The North Baja natural gas transmission pipeline from the Arizona-California border and along the northern edge of Baja California, Mexico is now fully subscribed for its 500 MMcf/d capacity over the next 25 years, creating an “energy annuity” for Sempra Energy and its partners in the project, Sempra’s CEO Steve Baum told a group of financial analysts at the company’s day-long meeting last Thursday in San Diego.

Baum and other Sempra senior executives told analysts that the company longer term would be shifting investment from some of its troubled assets in South America to Mexico where they feel the company’s experience and geographical proximity gives it an edge over competitors who are proposing various liquefied natural gas (LNG), pipeline and power plant projects in the neighboring nation to the south that has become the second biggest trading partner with the U.S. (Canada is No. 1.)

The 215-mile pipeline becomes a major strategic resource whose capacity can be doubled to serve proposed power plants and the eventual LNG terminal(s) proposed to be built in the extreme north end of Baja, along its Pacific Coast, Baum said. He said Sempra is creating an “integrated energy infrastructure” in the Southwest, along with partners from both sides of the border.

In response to questions about the company’s exposure deeper in Latin America, Sempra officials acknowledged that the company’s Argentina gas distribution pipeline interests are projected to have earnings cut in half this year (from $20 million to $10 million), but that ultimately they have “a fair optimism” regarding the ultimate outcome of the economic and political turmoil that have ravaged the South American nation since late last year. “That is why we have taken no impairment on goodwill in Argentina, and we have not taken any write-offs,” said Baum, adding that the only adjustment in Sempra’s accounting is for comprehensive income that is required under GAAP (generally accepted accounting principles).

“We believe we will recover at least, and probably more, than our investment in Argentina,” he said.

Sempra said the current Argentine government has violated its contractual rights in three major areas, but it is a party to an international investment treaty that was designed to stimulate foreign, private-sector investment in the nation in the 1990s when it began a massive privatization of its infrastructure. That treaty provides an international dispute resolution mechanism through which Sempra expects to be made whole for its original contracts. Longer term, it still views Argentina, and its other investments in Chile and Peru as profitable business ventures, but it clearly is looking to put its emphasis on Mexico.

“Our focus right now is on the bilateral investment (treaty) because we think through that process we will be able to recover all of our investment in Argentina, and at least be in a position where in negotiations with the government we have a receipt and then whatever the new contract relationships going forward we’ll be able to have a business that has extracted the difference out of the treaty arbitration along with a business we can go forward with,” said Don Felsinger, Sempra’s senior executive in charge of its global enterprise business unit.

“Mexico is about to offer more bids for electricity, so we see this as another opportunity. Mexico is still having discussions about allowing private-sector sellers to come in and sell excess capacity to the state-owned electric utility. There are a lot of opportunities in Mexico; it is a real developing economy with requirements for all types of infrastructure and we are going to participate in every opportunity that comes along in that region.”

Sempra’s senior management is predicting robust earnings in the $4/share area annually by 2006 when it expects to have all of its North Baja gas and electricity assets fully operational, including an LNG terminal for which it thinks it has a competitive edge due to the site it has lined up and the experience it already has successfully sheparding six different projects through Mexico’s national and local regulatory processes.

Sempra officials think that getting the first West Coast LNG receipt facility is “very strategic,” and that they can compete with much large energy companies, such as Chevron and Shell among others, because none of the competitors have taken a project through the Mexican regulatory processes. “We also understand the environmental issues of the region,” Felsinger said.

Sempra is ready with its full LNG filing once the Mexican equivalent of FERC issues the regulations. The issuance of those regulations will signal the start of the “competitive race” for LNG in Mexico, according to Sempra.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.