Sempra Energy Projects Binding Mexico and Southern California

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). Sempra Energy (NYSE:SRE) (San Diego, California) has a number of current energy projects, which link Baja California, California, Mexico and adjacent states in the USA. This is a trend, which is likely to grow for Sempra and other energy companies following a call at the end of 2001 by the Mexican government for a greater role for the private sector in the country's energy production and $120 billion investment in the sector by 2006. The 2001 to 2006 plan sees $48 billion being put into oil and gas upstream activities, $34 billion for the electricity sub sector, $20 billion for natural gas and $18 billion for refineries.

The Integral Fuel Policy of Mexico's department of energy seeks to make a significant reduction in the use of fuel oil in the current decade. This will be achieved by the construction of new natural gas fired combined-cycle power plants, the conversion of several power plants from fuel oil to natural gas operation, an increase in the industrial use of natural gas to meet new environmental standards and the promotion of the industrial and domestic use of gas. The natural gas industry is now the least regulated of Mexico's energy sub sectors.

Last week Sempra Energy and CMS Energy Corporation (NYSE:CMS) (Dearborn, Michigan) announced a joint agreement to develop a major new liquefied natural gas (LNG) receiving terminal to bring natural gas supplies into northwestern Mexico and Southern California.

The two companies will develop, finance and own the LNG terminal, Energia Costa Azul, and related port infrastructure, which will be, located on the Pacific coast, north of Ensenada, Baja California, Mexico. In the joint venture commercial operation of the terminal is scheduled to begin in late 2005. CMS Energy, which has more than 20 years of experience in operating America's largest LNG receiving terminal, at Lake Charles, Louisiana, will operate the Baja California facility under contract with the joint venture.

The $600 million plant will have a send-out capacity of one billion cubic feet a day of natural gas. The gas will be delivered to customers in Baja California and the southwestern USA through a 64 kilometer pipeline between the terminal and existing pipelines in the region. Sempra Energy has secured an optimal site for the terminal of 300 acres of industrial zoned land which is far from residential areas. Sempra has been a pioneer in integrating the natural gas and electricity markets in the US and Mexico. The company has a strong gas, pipeline and power generation presence in northwestern Mexico, officially filed for a permit with Mexico's Energy Regulatory Commission (ERC) in September.

The new terminal will provide customers in the Baja California and Southern California region with an alternative, long-term source of natural gas and give greater choice and flexibility now that they will no longer be 'end of pipe' victims paying higher costs for natural gas. They will now be 'front of pipe' customers which will create more competition for natural gas supplies.

In Mexicali, Baja California, Sempra Energy Resources and Sempra Energy International are building a 600MW power plant, Termoelectrica de Mexicali. This is a natural gas-fired plant, which is being built to Californian air-emissions standards and will use recycled sewage water for its cooling process as a water resource conservation measure. The plant will be connected to the US power grid via a 15.2 km, 230 000 volt transmission line. Electricity will be available for markets in California, Arizona and Mexico and commercial operation is scheduled for summer 2003.

Diversification of Mexico's electric power industry has taken place on a limited basis with private investors taking part in power generation but the distribution of electricity in the country has been a jealously guarded public sector mandate. There has been across the political spectrum support in 2002 in favor of the sale of a percentage of the state owned oil and gas company, Petroloes Mexicanos (PEMEX) and the national electricity utility, Comision Federal de Electricidad (CFE) by the Ministry of Energy. This is some way away from the government's promised free market reforms and the envisioned privatization of PEMEX.

A $230 million, 344 kilometer natural gas transportation pipeline, Gasoducto Bajanorte will begin in Arizona, U.S.A. and cross Baja California, Mexico to connect to the Transportadora de Gas del Norte (TGN) pipeline near Tijuana. Sempra Energy International is building the 216 kilometer section and PG&E Corporation's (NYSE:PCG) (San Francisco, California) National Energy Group is constructing the 128 kilometer U.S. segment. The 30 inch pipeline will have a natural gas capacity of 500 million cubic feet a day. It will serve new and existing power plants and industrial customers in northern Baja California and Southern California and has begun operating at partial capacity.

Although the greater integration of the U.S. and Mexican energy markets is progressing, Mexico should not be seen as a solution to future supply shortfalls of electricity in U.S. markets as a whole although it is possible that more power plants will be planned for northern Mexico to help satisfy the energy needs of both northern Mexico and southern California. Mexico, which is currently a net energy exporter, is expected to experience an average increase of 2.8% per annum through 2010.