Mexico Builds Half of a Great Natgas Project

There are a couple of bright hopes for U.S. natural gas producers these days.

LNG exports are getting a lot of press. But another solution to low gas prices may be even closer at hand: Mexico.

While U.S. gas production surges, so is Mexican demand. Driven by ambitious plans to replace the bulk of oil-fired power generation in the country with cheaper gas-powered capacity.

Plans for several billion cubic feet per day of new pipeline exports to Mexico are on the books. And those efforts got a boost last week, when federal regulators tentatively approved a new Arizona export line.

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The project's developers are seeking to build 60 miles of new pipeline to connect gas supply near Tucson to the Mexican border for export. After reviewing the proposal, the Federal Energy Regulatory Commission (FERC) said Friday that environmental impacts from the project could be brought to "less-than-significant levels". Giving a tacit go-ahead.

This is potentially good news for gas sellers with access to the new pipeline. The project could be completed by September 2014, giving suppliers the chance to sell into higher-value Mexican markets.

But not all sailing has been this smooth for south-of-the-border export plans.

Two weeks ago, Mexico's natgas ambitions hit a snag when a tender failed for a natgas pipeline key to import infrastructure from the U.S.

The Las Ramones phase two project is supposed to bring U.S. gas to key markets in north-central Mexico. The 460 mile pipeline is planned to interconnect with the phase one line that runs 750 miles into northern Mexico from Agua Dulce, Texas.

The phase one portion of this mainline has already been contracted to major midstream operator Sempra. But a tender for the phase two project drew only one bid. Raising speculation that state oil firm Pemex may be forced to build the phase two line on its own.

The interesting question is: why so little interest in the project? If U.S. exports to high-value Mexican markets are such a no-brainer, shouldn't developers be lining up at the opportunity to profit?

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It could be that potential partners are simply uncomfortable with the scale of the investment. The price tag for the phase two project alone is pegged at $3.3 billion.

But the lack of interest could equally be a sign of deeper concerns over the viability of U.S. exports. Indeed, many of the "end use" gas-fired power plants on the Mexican side are only in the planning stages. Pipeline developers might simply want greater assurances that this demand will actually materialize.

It will be especially interesting to see how this saga plays out if U.S. gas prices start to rise. Ambitious Mexican plans for natgas power could fizzle if the economic incentives behind the fuel begin to evaporate.

Here's to looking before you leap,

By. Dave Forest