Mexico as a “re-exporter” of US gas: Are the benefits worth the risks?

Uncertain, modest public benefits

Re-export projects could be lucrative for gas producers in Texas; the companies piping, liquefying, and shipping LNG from Mexico; gas importers in other countries; and the projects’ financiers. For the Mexican state and its people, by contrast, the main potential upsides would be:

• Unclear amounts of public revenue: LNG terminal operators in Mexico would pay the federal government corporate income (ISR) and payroll taxes, port and gas processing dues, as well as one-time fees for things like permits and customs. State-level and municipal governments could potentially charge their own fees, especially for permits and property taxes. Specific amounts are hard to predict, though, since the federal government has not said, even at a high level, what it expects to earn from re-exports. The only operational project so far, Altamira FLNG 1, does not disclose what it pays to Mexico, and the amounts each project ultimately would pay would depend on its financial success and the profits it reported in Mexico.

CFE, the state-owned electrical utility, could also earn revenue by supplying imported gas to new LNG terminals. But its current projections look unrealistic. CFE has claimed, for example, that it expects to turn a USD 500 million net profit over 15 years by supplying Altamira FLNG 1 with gas through the South Texas-Tuxpan pipeline, in which CFE has contracted capacity. This assumes, however, that the plant will use 100 percent of the gas CFE agreed to supply, and that all the resulting LNG exports would be priced using the Asian spot benchmark JKM. In reality, most Altamira FLNG 1 cargoes so far have gone to Caribbean countries like Puerto Rico, the U.S. Virgin Islands and Jamaica; not Asia. CFE has not disclosed its actual earnings to date from supplying gas to Altamira FLNG 1. 

• Limited jobs: Liquefaction plants are not labor-intensive, especially once they are built. New Fortress Energy, Altamira FLNG 1’s developer, doesn’t publish its employment figures. We estimate, using data for similar projects in the U.S. and Peru, that each new, small-to-medium-sized Mexican terminal would directly employ roughly 3,000 people during construction and only 100-200 once operational. Mexicans could fill most of the positions apart from a few highly specialized roles. Other non-direct employment—in gas production, banking and insurance, for instance—would mostly be in the U.S.

• Varying amounts of infrastructure: Some Mexican LNG terminals would require extensive new gas pipelines—a major challenge described in our previous post. For a small number of the proposed projects, successfully building new lines could add capacity and flexibility to Mexico’s existing pipeline network, possibly making it easier to keep gas flowing during supply disruptions. But most projects would do the opposite: flexibility and spare capacity would shrink as new export terminals competed with gas consumers in the power sector and industry—and even with one another. Beyond pipelines, the owners of some LNG terminals might have to build new power lines and roads that nearby communities could use, while others would rely on existing infrastructure and make smaller social contributions. Consider ECA LNG, Mexico’s second re-export project now under construction on the Pacific coast: the developer says it will provide neighbors with a rehabbed public park, new traffic lights, and some donated vehicles.

Serious potential risks

The possible downsides of these projects, meanwhile, are significant:

• Energy insecurity: LNG is often promoted as a way to increase energy security, but Mexico’s high dependence on U.S. gas for its own energy already poses an energy security risk. And what happens if suppliers in Texas start sending more of what they produce elsewhere? Mexico used to purchase two-thirds of all exported U.S. gas; today, it buys roughly a quarter. U.S. power plants and the huge new LNG export terminals on the Gulf Coast are consuming more of the total, and with aggressive plans to build even more, as we noted in our last blog. Re-exporting U.S. gas through Mexico will create additional rival demand, which could leave the country exposed to gas shortages. This could push Mexico’s electricity system into crisis mode, as happened during Winter Storm Uri in 2021. The risks could rise during periods of global gas scarcity, especially if desperate foreign buyers offered higher prices.

• Higher prices for gas, electricity and other commodities: Multiple U.S. government and independent analyses have consistently warned that expanding LNG exports, whether from the U.S. or Mexico, will raise gas and electricity prices on both sides of the border. A complex set of factors, with strong regional and time variations, are already driving up electricity prices in the U.S., with natural gas costs as a key part of the equation. The U.S. also shows how dysfunction in related LNG markets can affect energy costs at home: After Russia’s 2022 invasion of Ukraine, soaring LNG prices overseas pushed up gas prices in the US, costing consumers roughly US$110 billion in a single year. Predicting exactly how much more Mexican consumers will pay is difficult, yet higher natural gas prices in Texas would inevitably increase the cost of generating power in Mexico. And Mexico, it should be remembered, uses cheap gas to make many things beyond electricity, including fertilizers, petrochemicals, cement, steel, paper, plastics, glass, and processed food.

• Climate impacts: Although gas emits fewer greenhouse gases (GHG) than other fossil fuels, LNG is still highly polluting due to its long, emissions-heavy supply chain and the potency of methane. Lifecycle GHG emissions of LNG vary significantly across exporters, yet LNG projects in Mexico would rely mainly on gas from the Permian Basin, which has one of the highest methane intensities in the world. Multiple models show that countries cannot avoid the worst impacts of climate change while also ramping up gas exports. These dynamics are especially critical for Mexico given its high vulnerability to climate change and the limited capacity, resources and enforcement power of its environmental regulator (ASEA), which raises doubts about the effectiveness of methane mitigation as gas expands. 

• Socioenvironmental harms: Voices inside Mexico are also sounding alarms about the possible local impacts of re-export projects. Some foresee land grabs and worsening social conflicts around new LNG terminals, including in indigenous and vulnerable communities. LNG tanker traffic could harm migratory whales and other endangered marine life in ecologically sensitive areas such as the Gulf of California, as well as disrupt the already struggling ecotourism and commercial fishing industries. All of which is in addition to the harm new pipelines can cause, and bad outcomes in the U.S. from fracking. Once again, however, official data for Mexican projects is scarce: neither the government nor the developers for Altamira FLNG 1 and ECA LNG have published their impact assessments, and U.S. government studies are silent on impacts outside the U.S.

• Stranded assets: Our last post also described how a wave of new LNG export projects—many already under construction in the U.S. and Qatar—is contributing to a potential supply glut on the global LNG market. This glut, at least for some time, could depress prices and add pressure on projects in Mexico, making it challenging for them to recoup their investments. unable to sell enough gas to be profitable. Some analyses have shown how new LNG projects are at risk of generating returns below the minimum threshold under different scenarios. This could represent a risk for potential LNG projects in Mexico, especially those with relatively higher pipeline transportation costs.

Geopolitical power boost or pitfall?  

The geopolitical risks of tying Mexico’s fortunes even more closely to U.S. gas also warrants scrutiny. In theory, re-exports could align the two countries’ interests and give Mexico leverage in other negotiations, from security to trade deals. This presupposes, however, that current and future U.S. administrations will conduct foreign policy in trustworthy, rational, predictable ways, which is not guaranteed. Among internationally traded commodities, LNG is especially vulnerable to geopolitical conflict. Unrest in distant places can quickly destabilize markets, and authoritarian leaders can weaponize supply for their own ends. European and Asian countries learned this the hard way after Russia invaded Ukraine in 2022.