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Costa Azul deal sparks talk of more Mexico LNG export capacity

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Costa Azul deal sparks talk of more Mexico LNG export capacity

As Mexico looks to develop its natural gas export prowess, its Pacific Coast region is getting more attention from LNG exporters following a heads of agreement announced last week by Sempra Energy.

The preliminary sales contracts could see Southern California-based Sempra reach a final investment decision on its proposed Baja California Costa Azul LNG export terminal by late 2019. With high-profile buyers, including TOTAL SA, Mitsui & Co. Ltd. and Tokyo Gas Co. Ltd., potentially signing on to 20-year supply contracts from the facility, there is growing interest in the region as a potential hub for LNG exports.

"We've seen some interest in Senora and Sinaloa," John Hilfiker, an energy analyst with S&P Global Platts Analytics, said on Nov. 12 at the U.S.-Mexico LDC Gas Forum in San Antonio.

The two Mexican Pacific Coast states offer an advantage over exports from the U.S. Gulf Coast, given their proximity to northeast Asia's fast-growing LNG import market. "It's a story of being closer to markets," Hilfiker said, noting that the Pacific Coast location eliminates both the fees and potential constraints associated with transiting the Panama Canal.

The proposed Costa Azul LNG export terminal offers advantages, but also risks. One advantage is the location Hilfiker described. Exports from Mexico also avoid regulatory and environmental hurdles that have dogged West Coast LNG projects proposed on the U.S. side of the border, such as the Jordan Cove and Oregon LNG projects.

Another advantage is the underutilized LNG import terminal can be reconfigured for export at a relatively low cost, comparable to similarly sized brownfield projects on the U.S. Gulf Coast.

However, Costa Azul's location also poses supply risks. The Baja California site is largely disconnected from Mexico's mainland gas and power grids, isolating the region and making it heavily dependent on imports from the U.S. Constraints in the Southern California gas market add to that risk.

"It has interaction with the SoCal border," Hilfiker said, highlighting the recent transmission constraints into the southern California market and record-high gas prices this past summer.

Longer term, LNG export projects in Mexico's Baja California, or even on its mainland Pacific Coast, could face risks if the country's anticipated growth in gas supply fails to materialize.

"Beyond 2020, a lot depends on Mexico's ability to revitalize its own upstream production," Ross Wyeno, a senior energy analyst with Platts Analytics, said last week at the Platts Mexican Energy Conference.

"The energy reforms were optimistic about what we would see in terms of new oil and gas drilling," Wyeno said.

The recent election of Lopez Obrador to become the next Mexican president is reason for pause. According to Wyeno, any delay in Mexico's upstream development, which seems likely under the new leadership, would put pressure on import pipelines from the U.S. and cause the lines to become constrained by 2022 or 2023.

"If Mexican natural gas production is not capable of growing in the mid-2020s, then that would suggest that Mexico needs to begin seriously considering the addition of new pipeline capacity … right now," he said.

J. Robinson, a reporter for S&P Global Platts, wrote this article. S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.