Mexico is greatly expanding its natural gas pipeline and gas-fired power infrastructure while in the upstream sector, state-controlled Petroleos Mexicanos (Pemex) focuses on more-lucrative oil and allows non-associated gas production to dwindle. Increasingly, it will be gas from U.S. shales that comes to the country's rescue.
Barclays Commodities Research said net U.S. exports of gas to Mexico, about 2 Bcf/d this year, will climb to 2.3 Bcf/d next year. But in 2015 they will jump to 3.5 Bcf/d when new pipeline capacity comes online. "By 2016, U.S. exports to Mexico could more than double from current levels and rise to 4.5 Bcf/d," said Barclays analysts Biliana Pehlivanova and Shiyang Wang in a note last week.
Exports of U.S. gas to Mexico set a record last year, according to the Energy Information Administration (EIA), growing by 24% to 1.69 Bcf/d. Imports now account for more than 30% of Mexico's gas supply, and the country's gas usage is at its highest level ever, EIA said (see NGI,March 18).
It's not as if Mexico is a shale gas have-not. Indeed, the country has significant shale potential -- 545 Tcf by one count, placing it sixth in the world -- but it's a government-controlled business and the government lacks the capital needed to realize it, at least for now, particularly when Pemex's upstream focus is squarely on much more profitable oil, the analysts said.
"...[I]n our view, a resurgence of natural gas output due to a rapid development of shale reserves in the next few years is unlikely," they said. "Pemex's gas production dropped by 4% and 7% in 2012 and 2011, respectively. The weakness could persist in the near term, but the company expects to rein in the declines in the longer run..." Pemex guidance suggests an annual production growth rate of 1.6% for 2012-2028, the analysts said.
Even though production of gas associated with oil production has increased and Mexico is flaring less of that, it's not enough to offset declines in non-associated gas and meet growing demand.
Contrast that with demand growth, which is expected to accelerate as industry picks up, thanks in part to cheap U.S. gas, and growing gas-fired power generation, aided by stricter environmental regulations.
Power generation led gas demand growth over the last decade and will continue to do so over the next, the analysts said. "The CFE [Comision Federal de Electricidad] has announced plans to grow gas-fired generation capacity by 24.5 GW in 2010-2025, which could bring an additional 3.9 Bcf/d of natural gas demand," Pehlivanova and Wang said. "Mexico's Ministry of Energy projects gas demand for power generation to grow from 3.1 Bcf/d in 2011 to 6.1 Bcf/d in 2026."
Industrial gas demand was beat down 11% in 2009 by the recession but has recovered to record levels, the analysts said. Pemex's petrochemical business is contributing to the demand, as are industries such as basic metals, chemicals, glass, food and beverage, minerals, pulp and paper, textiles and others, according to Barclays. Still, the petroleum sector remains the largest consumer of natural gas in Mexico. The sector includes gas used for refining and petrochemical purposes as well (in the United States, these uses are considered industrial, the analysts said).
Getting the U.S. gas to Mexico hasn't been a problem and likely won't be in the future as there are eight major pipelines with combined capacity of 5.6 Bcf/d scheduled to start operation in Mexico between this year and 2017, the analysts said. The three largest pipelines are Los Ramones (2.1 Bcf/d), Chihuahua (850 MMcf/d) and Noroeste (770 MMcf/d), and these will connect directly with the U.S. pipeline grid with complementary projects on the U.S. side of the border, the analysts said.
Mexico's Energy Ministry estimates that capacity to import U.S. gas was about 2.98 Bcf/d as of 2011. "The three new projects (Los Ramones, Chihuahua and Noroeste) and their U.S. counterparts will expand Mexico's ability to import U.S. gas by 4 Bcf/d from current levels to 7 Bcf/d by the end of 2016," the analysts said.