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Viva Mexico! Exports to Mexico Surge to All-Time Highs

May 5, 2015 | By Jack Weixel

Battle of PueblaThe 5th of May, or Cinco de Mayo, is a national holiday in Mexico celebrating the Mexican Army’s surprise victory over French forces in the Battle of Puebla. While this battle did not end French occupation of Mexico in 1861, it was hailed as a major turning point in the war as a force of only 2,000 Mexican soldiers was able to defeat 6,000 heavily equipped French soldiers before they could capture Mexico City and move farther south into the heart of the country. The victory over what was widely considered the world’s premier army emboldened Mexican resistance and is a source of national pride and unity for the country. While Cinco de Mayo is now more widely celebrated in the United States, 154 years later in 2015, natural gas market observers have something else to celebrate as natural gas exports from the U.S. to Mexico approach the 2.7 billion cubic feet per day (Bcf/d) mark.

How important are Mexican exports to the U.S.? According to PointLogic Energy’s pipeline database, this year to date, Mexican exports are averaging 2.4 Bcf/d, or 0.6 Bcf/d higher than the first four months of 2014. With domestic demand averaging 83.3 Bcf/d for the year, Mexican exports are a mere 3% of this total. However without an outlet to Mexico, roughly 900 Bcf of gas per year would need to find a home elsewhere, or alternately be stuck in the ground, further depressing domestic gas prices.

 

Net Mexican Exports from the U.S.

The reason why the graph above is entitled Net Mexican Exports is because the U.S. does receive small volumes of gas into California via the Socal pipeline system at Otay Mesa and North Baja. However, the last time any significant amount of gas was imported into the U.S. was during February 2011. The Otay Mesa border crossing point was originally designed to take imported LNG from Sempra’s Costa Azul regasification plant in Baja California. As the supply and demand balance in the U.S. has shifted over the past three years, this gas has become less necessary and Sempra is actively pursuing switching the facility to a liquefaction export facility.

The majority of natural gas exports to Mexico cross the border through Texas and Arizona. The reason for the recent surge in exports this year has been the opening of the NET Mexico and Kinder Morgan Sierrita pipeline projects. Flows through the two new border crossings have averaged 514 MMcf/d this year, with NET Mexico responsible for over 90% of the increase.

NET Mexico and KM Sierrita Exports

NET Mexico is a 42” pipe that runs approximately 124 miles from the Agua Dulce Hub in Nueces County, TX and terminates at the border near Rio Grande City, TX. NET Mexico is anchored by a long term firm gas transportation agreement, for up to 2.1 Bcf/d, with MGI Supply Ltd., an indirect wholly owned subsidiary of Pemex Gas. Kinder’s Sierrita Gas Pipeline has about 200 MMcf/d of firm capacity on 60 miles of 36” pipe that runs from Tucson, AZ to a border point near Sasabe, AZ.

The Upcoming Surge

As pointed out in last week’s excellent Get the Point submission, PointLogic’s Pipeline Projects Database is tracking 6 projects with a combined capacity of 3.0 Bcf/d coming online through 2017. A majority of these projects are coming online in Texas and are detailed in the graph below.

Cumulative Texas to Mexico Capacity Additions

With incremental capacity increasing to nearly 5.3 Bcf/d by early 2017, how much could the U.S. market expect actual flows to increase over the same time? To assess the situation, let’s look at supply and demand factors on both sides of the border.

From PointLogic’s Gas Supply Forecast Model, we can anticipate growing Texas production as having a large impact on the amount of gas available to flow south. Within Texas, PointLogic’s Gas Supply Forecast model sees the largest potential for growth from South Texas in Districts 1-4, which includes the Eagle Ford Shale.

Texas Production

With the ability to ship condensate abroad (so long as it’s run through a distiller), some producers in South Texas may be relatively immune to the impact of soft oil prices, which may allow for some associated gas increases in addition to traditional gas window drilling in the region. The Energy Information Administration’s (EIA) most recent Drilling Productivity Report confirms that oil and natural gas production growth in the Eagle Ford is effectively flat going into the month of May (source: http://www.eia.gov/petroleum/drilling/pdf/eagleford.pdf). PointLogic’s current April forecast reflects this flat growth, but is more optimistic regarding South Texas in the future. Two years from now the commodity price situation that drives producer decisions on capital expenditures and pace of drilling will be very different.  With 1.7 Bcf/d of incremental gas sitting on the doorstep of Mexico, what sort of demand environment will exist to pull that gas across the border?

The Mexican government and its state run energy provider, the Comisión Federal de Electricidad (CFE), has made a conscious decision to make natural gas a critical part of their nation’s energy infrastructure. The CFE announced last April that it was initiating project proposals for five new natural gas pipelines to deliver more natural gas to domestic market areas. CFE has subsequently awarded several pipeline companies with contracts to construct these projects that could amount to over 6.0 Bcf/d of incremental transportation capacity.

Mexican Pipeline Projects

The motivation to source Texas gas is two-fold: Mexico’s current declining gas production portfolio as managed by PEMEX (particularly in offshore Gulf regions) and its reliance on expensive LNG gas that is imported at Manzanillo on Mexico’s west coast and Altamira on its northeastern coast (to a lesser degree now that U.S. imports have increased). CFE leadership sees cheap U.S. gas as an opportunity to reduce the cost of energy to its ever growing service constituency of over 36 million customers.

According to the EIA, Mexican natural gas consumption for power has increased to near 1.3 Bcf/d and is projected to grow exponentially over the next several years due to the installation of several thousand megawatts of increased combined cycle power plants and supporting transmission and distribution infrastructure. In late January, the CFE announced it will launch tenders for 666 megawatts (MW) of installed capacity at the Topolobampo III combined cycle power station. PointLogic expects this to be the first of several tenders announced throughout the next several years. In addition, Mexico’s cabinet level Secretaria de Energia (SENER) expects natural gas demand for power to increase from over 3.0 Bcf/d currently to 4.9 Bcf/d in 2027 (largely driven by private investment).

En Conclusión

As in any market, timing will be critical. Pipelines built ahead of installed generation capacity could sit idle or underutilized for many years. Production push is not enough to incent instant demand, as evident in the U.S. over the past several years. With 5.3 Bcf/d of incremental transportation capacity planned, PointLogic estimates that less than half that capacity will be utilized through 2017, increasing total exports to Mexico from an average of 2.5 Bcf/d in 2015 to over 5.0 Bcf/d in 2017. This is certainly enough incremental demand in the U.S. to instigate cause for a celebration – after all, Cinco de Mayo is more widely celebrated on this side of the border. In the natural gas space, increased flow, transportation and power projects are all positive signs for the creation of a more robust U.S. and North American natural gas market place.

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