Gas project could power plant complex in Mexico

05/14/2003 By BRENDAN M. CASE / The Dallas Morning News

ALTAMIRA, Mexico – Bountiful natural gas deposits lie just a few hundred miles from this bustling port city on Mexico's Gulf Coast. But officials here are planning to import boatloads of gas from as far away as Africa.

The Federal Electricity Commission – or CFE – plans to hire a major energy company this year to build a liquefied natural gas terminal and re-gasification plant in Altamira.

The LNG project, with a price of about $500 million, would fuel a complex of power plants in this burgeoning region about 300 miles south of Texas.

"This area is seeing a lot of economic growth, and we need more electricity," said Arnoldo García González, who oversees the CFE's operations here. "To generate electricity, we need natural gas."

The LNG rush reflects Mexico's increasingly urgent efforts to shore up its natural gas supply. State-owned oil monopoly Petróleos Mexicanos, or Pemex, has neglected gas production for years. Now, however, authorities are promoting the clean-burning fuel in power plants, factories and homes – and demand is booming.

Altamira probably will get the first of several LNG projects south of the border. Texas companies and global competitors also are planning LNG projects in Baja California, which would supply customers in both Mexico and the United States.

Skeptics say Mexico should develop its own natural gas reserves instead of relying on imports. But investment remains limited. Pemex channels most spending to oil production, and Mexico prohibits private companies from developing oil and gas reserves.

"We're a country that could export gas and make a big industry out of exploring for and producing gas," said Héctor Rangel Domene, president of the Business Coordinating Council, a leading private-sector lobbying group in Mexico City. "It's absurd that we can't do that."

Mexico has already become a juicy market for Texas gas exporters. Two months ago, Houston-based Kinder Morgan Inc. opened an $87 million cross-border pipeline. Tidelands Oil & Gas Corp., a Corpus Christi company, sold its gas production business last year to build cross-border pipelines.

Within a few years, Mexico might also be welcoming ships laden with super-cooled LNG from Nigeria, Venezuela, Malaysia or Indonesia.

"There's a growing gas market in Mexico," said Barbara Blakely, a spokeswoman for Shell México, which hopes to win the LNG contract in Altamira and to build a separate plant in Baja California. "Moving gas from one part of the world to another is no longer uncommon. We do it all the time."

Appetite for imports

Mexico still is a major crude oil exporter. But the country's growing appetite for gas imports illustrates its growing industrialization.

Glass and steel companies are devouring natural gas. More important, demand for electricity is rising quickly – and gas-fired power plants are getting most new investment. Recent legal changes have created a whole new business for natural gas distribution companies. Millions of consumers are now burning natural gas in their homes instead of liquid petroleum gas, the traditional fuel.

All told, natural gas imports reached nearly 650 million cubic feet per day during the first three months of the year, nearly three times what they were in 2000, according to Pemex. Domestic gas production has failed to keep pace with demand.

"Productive capacity is not increasing, while demand is rising quickly," said Alejandro González, an analyst with Cambridge Energy Research Associates in Cambridge, Mass. "The United States is in the same situation."

Pemex is trying to lure private companies to help develop gas reserves in northern Mexico's Burgos basin, a project that would cost at least $6 billion. But it faces political opposition from critics who say it violates Mexico's strict limits on private energy investment.

So the search is on for other gas sources, including LNG. Within a few years, LNG could conceivably account for more than one billion cubic feet per day – about as much as Pemex hopes private companies would extract from Burgos.

"If you start a new program to drill natural gas, how much is it going to cost you? Ten billion dollars?" asked Mr. González. "If you build an LNG terminal, it will cost you half a billion dollars. And you'll get the gas as soon as the terminal is finished."

Many LNG projects face stiff political opposition.

In Baja California, business leaders and grass-roots activists have warned that LNG terminals would create eyesores and security risks in areas that depend on tourism. Opponents fret that such terminals might prove tempting targets for terrorists.

Mexican officials say LNG plants would be built with an eye to security concerns. Ms. Blakely, the Shell spokeswoman, says her company has never experienced a major accident with LNG.

Other critics worry that energy companies will turn Mexico into a huge LNG depot for the United States, selling gas to U.S. customers while taking advantage of weaker environmental enforcement south of the border.

"Mexico could turn into a big LNG platform for the United States," said Víctor Rodríguez-Padilla, an energy expert who advises the opposition Institutional Revolutionary Party. "One of the risks is that our environmental standards would be ignored."

Baja California's role

Energy companies say they still hope to build LNG projects in Baja California, with plans to sell gas to customers on both sides of the border. Backers include Royal Dutch/Shell Group; Houston-based ConocoPhillips; Houston-based Marathon Oil Corp., ChevronTexaco Corp., which is based in San Ramon, Calif.; and Sempra Energy, which hails from San Diego.

Analysts say Baja California could only support one or two such projects, adding that it's hard to tell which company is winning the race to obtain all necessary permits. Last week, however, Mexican authorities issued Baja California's first LNG permit to Marathon Oil. Marathon executives envision a $1.5 billion "Tijuana Regional Energy Center," which would include LNG facilities, a power plant and a desalination plant to provide fresh water.

"The Tijuana area is seeing tremendous growth," said Paul Weeditz, a spokesman for Marathon. "Without these basic infrastructure elements, developing the economy is tough to achieve."

Hopes for Altamira

The Altamira LNG project could be the first to move forward.

Unlike the Baja projects, which would seek their own customers, the Altamira terminal would sell its gas to the Federal Electricity Commission, the CFE. The CFE would burn the gas in several power plants providing much needed electricity to the national grid.

Companies such as Mexico's Petrocel-Temex, Germany's BASF AG and U.S.-based General Electric Co. have major plastics and petrochemical plants in Altamira. Local power plants also can transmit power to customers in Monterrey, the northern business capital, and elsewhere in Mexico.

Altamira's LNG plant would need to supply up to 500 million cubic feet of gas a day. The price would be tied to Henry Hub benchmark prices on the New York Mercantile Exchange. At current prices, which are historically high, 500 million cubic feet of gas is worth nearly $3 million.

CFE officials originally had said they would announce the winner in April. Now they say a winner could be announced this summer. Officials said in January that companies interested in the project included Shell, BP, Spain's Iberdrola and other major competitors.

Would-be suppliers would have to show that the total price Mexico pays for LNG would be less than what it would pay to import gas through a pipeline. The CFE would agree to buy the gas for 15 years.

"This area is going to be one of the most important power generation areas in the country," said Mr. García, the local CFE director in the Tampico-Altamira area. "With all the new development in gas and electricity, we'll be able to satisfy demand."

Research librarian Darlean Spangenberger contributed to this report.

E-mail bcase@dallasnews.com