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Gas Production and Pipelines Primed to Head South of the Border

March 29, 2017 | By Warren Waite

Mexican energy trade has become one of the more important aspects to the U.S. natural gas market balance over the past three years. Inherent in understanding this relationship is the progress of Mexico’s energy reform and the buildup and utilization of export pipeline capacity to our southern neighbor. That is the subject of this week’s Get the Point in which we access what is happening within Mexico, energy trade with the U.S. and how the foundation for future gas export growth, especially from Texas, is being set today.

In terms of future volumetric growth expectations from a U.S. gas demand perspective, pipeline gas to Mexico ranks right behind LNG exports and U.S. gas-fired power generation. To meet this demand, new pipelines are being built, and existing pipelines are being expanded or having their flow capability reversed. In this report, we look at the new flow dynamics that are already taking shape, with some pipelines operating at 90% capacity, while others are at much lower utilization but well-positioned for the next growth spurt.

Mexico Energy Reforms, Clean Power Goals Set the Stage

In December 2013 Mexico amended its constitution putting forward energy reforms that opened up the entire energy industry to various degrees of private participation and competition. Thus far, the energy reform has failed to encourage an increase in domestic natural gas production. That is because the development of hydrocarbons in Mexico has always been focused on oil, not gas. More than half of Mexico natural gas production is associated gas from oil and is located at the southern end of the country. As shown below, the vast majority of marketable gas production in Mexico is at the southern end of the country. Domestic gas production in Mexico has declined by nearly 0.9 billion cubic feet per day (Bcf/d) since 2010 to 4.1 Bcf/d in 2015, according to Mexico’s national energy ministry (SENER).

Mexican Power Lifts Gas Demand

While domestic gas supply in Mexico began to wane as oil production lagged, demand for gas picked up, mostly from the power sector and liquefied natural gas (LNG) imports from abroad and pipeline imports from the U.S. were utilized to balance the market (see graph below).

Gas imports from the U.S. accounted for as little as 8% of Mexican gas demand back in 2000 (purple dash line, right axis). By 2010, U.S. gas imports as a percentage of total demand climbed to 14%. In 2016 pipeline imports surged to around 44% and are expected to account for half, if not more, of total demand in 2017 and beyond.

rising demand and falling production spur increased US imports

Natural gas-fired power generation capacity will continue to increase at the expense of retiring fuel-oil fired power plants. Importing cheap gas from the U.S. helps bring down the cost of generated power. It also helps improve the competitiveness of low-carbon generation. Natural gas can help meet Mexico’s 35% clean generation goal by 2024.

Earlier this year, the U.S. Energy Information Agency (EIA) highlighted the impact of new gas-fired power plants within Mexico, which accounts for over half of all of the country’s generation needs. SENER projects that through 2020 about 60% of all electric capacity additions will be fueled by natural gas. It also projects that between 2016 and 2029 gas-fired capacity additions will amount to 24.9 gigawatts, with more than half of that growth occurring through 2020. Translated to gas demand, SENER projects demand from the power sector will grow from 3.6 Bcf/d in 2015 to 5.4 Bcf/d in 2029.

Cumulative projected generation capacity additions in Mexico by fuel type

Shifts in Energy Trade

EIA recently compiled and summarized not only volumetric trade data, but also the net trade value of all imports and exports of various energy products. Historically, the U.S. has taken in dollar terms, more crude from Mexico than net exports of natural gas and petroleum products. The EIA noted, “from 2006 through 2010, for example, the value of U.S. energy imports from Mexico were two to three times greater than the value of U.S. energy exports to Mexico.”

Values of selected energy trade between Mexico and the US

Fast forward to 2015 and 2016, and the trade situation has reversed due to increasing exports to Mexico of natural gas and petroleum products and a sharp drop-off of imported Mexican crude. “For 2016, the value of U.S. energy exports to Mexico was $20.2 billion, while the value of U.S. energy imports from that country was $8.7 billion,” noted EIA.

Monthly volumes of selected energy commodities traded with Mexico

Gas Exports, Pipes and Projects

As mentioned above, pipeline exports of U.S.-produced gas to Mexico have picked up substantially in the last few years. In fact, net exports from the U.S. have nearly doubled from 1.9 Bcf/d in 2014 to 3.9 Bcf/d thus far in 2017.

