Copyright of the Daily Oil Bulletin 2018
Mexico Gas Demand A Relief Valve
With U.S. natural gas production reaching an estimated record of 66.1 bcf/d this month, Mexico’s growing demand for gas has been a welcome safety valve that a new report says will continue to be a growing market.
The report says natural gas export capacity between the U.S. and Mexico will reach 14 bcf/d by 2019, almost double the capacity in 2016, with gas demand in Mexico having grown by 2.6 per cent annually in the last decade and likely to continue growing at similar rates in the next decade.
The report, Outlook for Natural Gas Demand in Mexico: Implications for Exporters and the power sector, was produced by McLean, Virginia-based FTI Consulting. It points out that gas consumption, driven by income growth in Mexico of 2.6 per cent a year for the past decade and a shift to gas in the electricity sector, will continue to drive exports from the U.S.
“Mexico has been an attractive gas market, growing three-five per cent annually and well-connected with U.S. gas infrastructure,” FTI says, in a 23-page draft of the report.
The report, produced by authors Ken Ditzel, Xiang Li, and John Turnstall, says 3.1 bcf/d of U.S. export capacity was commissioned in 2017 and another 3.4 bcf/d is expected to come onstream this year, which will lift total pipeline export capacity to 14 bcf/d.
Ditzel, managing director of FTI, said that doesn’t mean 14 bcf/d of U.S. gas will be consumed on a regular basis into Mexico, but there will be times, such as during the country’s air conditioning season, when exports will be far in excess of average exports of 4.2 bcf/d.
About 88 per cent of that gas flows via pipelines, with about 12 per cent moving via LNG, mostly from the U.S.
“During air conditioning season demand will spike,” said Ditzel. “Also, as income per capita continues to grow, people will demand more air conditioning and will use more electronics.”
Within Mexico itself, FTI says 2.6 bcf/d of new gas pipeline capacity was commissioned in 2017, with another 9.8 bcf/d expected by 2019.
FTI said the important distinction between gas markets in the U.S., Canada and Mexico is that gas isn’t widely used for home heating, the largest driver of demand north of the Mexican border.
Most Mexican homes don’t have access to natural gas infrastructure and the warm climate means household demand is limited. Most Mexicans use propane, delivered in cylinders, for household consumption for cooking or water heating.
However, power sector and industrial demand, along with declining domestic gas production, has led to Mexico becoming a huge demand driver for U.S. gas producers.
Ditzel said that will continue to be the case, with gas imports reaching an average of 5.6 bcf/d by 2021, at which point the FTI report predicts that imports will level off, as domestic gas production starts to rise. Imports will then slowly decline to 4.8 bcf/d by 2030.
Citing estimates from SENER, the country’s energy secretariat, the consultancy estimates domestic production will rise to 4.1 bcf/d, from about three bcf/d now.
The report estimates that domestic production has declined by 29 per cent since 2010, as state-owned Petroleos Mexicanos (Pemex) struggled with financial issues and an inability to partner with private sector firms, while focusing on oil production.
The FTI report authors believe the country’s energy reform, which has led to more than 90 contracts being awarded to private sector companies, with onshore and offshore blocks representing a value of US$150 billion, will lead to more gas production. In particular, the report mentions a recent successful auction for shale oil and gas assets, which could lead to substantial gas production in the country’s Burgos Basin, which lies directly south of the highly productive Eagle Ford in Texas.
Domestic gas demand is being driven by the shift away from using bunker fuel for power generation to gas, but also by the liberalization of the power sector, still dominated by government-owned Comision Federal de Electricidad (CFE).
In 2016, CFE was divided into six independent generation companies, plus separate transmission, distribution and marketing companies. That has created a more transparent market, with online gas trading about to be launched.
FTI points out that that has led to price spikes, but Ditzel said he believes that is temporary.
“The solution to higher prices is higher prices,” he said. “We see a lot of capacity coming online [leading to more gas availability and lower prices].”
In addition, renewables, such as solar and wind energy, will play a growing role in the country’s domestic electricity production, with FTI estimating renewables will be responsible for 37 per cent of overall power production by 2030, while gas will be responsible for 55 per cent.
“Mexico has significant solar power capacity,” he said, with recent renewable power auctions attracting significant interest.
Citing CFE and other forecasts, FTI sees solar power being responsible for 11 per cent of generation, wind for nine per cent, hydro for 13 per cent, geothermal and biomass for four per cent, nuclear for five per cent and coal and fuel oil for five per cent by 2030.
Overall FTI sees more than 45 gigawatts of new power generating capacity being added in Mexico by 2030.
One interesting prediction in the report is that U.S. LNG exports from Mexico could become significant in the future.
“Mexico could become an LNG export hub, able to provide a transportation advantage over shipments through the Panama Canal,” the authors say.
Ditzel said that Mexican ports such as Lazaro Cardenas, in the Pacific port city of Manzanillo, now a large LNG import point, could become an export terminal in the future.