MEXICAN OFFICIALS DISCUSS LNG AND COAL MARKETS

UNCLAS SECTION 01 OF 02 MEXICO 001271 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA STATE FOR EB/ESC MCMANUS AND IZZO USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD USDOC FOR ITS/TD/ENERGY DIVISION TREASURY FOR IA (ALICE FAIBISHENKO) DOE FOR INTL AFFAIRS KDEUTSCH, ALOCKWOOD, AND GWARD DOE FOR DAS PUMPHREY AND A/S HARBERT DOL FOR ILAB E.O. 12958: N/A TAGS: ENRG EPET ECON MX SUBJECT: MEXICAN OFFICIALS DISCUSS LNG AND COAL MARKETS WITH DOE REF: 06 MEXICO 3638 Sensitive but unclassified, entire text. -------------- Introduction and Summary -------------- ¶1. (SBU) A Department of Energy (DOE) delegation and Mexican officials discussed supply challenges facing the North American (liquefied natural gas) LNG market. Lack of reasonably priced liquefied LNG will likely cause the GOM to place its Manzanillo regassification project (reftel) on hold. With a supply contract, however, Sempra Energy's one billion cubic feet per day Costa Azul project should begin operations later this year or early next. The group also discussed future prospects for North American coal. End Introduction and Summary. --- LNG --- ¶2. (SBU) Mexican Officials told Assistant Secretary Karen Harbert that LNG supply was becoming a significant problem. Francisco Santoyo, Chief Financial Officer of Mexico's electricity monopoly, the Federal Electricity Commission (CFE),told the delegation in a separate meeting that the company's 10 year program calls for gas-fired generation to move from 40 per cent of the power generation portfolio to 60 percent of total Mexican generation capacity, followed by 19% provided by hydroelectric power, 3.5% by nuclear power and less than 5% from coal. CFE has as a result, become a player in global LNG markets. ¶3. (SBU) This plan has provided CFE many areas of opportunity. The company has taken specific steps in the gas market to diversify Mexico's source of supply. CFE officials said that adding the LNG regassification facility at Altamira, which currently receives gas from Nigeria, has provided an alternative to pressure on the company from high U.S. gas prices. The Ensenada, Baja California regassification terminal "Costa Azul"-operated by Sempra would follow, due to go on line in late 2007 or early 2008. CFE will take half of Costa Azul's deliveries with the remainder going to the U.S. Mexico also has the option of increasing gas handling capacity at Altamira to 1 billion cubic feet per day (BCFD) to allow trading. ¶4. (SBU) CFE officials said it is in the process of awarding bids on a regassification plant at Manzanillo to supply gas fired generating capacity in Guadalajara, which it said would again help to relieve Mexico from high U.S. gas prices. Nonetheless, Santoyo admitted that supplying the plant with LNG will be a problem. When built, Manzanillo will provide additional opportunities for gas trading. CFE was currently looking for a reasonably priced LNG supply for the proposed Manzanillo facility. Santoyo felt that the pressure on Mexican electricity production caused by short LNG supplies was "manageable." Nevertheless, he added that the delay in marketing Sakhalin LNG, which CFE had counted on, had been "painful" for Mexico and that reliable supplies from Peru that could also be used to load Manzanillo were far off. He was more optimistic about Malaysian and Australian supplies for the facility. He asked if the U.S. and Mexico could work together to bring down prices for LNG. ¶5. (SBU) The Energy Secretariat's (SENER) Rafael Alexandri, in a separate meeting more openly told the delegation that in current bids, suppliers were offering LNG to Mexico for the Manzanillo facility at a price premium above the Henry Hub (U.S. Gulf Coast) reference, which he suggested showed suppliers intended to try to maintain a high North American price. MEXICO 00001271 002 OF 002 ¶6. (SBU) A/S Harbert noted that while the U.S. was committed to expanding its LNG import infrastructure, the U.S. was encountering challenges in securing new sources of LNG supply. She pointed out the emerging global LNG market, noting LNG spot cargoes have crisscrossed the Atlantic recently in response to higher prices being offered in Europe. ¶7. (SBU) Santoyo said in the future, Mexico will able looking at importing gas into Chihuahua through a proposed LNG terminal at Puerto Libertad and delivering at least some of that gas by pipeline to the U.S. CFE has received expressions of interest from El Paso Natural Gas in particular in importing gas to the U.S. market through Puerto Libertad. ¶8. (SBU) Santoyo suggested that continental gas security could be improved through additional LNG regassification construction. He suggested that a joint North American approach to Peru and othQpotential South American suppliers on the importance of those supplies to the North American and global markets may be appropriate. He also suggested a joint U.S.-Mexico discussion on LNG. Deputy Assistant Secretary of Energy for International Cooperation, David Pumphrey noted an existing APEC effort to design best practices for the international LNG market. ¶9. (SBU) Like Santoyo, Mexican Undersecretary of Energy for Planning, Jordy Herrera believed that Mexico would operate 3-4 LNG terminals in the next 10 years. Only one of these would be owned by the government, the rest would be private. One of these terminals would be geared to deliver gas to the U.S. However, Herrera was negative about the prospects for Manzanillo ever being built by CFE. -------------- Coal -------------- ¶10. (SBU) Santoyo noted that CFE was importing coal through Puerto Libertad to feed coal fired plants in Puerto Libertad and Coahuila, and added that capacity could be used for exports to the U.S. Pumphrey noted that DOE was supporting research into "Carbon Sequestration" including the FutureGen project for a zero-emission coal fired power plant and that Mexico might be interested in this technology to limit their carbon emissions as well. Herrera noted that Mexican coal consumption was minimal and was unlikely to increase. Santoyo noted that all CFE plant emissions fall within GOM limits, but there was increasing public pressure to tighten emissions rules. ¶11. (SBU) DOE A/S Harbert has cleared this message. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity GARZA