Could exports to Mexico double again in the next three years? Not likely, but keep in mind the energy reform in Mexico is a long-term plan that is accomplished in phases. It is more plausible that exports could grow by 50% and reach 6.0 Bcf/d by the end of the decade. Clearly, Mexican demand for U.S. gas is growing. The question is where exactly did all that supply come from? And how will the U.S. supply future export growth?

For 2016, U.S. net exports to Mexico averaged 3.6 Bcf/d with 2.9 Bcf/d, or 81%, of all pipeline exports to Mexico coming from Texas (the three blue shaded areas in the graph below) and the rest came from Arizona (which receives a large amount of its supply from Texas) and a fraction from California (combination of orange and red shaded areas). It’s worth getting more granular to understand where exactly in Texas supplies heading south of the border are coming from. First let’s put the Lone Star State in context. Based on 2016 data of all U.S. to Mexico net exports, about 0.7 Bcf/d, or 19%, came from interstate pipelines (sky blue shaded area) such as Natural Gas Pipeline of America (NGPL), Texas Eastern Transmission and El Paso Natural Gas. Intrastate pipelines represented 2.2 Bcf/d, or 62%, of all exports however, one in particular dominates. NET Mexico pipeline averaged 1.6 Bcf/d, or 44%, of all U.S. exports (dark blue shaded area).

Exports from texas dominate

NET Mexico is a 2.1 Bcf/d intrastate pipeline originating at the Aqua Dulce Hub near Corpus Christi, TX that receives gas from nine different interconnects and then moves gas south to the border where it connects to the Ramones Pipeline on the Mexican side. As the graph above shows, it grew quickly and is almost single handedly responsible for 2.0 Bcf/d export growth from 2014 to 2017. Current throughput on NET Mexico is estimated to be around 1.8 Bcf/d.

Within Texas there is a division of where gas is sourced that feeds into Mexico. Namely, West Texas or Permian Basin production, and South Texas, which accounts for Eagle Ford Shale gas and others along the Gulf Coast. In the near future, reversal projects on traditionally south-to-north long haul pipelines aim to attract gas from a mix of sources like the Haynesville, SCOOP/STACK and the Northeast to push new supplies along the Texas coast where it can meet rising industrial demand, LNG export projects and other interconnects that make their way into Mexico.

Some of those projects include:

  • Texas Eastern’s 400 MMcf/d South Texas Expansion Project (STEP)

  • Transco’s 475 MMcf/d Gulf Connector Project

  • NGPL’s Gulf Coast Southbound Expansion Project of up to 710 MMcf/d

  • Tennessee Gas Pipeline’s South System Flexibility Project for 500 MMcf/d.

In all, that is nearly 2.1 Bcf/d by late 2019 of new capacity that could push gas from in and outside of Texas southbound along the Texas coast—some of which would make it to Mexico. Further details of each of the aforementioned projects are available to PointLogic Energy subscribers via our Pipeline Project Tracker page. There are other projects that go directly to the border and connect with Mexican infrastructure, more on those in just a bit. 

South Texas

In 2016, Texas exports to Mexico averaged 2.9 Bcf/d, with roughly 90% crossing into Mexico from south Texas and 10% from west Texas. Within south Texas, as mentioned earlier, the NET-Mexico intrastate pipeline is the dominant incremental force since coming online at the end of 2014. Year to date 2017, south Texas exports to Mexico are estimated to be 2.9 Bcf/d, or about 1 Bcf/d (73% utilization) below the current border export capacity. NET Mexico is approximately 90% utilized in the first quarter 2017, leaving the majority of open available capacity at other exit points.

South Texas Exports & Capacity

By late 2017, Howard Energy Partners and Grupo Clisa’s joint venture for Nueva Era’s 0.5 Bcf/d pipeline from the Eagle Ford play in Texas to markets around Monterrey, Mexico will enter in-service. In late 2018, Enbridge’s (formerly Spectra Energy) 2.6 Bcf/d Valley Crossing Pipeline project is planned to bring gas from Agua Dulce Hub to an offshore green field pipe on the Mexico side called Sur de Texas- Tuxpan. Export volumes are expected to continually grow as new pipeline infrastructure in Texas comes into service and pipeline infrastructure within Mexico is completed feeding new gas-fired power plants, industrial demand growth, plus the use of U.S. gas to displace waning domestic gas production, fuel oil and higher cost LNG imports.

