Mexico’s nascent LNG market could develop into a major presence in the North American energy landscape, Arthur Deakin, Director of Energy at Americas Market Intelligence (AMI), told NGI’s Mexico GPI.
He cited the Biden administration’s current pause on permits for liquefied natural gas export projects to global markets – which Deakin said may persist if Vice President Kamala Harris wins the U.S. presidential election in November – as being potentially beneficial to Mexico’s LNG ambitions.
Deakin is the Director of Energy at AMI, a market research consultancy firm specializing in energy in the Americas. Since 2018, he has executed nearly 100 energy consulting engagements for clients in the United States and Latin America. At AMI, Deakin leads a team of over 20 consultants, whose mission statement is to be the most informed energy consultancy in low-carbon technologies in the region, leading the discussion on topics such as renewable power, clean fuels, and battery storage.
Deakin holds a bachelor’s degree from the University of Notre Dame in political science and government and will soon begin a master’s degree studies in energy at Stanford University.
Editor’s Note: NGI’s Mexico Gas Price Index, a leading tracker of Mexico’s natural gas market reform, offers the following Q&A column as part of a series of periodic interviews with market experts of natural gas in Mexico. Deakin is the 129th expert to participate in the series.
NGI: You recently published a report outlining the five main risks for the Mexico energy sector under a Claudia Sheinbaum government, which included “increased dependency on foreign fossil fuels” – such as U.S. sourced natural gas – as a primary risk. The report mentions that “any serious disputes between the two countries could force Mexico into uncomfortable concessions in exchange for continued U.S. supply.” Can you explain a little bit more about what those concessions might look like, particularly in terms of natural gas?
Deakin: I think a lot of concessions will likely be outside the energy sector, and could include things like increased border control, particularly if it’s former President Donald Trump that’s elected again. I think it could include stricter crackdown on fentanyl coming through the U.S. border, for example. I think these primary issues – which are always big talking points and major concerns for the U.S. – will probably be the first areas of focus for these potential concessions. As for Mexico’s dependence on U.S. natural gas, it gives the U.S. one more bargaining chip to use to negotiate concessions.
In terms of the energy sector, what I could see is that the U.S. administration, whoever is the president, might want Mexico to accelerate permits for U.S. renewable energy companies operating in Mexico. And to push Mexico to do so, the U.S. could use the lopsided natural gas relationship as leverage and make it harder for Mexico to access natural gas. The U.S. could use this relationship to its advantage to assure that Mexico is creating an environment that’s friendly to U.S. energy companies.
It’s all speculative at this point, though I think these might be some of the main concessions that we could see. As for natural gas, the U.S. could make it harder for Mexico to access it and use it as a pressure point.
NGI: Your report also mentioned that criminal extortion could delay major energy projects such as LNG terminals and natural gas pipelines, given that they overlap with drug routes in Mexico. Are there any specific natural gas pipeline or LNG projects under development in Mexico that you think could be affected or delayed by criminal and narcotics groups?
Deakin: In Mexico, it’s a known risk in many regions – and particularly rural areas – where there is a large presence of cartel groups. It’s often low level personnel from the cartels who are known to control these areas and, to build a particular section of the pipeline in their territory, you have to pay them off. It’s a right of way fee and, if a company doesn’t agree to pay them off, it can interfere with a project going forward. Some of the Mexico natural gas pipeline projects are still in their early stages of development, and these issues often arise once the actual construction begins.
The companies that are developing these massive projects are likely well aware of these risks and most are in some sort of a joint venture with the Federal Electricity Commission (CFE), which does give them more protection from these risks. But in the regions where some of the pipeline projects are planned that will feed LNG plants, there’s typically a risk of cartel interference.
NGI: You also wrote in your report that the Sheinbaum government might seek to continue to welcome and accelerate LNG development in Mexico in an effort to replace the supply deficit created in the U.S. market as a result of the current moratorium on LNG export permits. How do you think the Sheinbaum administration might accelerate LNG terminal project development in Mexico during the short-term?
Deakin: I see LNG as a big opportunity for Mexico, particularly if the moratorium continues in the U.S., which would likely be the case if Kamala Harris is elected as president. And, even if the moratorium is lifted, even in the short term, there’s still going to be interest in developing LNG projects in Mexico, particularly because the country offers lower costs and less regulatory scrutiny. This actually might be a different case if Donald Trump gets elected, who would likely be much more in favor of domestic LNG export facilities.
It definitely seems that Sheinbaum, if she follows in President Andrés Manuel López Obrador’s footsteps, is definitely going to be welcoming to LNG contracts, particularly because the projects that are underway are very long-term developments. These LNG export terminals are very expensive, they take several years to build and have shelf lives of 30-plus years. They are massive long-term infrastructure assets.
