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Global Reshuffle Presents 2023 Opportunities for Risk-Takers in Mexico’s Natural Gas Sector
In 2023, Mexico’s natural gas industry will be shaped by public-private partnerships and the shifting landscape brought about by Russia’s invasion of Ukraine. Political risk for private and international firms, meanwhile, remains high.
Last year, President Andrés Manuel López Obrador’s team said they would carry out costly infrastructure works in conjunction with the private sector. These include 7 GW of combined cycle generation plants, natural gas pipelines, and LNG export projects.
There are as many as six liquefied natural gas export projects planned for Mexico. These projects would re-export U.S. gas to Europe and Asia. In one instance, the gas would be sourced from the Lakach offshore gas field in the Gulf of Mexico and shipped off to Europe via a quick-build export facility.
While there has long been interest in these projects, enthusiasm boiled over following the war in Ukraine. In September, López Obrador even told German President Frank-Walter Steinmeier that his country would help Germans replace Russian natural gas.
State utility Comisión Federal de Electricidad (CFE) is also eager to use its natural gas capacity on myriad pipeline systems zigzagging Mexico and crossing over into the United States. CFE has 8.203 Bcf/d of capacity contracted in Mexico, but only 53% is being used. In the United States, CFE has contracted 11.3 Bcf/d, but only 38% is under use, according to the company.
With Russia’s invasion of Ukraine, “the [LNG] opportunity today is clearly tremendous because of what we’re seeing in markets,” Francisco Monaldi of Rice University’s Baker Institute for Public Policy told NGI. But, he cautioned, “I think the potential that is there is not going to be fulfilled because of the risks.”
Last July, U.S. Trade Representative (USTR) Katherine Tai announced the start of dispute settlement consultations with Mexico. She cited unfair treatment of U.S. firms in the energy sector, including in natural gas. She said Mexican actions violated the terms of the United States-Mexico-Canada-Agreement, or USMCA.
She specifically mentioned a June 2022 directive from Mexico energy ministry Sener that would require natural gas marketers and large consumers to source the fuel from either national oil company Petróleos Mexicanos (Pemex) or CFE.
That rule change has since been halted, but the dispute consultations are ongoing, with the real threat of potential penalties on Mexico. Duncan Wood of the Wilson Center in Washington D.C. said that he thinks the United States and Canada will “follow though.”
“The wheels are turning and Tai will want to see progress from Mexico,” while Canadian Trade Minister Mary Ng “is under pressure from Canadian investors to get some movement,” he told NGI’s Mexico GPI.
Matters are further complicated by energy sector regulators that have been significantly weakened by the López Obrador government. The energy permitting process has also become slow and burdensome.
Still, none of this has slowed the growing momentum for nearshoring, which promises to bring the three countries of the USMCA even closer together. This week, U.S. President Joe Biden made the first visit to Mexico City by a U.S. head of state in nine years. He was attending the North American Leaders Summit, which also included Prime Minister Justin Trudeau of Canada.
The trade dispute was kept out of the discussion as the leaders chose to focus instead on the opportunities presented by nearshoring and changing supply routes.
U.S. leaders have made it no secret that they seek to boost semiconductor production in North America. This would add to the major auto manufacturing business across borders, along with already existing, deeply integrated energy systems.
[LatAm Energy Trends: From Mexico down to Argentina, from natural gas and LNG to crude oil and ESG, listen in as NGI’s Christopher Lenton and Rice University’s Francisco Monaldi discuss what to expect from the energy markets of Latin America in 2023. Tune into the Hub & Flow podcast now.]
Growing Natural Gas Production
While Mexico will continue to meet a majority of its natural gas needs through pipeline imports principally from Texas, domestic production is showing growth. Pemex is targeting full-year average natural gas production of 4.67 Bcf/d in 2023, up 20% from the 3.88 Bcf/d averaged in the third quarter of 2022.
But despite this, and a high price environment, Pemex continues to struggle financially. “Pemex continues to lose money,” Wood said. He said the Mexican government in 2023 needs to “decide if they are really willing to sink more billions into the firm ahead of the election when the money spent thus far has failed to turn the ship around.”
Monaldi added that, “even though production has stabilized or slightly increased I don’t think the prospects are good, and I think the company will continue to be in trouble for the foreseeable future with heavy debt.”
Looking To 2024
One thing López Obrador has proven time and again is that he is not going to change his general position on energy policy. “Priority energy issues for this government will remain the Dos Bocas refinery, and the strengthening of state firms,” energy consultant Eduardo Prud’homme wrote in a recent column for NGI’s Mexico GPI.
Through to the end of his term in 2024, President López Obrador will continue to be the dominant actor in the sector, with rules determined at his whim, according to analysts. “I don’t see Mexico moving into a more rules based economic system,” academic Tony Payan said at the U.S.-Mexico Natural Gas Forum late last year.
Payan added that with an eye to the presidential election in 2024, López Obrador’s pick as successor would probably be Mexico City Mayor Claudia Sheinbaum.
Sheinbaum has recently indicated a commitment to López Obrador’s energy policies. She told reporters that she would seek to amend the constitution to grant CFE at least a 54% share of the generation segment, something the current president failed to achieve.
“In the opposition, no one stands out just yet, none that captures the imagination,” Payan said. “If the opposition doesn’t go as a united block, expect another Morena victory,” Payan said. Morena is López Obrador’s highly popular ruling political party.
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