Germany and Mexico have deepened their energy ties with a $5 billion agreement to develop cooperation in the liquefied natural gas (LNG) sector. The 20-year deal between the German utility company Uniper and the Mexican state-owned oil company Pemex will see LNG delivered from the Gulf of Mexico to an import terminal in northern Germany.
This agreement is a direct result of German Chancellor Olaf Scholz being rebuffed by Canadian Prime Minister Justin Trudeau when he visited Ottawa at the end August.
Scholz was hoping for an LNG deal with Canada, and was rudely surprised when Trudeau pooh-poohed the possibility and instead proposed to export hydrogen Germany.
Trudeau went so far as to claim publicly, without evidence, that there has “never been a strong business case” for LNG exports from Canada to Europe. Yet there is an enormous possibility for arbitrage. At various times over the past few months, the price of natural gas in Europe has been 20 times its price in Canada.
Scholz was diplomatic in public but, according to press reports, scathingly critical of the Canadian government in private meetings with business leaders. In fact, what was signed concerning hydrogen was no more than a “declaration of intent” to create a “hydrogen alliance” between Canada and Germany. Even if production was actually to happen and means of transportation to be found, Germany prefers so-called “green hydrogen” (produced by electrolysis from water by renewable energy).
Canada, however, produces none of that but instead only “gray hydrogen” (from methane gas without carbon capture; with carbon capture it would be called “blue hydrogen”). In fact, if Canada ever produces blue hydrogen, it would more like be in the west than in the east of the country, and therefore targeted at markets either in Asia or the west coast of the United States, rather than at European markets such as Germany.
Canadian officials pretend that such a project could be up and running by the middle of the decade. Yet in the seven years that Trudeau has been prime minister, only one energy export project has been approved, the Shell-led LNG project at Kitimat in British Columbia, and even it is still encountering problems in the construction phase.
So it was not really a great surprise when, following a recent state visit the German president Frank-Walter Steinmeier, Mexico has announced a $5 billion project for an LNG hub on its Caribbean coast. Germany will be first in line for Mexico’s exports, at its Wilhemshaven gas hub. Construction has been accelerated since Russia reinvigorated its war of aggression against in February, and it is hoped that the terminal would be ready to receive imports as early as January next year.
As Germany has been desperately seeking to increase its imports of natural gas from non-Russian sources, while Mexico has been trying to find ways diversify its customer base and reduce its dependence on the United States as a buyer, the new deal is potentially a very significant win-win scenario.
Already in 2016, Mexico reached an agreement with the German electric utility company E.ON for the latter to purchase up to 1.5 million tons of LNG annually over a 20-year period. The following year, it struck a deal with Norway’s Statoil (which has since changed its name to “Equinor”) for the sale of 600,000 tons per year over 15 years.
All this would not only give Mexico access to German markets but also create new business opportunities for German companies: in recent years, Mexico has been working hard to increase its production of natural gas.
The partnership between Germany and Mexico could have significantly increase competition in the global LNG market, where a few large producers currently dominate.
Germany is one of the world’s largest consumers of natural gas, and Mexican officials have been working to reform the country’s energy sector. Mexico has the fourth-largest shale gas reserves in the world. It needs to tap into them to meet rising domestic demand. Export to foreign markets would dovetail nicely with domestic resource development.
The two countries have already agreed to cooperate in construction of LNG export structures on Mexico’s Caribbean Sea cost. They could possibly cooperate further on the development Mexico’s enormous shale gas resources. For this reason the deal, if executed, has the potential to transform the global natural gas market.