Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
Energy demand in Southeast Asia is on a strong upward trajectory, driven by urbanization, industrial growth and the changing energy matrix in the region. Energy policy priorities for governments in the region are to maintain energy security, affordability and sustainability, but their infrastructure gaps make it difficult for them to achieve full connectivity. In this context, liquefied natural gas has emerged as one of the energy sources with the greatest potential.
Indonesia and Malaysia play a dual role in both receiving and sending out LNG.
Malaysia, the world's fifth largest LNG exporter, has more than 31.5 million metric tons/year of liquefaction capacity. This infrastructure already seems insufficient to ensure a reliable long-term supply of LNG to its current buyers. It is also signing on to buy more LNG from the world, including from Mexico. Its energy transition plan foresees an increase in the share of natural gas in the primary energy mix from 43% in 2023 to 56% in 2050.
Indonesia, meanwhile, also seeks to monetize its gas production in the LNG market. However, its population growth has opened a gap between an intense demand for electrification and dwindling natural gas supply from mature fields.
In aggregate, Vietnam, the Philippines, Indonesia, Malaysia, Thailand and Singapore are now expanding their generation capacity with combined cycle technologies by more than 100 GW. This massive growth can only occur with a comparable expansion in LNG imports.
In parallel, the United States has positioned itself as a key supplier of LNG and the way it has mitigated the supply cuts of Russian gas to Europe exemplifies its ability to respond to global market dynamics. Its presence in Asia, evident with deliveries to China, India, Pakistan, Bangladesh, Japan, South Korea, Taiwan and Singapore, is far from being comparable with exports to Europe. The explanation is simple and lies in the fact that the traditional way out to the global market has been the Atlantic and accessing the Asian market involves long routes that entail making it through the choked Panama Canal.
Still, for Asian markets, the option of North American gas looks very promising due to its commercial flexibility. The liquefaction terminal projects that would provide an outlet for natural gas produced in Texas through the Mexican Pacific seem to be a logical solution. Mexico has about a dozen LNG export projects in varying stages of development, most of which would rely on feed gas sourced from the United States. But the strategic importance of these projects is not necessarily consistent with the priorities and needs of Mexico's energy policy.
Although Mexico offers clear logistical advantages for U.S. developers, such as bypassing the Panama Canal and reducing shipping costs, the country’s political environment creates risks for long-term infrastructure investment. The ongoing proposed reform of the judiciary and the overhaul or potential elimination of regulatory bodies is a substantial change of the rules.
Despite some milestones in announced LNG projects in Baja California, Sonora, Sinaloa, and even Oaxaca, the originally planned development times have not been met. Whether it is due to the lack of re-export authorizations from the U.S. Department of Energy, issues in getting the right permits from Mexican authorities, or productivity problems in construction, the reasons for private investors to be wary are understandable. LNG liquefaction projects require significant initial capital, precise coordination in the development of each stage of the supply chain, and a battery of contracts with banks, investment funds, suppliers and buyers. Performing due diligence on an energy project in Mexico is not an easy task, since there is no crystal ball, oracle or financial model capable of adequately understanding what the sector might look like under president-elect Claudia Sheinbaum.
Sheinbaum's government program suggests a continuation of the systematic backtracking on the energy reforms of 2013 and 2014. The regulatory frameworks that were designed to attract foreign investment might no longer exist in a few months. Sheinbaum has made it clear that she intends to strengthen the state firms at the expense of private and foreign actors. However, the new government's policies will probably not be interventionist. Still, especially if the current reform proposal goes ahead, the environment that private investors will face in the coming years will be one of significant risks.
Although LNG projects do not compete with the market served by Petroleos Mexicanos (Pemex) and Comision Federal de Electricidad (CFE), they do not represent, a priori, an advantage or benefit for the Mexican government and its state-owned companies. In the absence of an economic agreement that shares or transfers a concrete benefit to the government, their success will ultimately depend on favorable discretionary circumstances, something that, for the moment, seems difficult to achieve for many global companies.
In addition, the geographic and logistical advantage that can be achieved with access to the Pacific hides a complex list of economic and security challenges. The local and state-level perception of these types of projects is that they do not represent tangible long-term benefits for the population and the energy supply of neighboring communities. On the contrary, the size of these projects makes them conspicuous and, given the general public's lack of familiarity with the transit and liquefaction processes, some see them as a risk for the environment. Mexico is also a scene of continuous siege by criminal groups on the business class.
Mexico LNG re-export projects present a double-edged sword. On the one hand, these projects offer the potential for economic growth, job creation, and further expansion of the natural gas logistics network, a phenomenon that in itself implies an improvement in energy security. On the other hand, Mexico positioning itself as a key re-export center for American gas is contradictory to the roots of energy nationalism.
Nor can we lose sight of the risks arising from an increasingly relevant geopolitical perspective, which includes a trade war between the United States and China. In this latent conflict, both powers are striving to influence the global energy market. The aspirations of North American LNG companies to establish a presence in Southeast Asia face an antagonistic situation on several fronts. On the one hand, China seeks to diversify its natural gas imports with connectivity to Russian production. On the other hand, with a bilateral investment strategy in electromobility projects in several countries in the region, China seeks to consolidate its dominance in battery production chains and displace dependence on fossil fuels with renewable energy.
In this complex context, LNG liquefaction projects anchored in Mexico could be caught in uncertain scenarios regarding natural gas demand in Southeast Asia. While it is true that energy demand in the region will clearly grow, the predominant composition of the future energy matrix is not entirely clear.
The combined effect of local, national and global political and regulatory uncertainties represents a major challenge for developers who have ventured to originate and advance transpacific projects. Without a doubt, it is the policies, rather than the economic fundamentals, that are the sources of greatest risk for these kinds of projects.
Despite these challenges, Mexico's LNG projects offer important opportunities for economies on both sides of the Rio Grande. Common sense and market-first thinking would make for a much more conducive environment. For example, a more permissive U.S. energy policy toward exports would help alleviate the already existing swarm of risks. And in this field, the most important bargaining chip with the Mexican government has to do with cross-border energy cooperation. The continuity that would be achieved by allowing free transit to re-export projects to Asia is equal to the continuity needed to meet Mexico's growing gas demand.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