Beginning a new long-term LNG project definitely comes with a lot of risk, though at the same time, most of the long-term energy outlooks across the industry forecast that natural gas demand should be relatively stable for years to come. I know there are some agencies that see its demand beginning to decline in 2040 or so, but I also think those forecasts are dependent on how fast we develop other technologies, including hydrogen generation and storage, for example.
NGI: We saw a wave of blackouts in Mexico in May due to unexpected surges in electricity demand. In your report, AMI predicted that Sheinbaum could increase the maximum threshold for distributed generation projects to 1 MW from 0.5 MW, which would allow for an easier grid connection for larger on-site projects that supply power to industrial facilities. Do you think this will be something that Sheinbaum seeks to do soon after entering office?
Deakin: So Mexico has the distributed generation threshold, which is 0.5 MW. And then there's an exempt generator limit, which is essentially the amount that you can install without requiring a permit from the Comision Reguladora de Energia (CRE). Both of these thresholds are 0.5 MW right now, so if you want to install anything above that amount, you need a permit and can’t sell production back to the grid because you’re over that 0.5 MW limit.
What I’ve been hearing is that Sheinbaum wants to increase the exempt generator limit from 0.5 MW to perhaps 1 MW, but keep the distributed generation limit at 0.5 MW. What that means is that she'll push for C&I – commercial and industrial – self-supply development, which would allow manufacturing companies or automotive companies to build projects at their locations for their own energy self-supply without needing that permit because the exempt generator limit will be increased. But they won’t be able to sell back into the grid because the distributed generation limit will still be at 0.5 MW.
So, what this would likely do is encourage more self-supply projects, potentially through faster permitting approvals and larger projects, but it won't take away the capacity in the distribution network. A main complaint right now is that distributed generation, especially for C&I, is taking up a lot of the capacity in the distribution network. And distributed generation was supposed to be a way to democratize access to solar. But if the C&I customers are taking up all this distribution capacity in the network, then there are less opportunities for residential customers to install distributed solar. So, the idea is to increase the amount allowed for C&I customers to build in terms of self-supply, but not necessarily to sell back into the grid.
This is something I’ve been hearing quite a bit about, and that would be a relatively easy change. I’ve heard this is something that is being considered and I think it could happen during the first six months that she’s in office.
NGI: In your opinion, what is the top energy industry challenge facing the Sheinbaum administration?
Deakin: I think the main challenge is if Sheinbaum is able to kind of keep López Obrador and his friends and political allies happy in regards to propping up state owned companies, the CFE and Petróleos Mexicanos (Pemex), while encouraging private sector development. How you can balance both of those I think makes for a very tough thing. And I don't know if she'll be able to do it without losing a lot of money subsidizing both Pemex and CFE. This will definitely be a major challenge.
Another challenge will be regaining investor confidence. I think so many companies got burned in the last six years that a lot of them left and aren’t interested in returning or considering business development in Mexico. It’s a big risk to put in so much effort and money and make yourself vulnerable to be burned again, so I think there’s some rebuilding of the trust process that has to happen. At the same time, there are still a lot of companies that still see Mexico as a great opportunity. So a lot of it depends on the risk appetite of the company.
I think another major challenge is building more transmission and distribution capacity. This is an issue that's global and regional as well, and in Mexico, they just haven't been able to meet that demand. The blackouts are a clear sign of that. Getting the finance needed to build these large infrastructure projects given the current state of investor confidence is going to be tough. And then there is the challenge to encourage companies to be interested in public-private partnerships, which will likely be the case with CFE and Pemex overseeing all the major infrastructure developments.
NGI: And what do you see as the biggest opportunity?
Deakin: In terms of opportunities, the increase in distributed generation that I mentioned is a big area for growth potential. I think Mexico only has around 3.5 GW of distributed generation, while Brazil has around 27 GW. It’s a big difference and Brazil is not nine or ten times bigger than Mexico. So, I think there’s a lot of room for growth there that's being limited by these thresholds. So if that is modified, I think there will be exponential growth.
We also have a lot of our clients looking at Mexico for feedstock for renewable fuels. So used cooking oil and animal fats, and even soybean oil and distillate corn oil, is something that a lot of companies and refineries are desperate for in Europe and the U.S. Because there's been such a ramp up of production of sustainable aviation fuel and renewable diesel, these clients need to get feedstock and they're running into supply limitations. So I think that's a major opportunity as well.
Another one, as I mentioned early, is LNG development. If the U.S. moratorium persists, this could be a big growth opportunity for Mexico.