West Texas

Currently, there isn’t much activity from West Texas to get excited about; 2017 export volumes are running at an estimated 0.3 Bcf/d, or less than 10% of available export capacity. What is exciting is the in-service of a few large volume pipelines owned by Energy Transfer Partners (ETP). In January, the 1.135 Bcf/d Comanche Trail pipeline went into service. On March 21, ETP completed construction of the 1.356 Bcf/d TransPecos Pipeline and is set to begin operating March 31. By April, West Texas export capacity to Mexico reaches 4.3 Bcf/d.

West Texas Exports & Capacity

Both of the ETP pipelines originate near Waha (a major gas hub within the Permian Basin) with Comanche Trail traversing west to its exit point at San Elizario and TransPecos travelling southwest to Presidio. In each case, these pipelines then connect to new pipeline infrastructure within Mexico. Comanche Trail connects to San Isidro-Samalayuca pipeline (1,135 MMcf/d). TransPecos connects to Ojinaga- El Encino pipeline (1,350 MMcf/d). A map depicting pipeline projects on both sides of the border is shown below. Details for each can be found online via PointLogic Energy’s Pipeline Project Tracker.

New US-Mexico natural gas pipelines

** PointLogic notes some updates to the EIA map published in late 2016. Nueces-Brownsville is now called Valley Crossing. Encino-Topolobampo will enter in-service in 2017 instead of 2016. Sasabe-Samalayuca and Sur de Texas- Tuxpan are likely to have a start date in early 2018 and 2019, respectively.

Between Comanche Trail, TransPecos and ONEOK’s RoadRunner Gas Transmission Pipeline is 3.06 Bcf/d of export capacity from the Permian Basin in West Texas to Mexico. The Permian is an oil-driven play and has been the premier location for producers for a number of years due to its multiple geological pay stacks of hydrocarbons, drilling efficiencies, use of proppant and longer laterals.

That said, associated gas production growth is forecast to continually grow into the next decade – and the midstream sector is aware of the opportunity to move the gas. On March 22, Kinder Morgan announced a non-binding open season for a new build 1.7 Bcf/d intrastate pipeline called Gulf Coast Express that would originate near Waha and move east to the Agua Dulce Hub. That is a positive sign for expected Permian production growth and the willingness to build the infrastructure to take it to growing downstream markets.

Primed for Growth

By how much and when will exports to Mexico increase? Unlike other parts of the U.S., like the Northeast, exports to Mexico are not a function of a lack of export capacity, but a matter of having the infrastructure in place within Mexico. This pertains not just to the pipelines, but more so to the gas-fired power plants that are in the works. You need both, infrastructure and demand.

Based upon the information provided above, it is apparent that pipeline build out in the northern part of Mexico is significant and demand to date has yet to satisfy  the volumes needed to fill export capacity. The demand growth story for Mexico will be gradual, just like the objectives of the country’s energy reforms, and much of the capacity being built today will not be highly utilized for many years to come.

From a U.S. perspective, the country is expected to become an annual net exporter of natural gas in 2018, meaning LNG and Mexican exports are greater than what is imported from Canada. As PointLogic as noted previously, the months of November 2016 and February 2017 were the first where the U.S. achieved net exporter status, both by an average of a little more than 0.1 Bcf/d. By the early 2020’s LNG export volume could surpass exports to Mexico while these exports to Mexico could exceed Canadian imports. As previously mentioned, current net exports to Mexico are just shy of 4.0 Bcf/d, according to PointLogic Energy data and deep analysis of EIA entry and exit point data. By the end of the decade, exports could reach 6.0 Bcf/d in some months and annually reach that mark by the first half of the 2020’s. SENER’s Natural Gas Outlook 2016-2030, places U.S. exports near 5.5 Bcf/d in the same time horizon.

The export picture could even be better if Mexican gas production continues to decline and domestic power and industrial demand growth is stronger than anticipated. Moreover, the success of free market open seasons for gas pipeline capacity and other policy initiatives to create a liquid and dynamic gas market could help boost the upside potential.

Downside risk is that energy reform measures trigger a resurgence in associated and non-associated Mexican gas production, lessening the need for U.S. gas. And it should be noted that the liberalization of the energy industry has led to considerable new offshore leasing that involves major international oil companies. Delays or cancellations of Mexican infrastructure projects, whether power plants or pipelines would also have an impact. If U.S. border taxes or trade tariffs come to fruition that could also have an impact on the energy trade with Mexico.

Stay tuned as PointLogic tracks and documents activities to and within Mexico this summer and beyond.

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