Today, Apache (NYSE: APA) confirmed natural gas shut-ins in its premiere Alpine High play in the Permian Basin in response to negative Waha prices. The release highlighted the deferred production from Alpine High would be temporary. However, the next US pipeline out of the Permian, Kinder Morgan’s Gulf Coast Express, isn’t expected to start until October 2019. Until Gulf Coast Express enters service, Mexico remains the only major potential outlet for stranded Waha gas. Today’s Energy Market Commentary will focus on the projects in Mexico capable of providing a measure of relief for gas constraints this summer.
US to Mexico cross-border capacity from the Permian has grown significantly in recent years. However, as highlighted in the graph below, exports of natural gas from the Permian have not followed suit.
Exports to Mexico from the Permian averaged 0.35 Bcf/d in 2015 and year-to-date have averaged 0.54 Bcf/d. Volumes remain far short of the over 4 Bcf/d of pipeline capacity linking the Permian to Mexico. Exports to Mexico via the Permian remain well below capacity due to significant project delays further downstream. These pending projects are crucial to easing the oversupply of natural gas in the Permian. The map below provides an overview of these key projects.
The pending completion of Fermaca’s “Wahalajara” system will allow gas to travel from Waha to Guadalajara. Guadalajara represents the second largest city in Mexico with a population of 1.5 million people. The three-stage system starts with the 1.6 Bcf/d El Encino – La Laguna pipeline, which has been in service since March 2018 but has yet to begin flowing. The project will then telescope down to 1.2 Bcf/d on the La-Laguna – Aguascalientes pipeline and terminate on the 0.89 Bcf/d Villa de Reyes – Aguascalientes – Guadalajara pipeline. Earlier this month, Fermaca announced the remaining two legs had been delayed to May 2019 from March 2019. In the past year, the La Laguna – Aguascalientes pipeline has been delayed 4 times which has dampened our expectations the project will enter service this summer.
Waha could also see relief from Carso Energy’s Samalayuca – Sasabe pipeline. The 0.5 Bcf/d pipeline will run parallel to the US-Mexico border. The pipeline could transport gas from Waha to Sasabe on the Arizona – Mexico border and compete with Kinder Morgan’s Sierrita pipeline. As illustrated in the graph above, the Sierrita pipeline received, on average, 0.15 Bcf/d from El Paso Pipeline over the last 12-months. El Paso is currently running at full capacity from the Permian and downstream of the Sierrita pipeline in Arizona. However, with such small volumes, it is possible the new pipeline could displace Sierrita volumes back into Arizona on either El Paso or Transwestern and incrementally increase Waha exports.
The project was initially scheduled for a December 2018 in service date which has since been delayed to August 2019. Combined, the delays to the Samalayuca-Sasabe and La Laguna – Aguascalientes pipelines have exacerbated the issues in the Permian by delaying nearly 1.5 Bcf/d of downstream connectivity for Waha gas.
A similar situation is occurring in South Texas. Enbridge’s 2.6 Bcf/d Valley Crossing pipeline runs from Agua Dulce to Brownsville where it connects with the 2.6 Bcf/d Sur de Texas – Tuxpan pipeline. Originally scheduled to enter service in 2018, the Sur de Texas pipeline has been delayed over a year, with the most recent delay pushing the in-service date back from mid-March to June. However, even once the project comes online, the project will likely operate at just 65% of full capacity due to the indefinite suspensions of the Tuxpan – Tula and Tula – Villa de Reyes projects in central Mexico.
Although there are multiple pipeline projects under development in Mexico, a history of delays should temper expectations of relief for US gas prices. For more updates on Mexican infrastructure and its impact on US gas markets, request a sample of our Henry Hub Outlook for an in-depth breakdown of supply and demand fundamentals driving Mexico gas dynamics.