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Sempra defends Mexico plans despite Nafta chatter

15 Dec 2017, 8.37 pm GMT

Sempra defends plans despite Nafta chatter: Correction

Corrects spelling of Baker Botts attorney Carlos Solé

Washington, 15 December (Argus) — US midstream company Sempra Energy says US-Mexico energy trade and investments will continue to grow regardless of the outcome of trade negotiations and Mexico's presidential election next year.

"Commercial activity will not stand by while the three countries examine the North American Free Trade Agreement (Nafta)," Sempra regional vice president Mark Nelson said today. Opportunities in Mexico's oil, natural gas and renewable energy sectors will remain attractive to investors, he said at a discussion in Washington hosted by advocacy group the Inter-American Dialogue.

Sempra is among US companies taking advantage of a historic opening of Mexico's energy sector under President Enrique Pena Nieto. Sempra's Mexican unit IEnova has identified $10bn in investment opportunities in Mexico's wholesale electricity and fuel sector. Sempra is looking to convert its Costa Azul regasification plant in northwestern Mexico to an LNG export facility and has invested in cross-border pipeline projects.

Canada, Mexico and the US have been negotiating revisions to Nafta since August. The lack of progress, an ambitious schedule for completing the talks by March 2018 and US president Donald Trump's threats to abrogate the agreement are starting to worry some US energy industry executives.

But Nafta talks so far have not had a chilling effect on US-Mexico energy trade, law firm Baker Botts Latin American practice co-chair Carlos Solé said at the event. "There is too much inter-connectivity between the two nations on the energy space for there to be a reversal, notwithstanding what happens in the political space."

US exports of natural gas by pipeline to Mexico averaged 4.2 Bcf/d (118mn m³/d) in January-September, up by 13pc on the year, Energy Information Administration data show. US exports of refined products in the same period increased by 20pc to 982,556 b/d, as Mexico started to liberalize its retail fuel sector.

The outcome of Mexico's presidential election, scheduled for July 2018, and the country's economic outlook matter more for the bilateral energy trade and investment, Solé said. "If the economy slows, the demand for natural gas and power will not have the same growth rate."

US investors have flocked to Mexico's natural gas and retail fuel sectors, but the power sector is turning out to be a bigger challenge than expected, Solé said. Mexico's third auction for long-term electricity supply has drawn tepid response even though the process allowed non-government buyers to participate for the first time.

The prices set at the electricity supply auctions, as low as $20/MWh, are not enough to attract potential investors, he said. And in wholesale electricity markets, "the dilemma for the US electricity exporters is that they do not know what they can sell it for in Mexico," Solé said.

Potential investors are also mindful that the US could withdraw from Nafta, GE senior manager of global government affairs David Nelson said. Potential buyers of GE gas turbine have raised questions about the security of US natural gas supply if Nafta ends, Nelson said.

The permitting process for exports of natural gas to countries without a free trade agreement with the US is more onerous as the Department of Energy has to determine if such exports are in the public interest.

Similar inquiries from clients in Mexico already have prompted Baker Botts to consult with the US Department of Energy, which oversees permitting for US natural gas exports. "One interpretation is that the change of free trade agreement status of a country does not impact your ability to export there under existing permits," Solé said. "But it is all hypothetical at this point."

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