Last week, the Department of Energy authorized the Freeport LNG project to export gas to countries that don't have free-trade agreements with the United States.
The project -- a $10 billion plant in Quintana Island, Texas, partly owned by ConocoPhillips, Dow Chemical, and Osaka Gas -- is only the second LNG export venture to receive the department's approval, since Cheniere Energy's (NYSEMKT:LNG) Sabine Pass terminal in Louisiana was given permission back in 2011.
Much of the enthusiasm regarding US LNG exports stems from the large disparity between gas prices in the U.S. and those elsewhere in the world. Unlike oil, natural gas doesn't have a globally determined price, largely because of transport difficulties. That provides U.S. energy companies with lucrative opportunities to ship gas to foreign markets, where it can fetch several times its domestic price.
But while the recent surge of interest in U.S. LNG exports centers primarily on foreign non-free trade markets, especially in Asia, there's another huge market much closer to home that already imports huge volumes of U.S. natural gas. And over the next several years, it's likely to import much more. Let's take a closer look.
Mexico's demand for LNG imports
That market is Mexico. Because of the North American Free Trade Agreement involving the U.S., Canada, and Mexico, which was enforced beginning in 1994, Mexico and the U.S. can trade freely. Since that time, U.S. imports of Mexican crude oil have grown steadily, as have Mexican imports of natural gas.
In fact, U.S. exports of natural gas to Mexico have doubled over the past three years, according to a recent research note by Barclays. There are two key reasons underpinning this trend. Over the past three years, Mexico's economy and population have grown at a relatively fast clip, while its natural gas output has fallen 11%, creating greater demand for energy.
Looking ahead, Mexican demand for LNG imports is expected to rise significantly. Barclays estimates U.S. gas exports to Mexico to average 2 billion cubic feet per day this year and 2.2 bcfd in 2014. And beyond 2014, the volume of exports is expected to accelerate, as more pipeline capacity comes on line.
According to the nation's government-owned power generator, Comision Federal de Electricidad (CFE), nearly 20 gigawatts of gas-fired generation capacity will probably need to be developed over the next decade or so. The CFE further estimates that Mexican gas-fired plants will need about 3.8 billion cubic feet per day of additional gas to operate.
In addition to electricity generation, new industrial facilities are also driving demand for natural gas and prompting the construction of several cross-border pipelines. For instance, Petroleos Mexicanos is expected to shortly release bidding rules for part of the Los Ramones pipeline project -- a pipeline that will transport roughly 3 billion cubic feet of natural gas per day by 2015 from southern Texas to the central Mexican state of Guanajuato.
The 600-mile pipeline is just one of several expected to come online over the next few years to satisfy Mexico's demand for energy. According to a Petroleos Mexicanos official, Los Ramones and other pipelines could lead to a tripling of U.S. gas imports to Mexico.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has options on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.