Mexico: Preparing For LNG
Natural gas consumption in Mexico grew at an annual rate of 4.6% between 1993 and 2001, according to a recent Ministry of Energy publication called the “2002-2011 Natural Gas Market Perspective.” Most of the growth was due to the greater demand for gas to run power plants.
Consumption of natural gas by the power sector alone grew at an annual rate of 12.1%. Power companies are becoming the largest single consumer of gas in the country. The growth rates in other sectors pulled down the average. The residential and services sectors had growth of only 1.2% a year. The main factor limiting gas consumption in these sectors is the limited gas distribution network in the country.
The future looks better. Since 1995, the Energy Regulatory Commission, or “CRE,” has granted 21 permits for new natural gas distribution systems to be constructed in several cities. Some of the distribution lines authorized by these permits are still under construction.
In the 1990’s, almost all the demand for natural gas was met out of domestic reserves. That is starting to change. By 2001, the country was importing gas to cover approximately 9% of domestic consumption.
The Mexican government is projecting 10.2% annual growth in demand for natural gas over the next 10 years. The trend is for more imports as a share of total supply. Demand for gas to generate electricity is expected to outstrip growth in other sectors. Growth in gas consumption by power plants is expected to increase by 12.6% a year over the next 10 years. This represents an increase from consumption of 1,156 million cubic feet a day in 2001 for electricity generation to 3,801 million cubic feet a day by 2011.
The government recognizes that the demand cannot be met without private investment in the oil and gas sector. Its current 5-year development plan has as a goal the construction of one or more LNG plants. The Comisión Federal de Electricidad put out a request for bids in late December for someone to supply an average of 425 million cubic feet a day of LNG over the next 15 years. The winner will be expected to build a new LNG plant in Altamira,Tamaulipas and to have the plant in operation by January 2006.
Developers have been eying Mexico as a good place to put an LNG plant to supply the California market for at least the last three years. However, it has become clear with construction of new power plants in Baja on the Mexican side of the border that the increasing local gas demand is enough to justify such plants in Mexico.
This has led to a “Mexican LNG rush.” It caused the Fox administration, in turn, to take steps to regulate — but at the same time promote — construction of LNG plants in Mexico. One of these steps was to propose amendments to existing gas regulations to impose standards for such things as storage and regasification of liquefied natural gas, including the transferring of LNG from vessels to plants and security measures that will be required to ensure safe handling. The proposed amendments would also have created a new kind of permit specifically for the storage and regasification of LNG. However, the Fox administration never moved forward with these amendments because it feared they would be contested by Congress after a Supreme Court ruling in April 2002 declaring unconstitutional certain reforms made by the government to the rules for cogeneration and self-supply projects.
In the meantime, the Fox administration published temporary “guidelines” for the construction and operation of LNG plants in an effort to dispel any legal doubts about the legality of private sector involvement. The guidelines are found in Norma Oficial Mexicana de Emergencia (NOM-EM-001-SECRE-2002). They are expected to be replaced by a set of new “permanent” guidelines later this year. Existing gas regulations are expected to be amended at the same time.
The guidelines explain the technical requirements for design, construction, operation and maintenance of LNG plants. They apply to onshore facilities of LNG plants, from the point where LNG is received from a vessel to the pipeline in which the vaporized natural gas is delivered. They also apply to all activities related to the LNG plant, including receiving, transferring, storage, regasification and delivery of LNG.
The guidelines require a developer to obtain from CRE a gas storage permit before he can build and operate a plant. The legal entity that will operate and maintain the plant must also be authorized by CRE.
Existing gas regulations explain how to obtain a gas storage permit. Gas storage permits are granted for a term of 30 years and can be renewed for one or more additional terms of 15 years each. A permit can be revoked in certain circumstances described in article 13 of the “Law Regulating Article 27 of the Constitution in Oil Matters.”
The same legal entity the holds the gas storage permit might also hold another permit that will be required for the eventual transportation and distribution of the regasified gas.
Announced LNG Projects
There has been an overwhelming interest in the construction of LNG plants in Mexico. Currently, at least seven LNG projects have been announced. Four of these projects will be located in Baja California, one in Altamira, Tamauipas and two in Lázaro Cárdenas, Michoacán. Also Topolobambo, Manzanillo has been proposed as a site to install an LNG plant.
In Baja California, El Paso Global LNG and Philips will jointly develop an LNG regasification terminal that is expected to begin operating in 2006 and will have an estimated cost of US$500 million.
Marathon Oil Corp., together with Grupo GGS and Golar LNG Limited, plan to build an LNG regasification project that will also include a power plant, a water desalination plant, wastewater treatment facilities and the natural gas pipeline infrastructure. The estimated investment for this project is US$1.5 billion. Marathon Oil Corp. has already applied to CRE for the necessary permit to begin construction. It expects the permit to be granted during the first half of 2003.
A third project will be developed by CMS Energy Corporation and Sempra Energy. This plant will have a send-out capacity of approximately 1 billion cubic feet a day of natural gas and is expected to begin commercial operation in late 2005.
Finally, Shell Gas and Power also has expressed its interest in building an LNG plant in Baja California. The plant cost will be US$500 million and its completion is expected in 2006. For this plant, Shell has contracted for 7.5 million tons a year of LNG as the initial supply for the plant.
In Altamira, the most notable project is the LNG regasification terminal to be constructed and operated by El Paso Global LNG and Shell Gas and Power. El Paso and Shell have already applied for the necessary permit from CRE and expect to receive it during 2003. Initial investment costs are estimated to be as much as US$300 million, and the plant is scheduled to start operating in the first half of 2004.
The last two LNG projects that have been announced are being developed by Tractebel and Repsol-YPF with Gas Natural SDG. The plants will be built in Lázaro Cárdenas, Michoacán, and the estimated cost of each plant is approximately US$500 million.
Some analysts have noted that that there could be around 20 Mexican LNG terminals if all proposals are approved. Currently, 18 projects are under review. However, they believe that in view of the estimations of Mexico’s gas needs for the next ten years and the possibility of supplying natural gas to California, it is more realistic to think on the installation of three or four LNG regasification terminals in Mexico over the next 15 to 20 years.