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Mexico Gas Pipeline Network Filling Out in 2017

May 24, 2017 | By Kevin Adler

U.S. gas exports to Mexico are one of the key outlets for growing U.S. shale gas production. According to the U.S. Energy Information Administration (EIA), U.S. gas exports to Mexico have doubled since 2013 and are now more than 4 billion cubic feet per day (4 Bcf/d), on average.

On the U.S. side of the border, many pipeline projects have come in service in the last two years, increasing potential deliverability to more than 10 Bcf/d. The bottleneck is on Mexico’s side, where the pace of the build-out of a network of pipelines is lagging behind optimistic projections made a few years ago. However, several new projects have reached in service so far in 2017, and several more are likely to be completed soon.

In this issue of Get the Point, we look at recent developments in Mexico pipeline projects.

Three key gas pipelines to facilitate U.S.-to-Mexico exports are due to come in service in June, according to information compiled by IHS Markit and PointLogic.

Set to reach in service in June are Encino-to-Laguna, Guaymas-to-El Oro and Ojinaga-to-El Encino. In total, they have a capacity of about 3.3 Bcf/d.

But as important as the total capacity of each project is, of equal importance is how they work in conjunction with each other and with other pipelines already in operation to grow the gas pipeline network in Mexico. That network is critical to delivering new volumes of gas from U.S. sources to gas-fired power generators as well as to industrial and commercial end-users.

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“In looking at the pipelines, it’s not a simple matter of adding up capacity. It’s more complicated than that,” said PointLogic Energy analyst Warren Waite. “We’ve known that there are two parts to the story of increasing U.S. gas exports to Mexico. Part one is getting the gas that’s produced in the U.S. to the border. And that’s in pretty good shape. Part two is moving it from the border to deeper into Mexico, where the new pipelines will target power demand, supply gas to new parts of the country and diversify transmission routes to reduce congestion. That’s where these pipelines come in.”

Mexico’s strong interest in natural gas imports comes from several factors, including rapidly increasing power demand and a need to decarbonize its energy mix from a heavy reliance on fuel oil to produce power.

As reported by the International Energy Agency last year, Mexico has issued a plan, known as “The New Policies Scenario,” in which it would more than double electricity generation capacity from 70 gigawatts (GW) in 2015 to almost 160 GW in 2040. Importantly, gas-fired power would account for half of the net increase, while fuel oil-fired electricity generating capacity would decrease from 17 GW in 2015 to 3 GW in the same time period and coal-based power would be flat (see graph).

 

Source: International Energy Agency

 

Taking a closer look at the pipelines that are coming in service in June, as well as those that have come in service earlier this year or are nearly complete, it becomes apparent how two distinct network expansions will start delivering gas to the power sector and other users.

Ojinaga-to-El Encino and El Encino-to-Laguna

The first network is based on the additions of Ojinaga-to-El Encino and El Encino-to-Laguna pipelines (red oval and light blue ovals on map below). Working together, they will increase delivery capacity from the Texas border into the heart of Mexico’s northern territories by more than 1.3 Bcf/d.

“The supply that will feed much of the gas flowing into Ojinaga-El Encino and its downstream interconnects will come from the Permian via the TransPecos intra-state pipeline,” said Waite. “TransPecos was officially put into service back in March, though construction delays within Mexico is why the downstream connecting entities have lagged behind.” (TransPecos is dotted green line on map below.)

At El Encino, a third pipeline known as El Encino-to-Topolobampo (shown as purple oval) was nearly completed last year, but has been held up with some issues related to indigenous peoples living along one small part of the route. A spokesperson for TransCanada, which is developer of El Encino-Topolobampo, told PointLogic by email that the company expects completion this year. Ultimately, that link will take up to 670 MMcf/d of the gas coming from the Ojina-El Encino pipeline further west to the coast.

PointLogic expects TransPecos to continue to export less than its full capacity to Mexico until more of the interconnects in Mexico are operational, and that could take many years, said Waite. “It will take time for substantial demand within Mexico sourced from the Permian to develop,” he said.

Source: U.S. Energy Information Administration and PointLogic Energy 

 

Guaymas-to-El Oro

The other June project is on the west coast of Mexico: Guaymas-to-El Oro, and it links up with a pipeline that went into service earlier this year. (Also known as Guaymas-to-Topolobampo; see yellow oval on map above.)

Guaymas-El Oro will deliver up to 500 MMcf/d to the El Oro-to-Mazatlan pipeline, which moves gas further south along the coast.

This, too, has its own interconnect challenge, namely the Samalayuca-to-Sasabe pipeline (capacity 470 MMcf/d), which is due in service in April 2018. However, until then a small amount of gas will be exported at Pima County, Ariz. on Sierrita Gas Pipeline, which goes into the existing Sasabe-Guaymos pipeline (solid black line on map above).

More Coming

Keep in mind that the projects this year are only a down payment on the expected growth. U.S. to Mexico exports doubled from 2.0 Bcf/d in 2014 to roughly 4.0 Bcf/d in 2017. Exports to Mexico in the month of May have averaged above 4.2 Bcf/d, the second-highest monthly export average since August 2016.   

PointLogic projects that in summer 2017, U.S. exports to Mexico will average 4.2 Bcf/d, peaking in July and August at 4.5 Bcf/d. For winter 2017/18, PointLogic is expecting exports to Mexico to remain steady at an average of 4.2 Bcf/d, before increasing again to average 4.8 Bcf/d during summer 2018.

From the start of 2017 through the end of 2019, PointLogic and IHS Markit have identified over 10 Bcf/d of capacity in projects that have been approved and for which contracts have been awarded—though even with the pipelines in service, full usage is not going to happen overnight. “We think it will take more than a decade for pipeline exports to double again, perhaps two,” said Waite.

(For more on the Mexican pipeline build-out and analysis of U.S.-to-Mexico export dynamics, see Gas Production and Pipelines Primed to Head South of the Border.)

The biggest U.S. beneficiaries of the growing demand for gas in Mexico are deliveries through West Texas, where the Roadrunner, Comanche Trail and TransPecos pipeline projects have come into service, and the Agua Dulce Hub on the Texas Gulf. West Texas export capacity could surpass 4 Bcf/d by the end of 2018, and South Texas around Agua Dulce could reach nearly 7 Bcf/d.

Stay tuned to PointLogic as this dynamic demand source for U.S. gas materializes over the next several months. 

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