Removal of a 4% import tariff on natural gas July 1, new openaccess transportation rates and the likelihood that Mexico willbegin privatization of its electric industry this year are makingthe country a more attractive business target for the U.S. energyindustry, and California-based Sempra Energy is taking immediateadvantage of the opening.

The new gas rules were announced May 21, during the same weekMexico’s President Ernesto Zedillo and California’s Gov. Gray Davisjoined in a ceremony marking the official construction start of a23-mile, $35 million gas transmission pipeline from the bordersouth of San Diego to a major electric power plant at Rosarito innorthern Baja California.

Also in the same week the Mexican government awarded aSempra-backed partnership the license to build and operate a gasdistribution system in La Laguna-Durango in north-central Mexico.

“We are pleased to be on the leading edge of Mexico’s efforts toexpand energy options for its residential and business customers,”said Sempra’s Donald E. Felsinger, group president for unregulatedbusinesses. “As Mexican energy demand increases, and the energymarkets of Mexico and the United States become more intertwined, welook forward to providing fully integrated energy solutions to evenmore customers in northern Mexico.”

The tariff cut and new gas transportation rules will make U.S.gas supplies more competitive and will encourage more developmentof cross-border gas transportation pipelines into Mexico, accordingto Sempra’s San Diego-based spokesman Michael Clark. “Pemex (theMexican state oil company) has pretty much controlled the market upuntil now.”

The regulatory breakthroughs south of the border came on theheels of a three-day California visit by Mexico’s President ErnestoZedillo that ended with a stop at Sempra’s headquarters a few milesnorth of the U.S.-Mexico border. The flurry of political andeconomic activity further strengthens Sempra’s growing network ofgas infrastructure projects in northern Mexico along the borderbetween Texas and California, said Clark, although he noted two ofSempra’s projects in northern Baja near the California-Mexicoborder already had been exempted from the tax on gas imports.

For the Mexicali gas distribution project east of San Diegoalong the Mexican border, about 11 MMcf/d of U.S. gas is currentlybeing delivered with expectations that will grow to around 50MMcf/d when it reaches 25,000 customers in 2002.

La Laguna-Durango is estimated to be a $40 million projectreaching 50,000 customers in the fifth year of operation of the newdistribution system, eventually extending to reach 125,000customers. As part of its new license, Sempra Energy Internationalwill acquire 27 miles of existing steel transmission pipeline fromPemex, which now delivers 14 MMcf/d to 22 industrial customers inthe area. Sempra expects to take over operation June 21 and beginbuilding the distribution pipeline system from there.

Sempra has a project similar to La Laguna-Durango already underway that will reach 50,000 customers in the state of Chihuahua by2002. There, the gas pipeline is connected to both Texas and Gulfof Mexico supply sources, so theoretically supplies for the newMexican customers can come from either end. The La Laguna-Durangoproject to the southwest is along the same Pemex transmissionpipeline serving Chihuahua, but it is situated a lot farther fromU.S. gas supplies than its neighboring northern state.

“We believe the energy infrastructure of the United States andMexico will become increasingly interconnected over the next decade,” said Sempra CEO, Richard Farman.

Mexican gas demand growth is “very likely” to average 8% peryear over the next 10 years, said George Liparidis, senior vicepresident for Sempra Energy International. “The biggest driver isgoing to be these new power plants. As these projects closefinancing and construction is completed, you’re just going to seeincredible increases in demand. For the residential-commercialside, you’re just going to see steady growth.”

Mexican power demand is growing at a rapid 6%/year, andlegislators are close to amending two articles of the Mexicanconstitution that will allow privatization of the country’selectric industry to go forward and sorely needed investment fromthe private sector to begin.

Mexico’s elimination of the gas import tariff also was heraldedas good news by KN Energy, Sempra’s merger partner. KN was one ofmany U.S. companies that lobbied long and hard for the tariff’selimination. “I think it’s a welcome step in the right directionfor the free movement of energy across the borders, and it’s goingto be advantageous to Mexican customers and U.S. energy providers.And it’s certainly going to enhance competition along theU.S.-Mexico border,” said Bill Garner, KN Energy Internationalexecutive vice president.

KN right now is evaluating acceleration of a 105-mile pipelineproject targeting Monterrey, Mexico. “It’s going to accelerate theproject.” KN also has an LDC in Hermosillo. Industrial customersthere will benefit from the tariff’s elimination.

“It affords us additional market opportunities in the state ofChihuahua. We’re one of the major exporters of gas to Mexico nowthrough an interconnect in El Paso, TX, and this will open upadditional marketing opportunities, primarily industrialcustomers.”

Last June, the Interstate Natural Gas Association of America(INGAA) in the face of Mexican opposition abandoned efforts toeliminate the tariff. INGAA decided to temporarily shelve the issueafter natural gas was pulled from a list of agreed tariffreductions in May 1998 following a NAFTA ministerial meeting withCanada and Mexico. The action was taken when the United Statescould not agree to the terms under which Mexico said it wouldremove the gas tariff.

“We’ve been actively discussing this with Mexican and U.S.Department of Commerce representatives for years,” Garner said.

Richard Nemec, Los Angeles; Joe Fisher, Houston

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