March 28, 2018 | Warren Waite & Kevin Adler
U.S. natural gas exports to Mexico is a growth business. Exports were a record 4.2 billion cubic feet per day (Bcf/d) in 2017, or more than twice the level in 2013. Growth will continue, as OPIS PointLogic is forecasting that they will rise to 4.6 Bcf/d this year. And yet, Mexico holds much more potential as a natural gas destination than the current exports are providing.
A year ago in Get the Point, we provided a detailed look at U.S.-to-Mexico gas flows, as well as our tracking of new and proposed pipeline projects that will further increase cross-border trade (see Gas Production and Pipelines Primed to Head South of the Border, March 30, 2017). In this issue of Get the Point, we update on developments since that time, with an additional focus on new daily flow data we have available on cross-border pipelines.
Opportunity Knocks: Mexico’s need for natural gas
To quickly review the key points we made a year ago, a number of factors have opened new opportunities for U.S. gas to expand its market share: Mexico’s energy reforms, falling gas production and need for lower-carbon energy production. Domestic gas production in Mexico was 3.1 Bcf/d in 2017, according to data from IHS Markit and Mexico’s national energy ministry SENER. This represents a decline of nearly 1.8 Bcf/d since 2010. Yet, gas demand in 2017 was nearly 8 Bcf/d.
Gas imports from the U.S. have benefited. After accounting for as little as 15% of Mexican gas demand back in 2008 (purple dash line, right axis), they have surged to more than 50% of Mexico’s natural gas supplies last year.
More growth in gas demand can be expected. Power demand in Mexico is growing at 3% per year, said Jaime Hernandez, general director of the Comision Federal de Electridad, at the CERAWeek 2018 conference in early March. (CERAWeek is sponsored by IHS Markit, which owns OPIS PointLogic.)
In a report in 2017, SENER said that 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.
CFE, which provides much of the country’s generation needs and maintains the entirety of its power transmission and distribution network, is backing this growth, said Hernandez. CFE is investing $15 billion in power production and its power grid, in addition to the tens of billions of dollars that Mexican and non-Mexican gas pipeline operators are investing in the gas infrastructure, Hernandez said.
Where is gas coming from, and where is it going?
Mexico’s energy reforms are another part of the equation, as they are both opening opportunities for outside investment and increasing transparency about the market’s conditions.
As part of those reforms, gas pipeline reporting vastly improved last year. In August, OPIS PointLogic began to track daily pipeline data across more than 15 pipelines in Mexico, and our current collection of pipeline data on both sides of the border accounts for nearly 90% of all daily pipeline flows from the U.S. to Mexico. Leveraging historical U.S. Energy Information Administration (EIA) data and pipeline flow data collected by OPIS PointLogic, we can generally cite through the current day where supply headed to Mexico comes from and, in the majority of cases, the daily volume of gas flowing across the southern border down to the pipeline level.
Thus far in 2018, the U.S. has piped about 4.3 Bcf/d across the border, a 0.3 Bcf/d increase from the same period last year. Nearly 3.7 Bcf/d, or 85% of all exports, exit via Texas. The remainder departs the U.S. via Arizona and California.
Looking more closely, we see that the vast majority of gas, nearly 3.3 Bcf/d or 76%, comes from South Texas. It’s sourced from the Eagle Ford, other supplies along the Texas coast and a mixture of inbound supplies from the Mid-continent and the Northeast on the growing network of pipelines designed to move Marcellus and Utica production to growth markets.
One other note about Texas-sourced gas. The other primary Texas source providing gas to Mexico is the Permian Basin in western Texas. Permian Basin gas on the El Paso Natural Gas Pipeline moves west and then south out of Arizona, so while it might appear to be “Arizona” gas, it’s actually “Texas” gas, too. The Permian Basin as a whole, by our estimates, currently accounts for about 0.7 Bcf/d, or 17%, of export gas heading to Mexico.
Source: OPIS PointLogic
Presently, some pipelines carry a much heavier load of the export activity than others. As previously mentioned, the majority of export gas to Mexico comes through Texas, but on a pipeline capacity perspective the Lone Star State is only about 45% utilized as a whole. As shown on the chart below, U.S.-to-Mexico exports at a pipeline level can vary quite a bit and so, too, do the utilization rates.
Pipelines like NET Mexico and Kinder Morgan Texas are running at over 90% and 80% utilization, respectively. Others like Comanche Trail and TransPecos have extremely low utilization rates of 10% and <1%, respectively. The latter two are Texas Permian-sourced pipelines that entered in-service in 1Q 2017, but are awaiting pipeline buildouts downstream in Mexico and the materialization of Mexican gas demand, namely the power burn previously described.
Source: OPIS PointLogic
While it’s clear that natural gas demand in Mexico is growing and that the U.S. is well-positioned to meet the country’s needs, the outlook is cloudy in some respects. The largest unknown is how quickly Mexico’s demand will increase, and whether the necessary gas pipeline infrastructure will be in place to serve the new demand. Like New England, Mexico suffers from capacity constraints—in this case not just on gas pipelines, but also on the gas-fired power plants that will drive demand in the future.
OPIS PointLogic and IHS Markit track the progress of Mexico’s gas pipeline projects, and we see a busy 2018 on the horizon. About 6.5 Bcf/d of Mexican pipeline projects are in the works. Of that total, only 0.5 Bcf/d is directly connected to the U.S. border via the Nueva Era Pipeline system, and the rest is within Mexico. The U.S side of Nueva Era, also known as Impulsora, technically entered service in January 2018, but due to construction delays on the Mexico midstream segment, we don’t expect exports to materialize until 3Q 2018.
The other 6.0 Bcf/d of 2018 Mexican pipeline projects that could enter service this year are mostly scheduled for the fourth quarter and involve bridging the gaps between connecting pipelines within Mexico. This will help reduce bottlenecks in central and southern Mexico and will allow Permian gas to reach further south, such as to the city of Guadalajara.
By late-2018, or more likely early 2019, the combination of Enbridge’s Valley Crossing Project (formally Nueces-Brownsville) and Sur de Texas–Tuxpan pipeline project (joint venture with TransCanada and Sempra's Mexican unit IEnova) will add 2.6 Bcf/d of capacity. The pipeline system begins near Corpus Christi, Texas and moves south towards Brownsville, Texas before traversing about 500 miles south in the Gulf of Mexico to the state of Veracruz, where it will interconnect with Cenagas-operated pipelines in Altamira and then to TransCanada’s Tuxpan-Tula pipeline (online in late 2018).
The bottom line is that 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. As IHS Markit noted in a recent analysis, “upcoming pipelines in the North, Northwest, Northeast, and Central regions are all starting operations in 2018-19, alleviating bottlenecks in connecting supply sources with demand.”
If Mexico’s power and industrial growth forecasts are realized, IHS Markit forecasts that U.S. gas exports by the end of the decade could reach 6.0 Bcf/d in some months and annually reach that mark by the first half of the 2020s. SENER’s Natural Gas Outlook: 2016-2030 is a little more cautious, placing U.S. exports near 5.5 Bcf/d in the same time horizon.
At OPIS PointLogic, we remain optimistic about Mexico. We believe that successful bids during market open seasons for gas pipeline capacity, as well as the evolution of price reporting and Mexico’s policy initiatives, can create a liquid and dynamic gas market to boost the upside of Mexico’s gas demand and U.S. exports to the country. In addition to the addition of pipeline capacity, we will be watching the July presidential election in the nation, as policies towards energy development and outside investment could change. Nevertheless, U.S. natural gas exports to Mexico are expected to continue to increase as Mexican infrastructure and demand evolves.