The United States can count on selling a growing sliver of its natural gas production to Mexico as the country's reliance on gas-fired power generation grows, domestic oil production overshadows that of gas, and liquefied natural gas (LNG) tankers spurn the country's terminals for more lucrative markets, Barclays Capital analysts said Tuesday.
"We expect exports of U.S. gas to Mexico to remain elevated in 2011 and average 1.3 Bcf/d," the analysts said in note. "This represents a 450 MMcf/d increase versus last year. Continued tightening of Mexican supply-demand balances should lead to further growth in 2012. We expect U.S. flows to Mexico to increase by another 200 MMcf/d in 2012, to an average of 1.5 Bcf/d."
Mexico uses gas in its petroleum sector for refining and petrochemicals production and reinjects gas during oil production. The sector's gas use is growing, but it is power generation where gas demand growth will be greatest, Barclays said. The country's plans call for limiting the share of natural gas in the power sector to 45%. Even with the cap, Mexican authorities estimate that power sector gas demand will grow by 3.8 Bcf/d by 2024, according to Barclays.
Mexico's domestic gas production "has tipped into decline," the analysts said. More than 60% of the country's gas output is associated with oil production (see Daily GPI, April 4). This portion is growing slightly, but the gain is offset by declines in nonassociated production. "For the first four months of this year, Pemex [Petroleos Mexicanos] reports a drop of nonassociated gas output by 13% year over year, resulting in an aggregate production drop of 4% year over year," the analysts said.
"Similar to the trend in the U.S., the drastic disparity between oil and gas prices is prompting the majority of capital spending to be directed toward oil targets at the expense of natural gas."
Also not unlike the United States, Mexico built its share of LNG import terminals, which now are finding themselves subject to the same market forces affecting import terminals north of the border. The Barclays analysts said they expect global LNG markets to tighten in the coming months and into next year, with spot LNG prices in Asia (currently about $14/MMBtu) to remain elevated relative to prices in North America.
"This suggests that U.S. pipeline gas imports will remain the more attractive source of meeting Mexico's growing gap of demand and domestic production," they said.
On the surface it would appear that there is plenty of cross-border pipeline capacity available to move gas from the United States to Mexico. U.S. interconnect points could handle more than 4 Bcf/d were it not for "some bottlenecks," the analysts said. "...[T]he potential for growth from current levels is more limited than the capacity would suggest."
However, Mexico's electricity authority is planning to construct a 500 MMcf/d pipeline in Chihuahua by 2013 that would connect with a U.S. pipeline near El Paso, TX, in order to serve gas-fired power plants, the analysts noted.
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