyers in signing long-term supply deals as a source of optimism.

SNL Image

Mexico Pacific Ltd.'s proposed LNG terminal would be capable of producing up to 12.9 million tonnes per year.
Source: Mexico Pacific Ltd. LLC

"Most projects struggle with customers," said MPL Chief Commercial Officer Sarah Bairstow, a veteran of Santos Ltd.'s Gladstone LNG project in Australia "That hasn't been our struggle."

The contestants

Mid-sized projects like MPL and expansion projects of existing terminals have appeared to attract some of the most commercial interest in 2021, according to Jason Feer, head of business intelligence at Poten & Partners.

"We are seeing people give some dark horses more of a look than maybe they were in the past. Mexico Pacific Ltd. has been getting quite a look these days," Feer said in an interview.

"Obviously with the number of projects that we have in the U.S., there is not room for everybody," Feer said. "And the dynamic seems to be that projects that are most competitive are in that 8 [million]-12 million tonne range, or expansion projects — those are the ones that seem to have momentum these days."

One reason that Feer said smaller projects can appeal to buyers is that developers need to contract fewer LNG supplies to secure financing, giving customers greater influence over whether a project advances to construction and removing some of the uncertainty about whether the supplies will be available when buyers need them.

"From a customer perspective, when they sign contracts with projects they need to be certain that these volumes will materialize," Bairstow said. "They don't want to take a punt."

Another key selling point of the MPL project is its proposed location on the Pacific Ocean. This would bring the benefit of a shorter shipping route to Asia compared to facilities on the U.S. Gulf Coast that would enable LNG tankers to avoid the Panama Canal. The project would connect with an existing pipeline system that is underutilized.

Shanda said exporting U.S. gas off the West Coast is "the black pearl of North American LNG."

Backed by the private-equity investor AVAIO Capital, MPL is marketing what it says will be "the lowest North American landed LNG price into Asia."

The race

MPL still needs an export permit from the Mexican government, which executives said they expect will be issued by the end of June. In the meantime, MPL said it is in advanced discussions with buyers serving China, South Korea, and Japan about purchasing supplies under long-term contracts.

To commercially sanction the two trains capable of producing 8.6 Mt/y, the company would need to line up about 6 Mt/y worth of supply deals, according to Shanda. MPL expected to reach that threshold without much trouble. The company said it has about 10 Mt/y worth of preliminary agreements that it is working to convert to sale and purchase agreements, and it is discussing potential deals for some 8 Mt/y worth of additional supplies. The company declined to name the counterparties.

If the anticipated contracts fail to materialize, executives said the company could still move forward with a single 4.3 Mt/y-train by contracting 75% of that capacity.

The company's site in Puerto Libertad, Sonora, about 125 miles south of the Arizona border on the north edge of the Sea of Cortez, has room for expansion. The site covers a total of about 1,100 acres, and the first three phases of the project just require 300 acres.

The company last year tapped Mitsubishi UFJ Financial Group Inc. as its financial advisor. Bechtel Corp. is developing the company's front-end engineering design, the MPL executives said. The executives said they are on track to have an engineering, procurement and construction contract by early November. They expect the signing of binding sales and purchase agreements with customers to follow.

"This project has much more flexibility that allows us to get to FID than most projects have in the world," Shanda said.