Financial Times
US shale gas producers bet Mexico is next bonanza

Monday, April 25, 2016

Donald Trump wants a wall along Mexico’s northern border. Energy companies are perforating it with pipelines.

They are laying steel pipes, some beneath the Rio Grande riverbed, to export billions of cubic feet more US shale gas to markets in Nuevo León, Guanajuato and other Mexican states.

The shipments could quietly uncork a glutted US market, rivalling volumes of much-hailed new liquefied natural gas (LNG) exports from the coasts.

Bigger gas sales to Mexico could not come soon enough for energy producers. The warmest winter on record left 2.5tn cubic feet of gas in US storage, the most ever for the end of the heating season. The US Energy Information Administration believes gas prices will average $2 per million British thermal units this year, the cheapest since 1998.

“It’s a huge potential economic benefit to US producers to be able to ship gas just across the border to Mexico,” David Porter, chairman of the Texas Railroad Commission, a state energy regulator, told the FT Energy Infrastructure Forum in Houston last week.

For Mexico, gas imports will feed power plants that are switching from oil as a generation fuel and answer a government drive to lower manufacturers’ electricity costs. Natural gas is used for 60 per cent of the country’s power generation, Goldman Sachs says.

“There’s a lot of dormant demand,” says José Manuel Carrera, head of alliances and new business at Pemex, the Mexican state energy company.

The US produced a record 74bn cubic feet per day of natural gas last year, exporting 2.9bn cu ft/d to Mexico. Pemex says its domestic production of gas fell 4.4 per cent to 5.5bn cu ft/d in 2015.

IHS Energy estimates US gas exports to Mexico will rise to 4.4bn cu ft/d by 2020, and some analysts and executives forecast even more. US LNG exports — advertised as a lifeline for shale producers — won’t overtake gas exports to Mexico until 2019, IHS estimates.

Nina Fahy of PIRA Energy, a consultancy, calls the added sales to Mexico, LNG exports and gas-intensive US manufacturing the “big three” new sources of demand for North American gas to the end of the decade.

Eyeing an expanding market, investors have ploughed money into pipelines to Mexico, encouraged by reforms ending an eight-decade-old state energy monopoly.

Last month Oneok Partners, a US pipeline group, and Fermaca, a Mexican gas infrastructure company, finished the first phase of the Roadrunner pipeline linking the Permian basin of west Texas to the border. A second phase under construction will bring Roadrunner’s capacity to 570m cu ft/d.

This summer the Los Ramones II pipeline is set to open with 1.4bn cu ft/d of capacity, bringing gas from Texas’s Eagle Ford shale to Mexico City’s doorstep.

“It’s critical infrastructure for Mexico as it shifts from burning diesel fuel to ultimately using natural gas” to generate more power, says Mark Florian, head of the infrastructure fund at First Reserve, an investor in the Los Ramones II pipeline.

A third large pipeline, 2.6bn cu ft/d in size, is planned to run beneath the waters of the Gulf of Mexico from Texas to Mexico’s east coast in Veracruz.

Piped gas has hurt imports of waterborne LNG to Mexico’s east and west coasts, according to Platts Analytics, underscoring how US shale production is rippling through global energy markets.

A five-year plan calls for adding 5,159km to Mexico's national pipeline network by constructing 13 lines, according to Cenagas, the agency that manages the gas transmission system. Platts forecasts that pipeline capacity between the US and Mexico will more than double to about 14.7bn cu ft/d by 2019 — far more than anticipated imports. The surplus pipeline space would ensure Mexico can get enough US gas on days of peak demand, as there is little room to store gas in Mexico, Platts says. 

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