Recently, we have had an uptick in questions about our view on US natural gas exports to Mexico driven by new export pipeline announcements. Pipeline development from the US to Mexico has seen recent new capacity with an additional 6 Bcf/d permitted or planned projects through 2020. These announcements, combined with existing and recently completed projects, would give the US market the ability to export nearly 12 Bcf/d of supply to Mexico compared to just 2.0 Bcf/d of flows to Mexico in 2014. After recently speaking at several conferences, we’ve had a chance to review a plethora of export forecasts with the most bullish forecasts calling for natural gas exports in excess of 7.0 Bcf/d by 2020. While natural gas exports to Mexico play an important role in our forward view of the market in terms of tightening the supply and demand balance for the US, 5 Bcf/d of incremental natural gas exports to Mexico by 2020 would require exceptional things to happen south of the border.
First, the Mexican gas demand market in 2014 was, on average, a 8.3 Bcf/d market in total met by 5.6 Bcf/d of domestic production, 0.9 Bcf/d of LNG, and 2.0 Bcf/d of imports from the US (totals do not match due to independent rounding). Another 5 Bcf/d of US natural gas exports to Mexico by 2020 would imply huge declines in Mexican production or massive growth in Mexican demand and complete replacement of LNG. Granted, a $45 WTI price may have some impact on Mexican gas production, but if we look solely at the demand side, demand would need to exceed 12.6 Bcf/d by 2020 and 100% of LNG would need to be displaced back on the water at a time when global LNG markets are already awash with gas. This jump in demand would represent a 52% increase in Mexican demand by 2020, or 7% annual growth rate, and if LNG cannot be displaced, demand would need to grow by nearly 9% per year. Is there historical precedent for this to occur?
If we look at the top 20 global gas markets (and leave aside the biggest two – US & Russia) and growth rates over the last five years, only China has posted 15% growth rates while Mexico has only seen a 3.5% growth rate. During this time, low US gas prices dominated the US market and lowered the price for Mexican consumers as well as bolstering demand. A disturbing side note – US LNG exports are in part going to chase demand in Europe. Unfortunately, the chart below shows the three largest European markets all posting consumption declines over the last five years – a blog story for another time. See chart below.
If we look at the North American natural gas markets, we see that since 2000, Mexico has registered impressive growth averaging 5.6% Y/Y for that time period while the larger US and Canadian markets have shown lower growth rates.
And if we apply a 5.6% growth factor to current Mexico demand going forward, we see 1) that rate does not cross the 12 Bcf/d mark until 2023 and 2) that rate does not cross the threshold of current Mexico production plus all new US pipeline capacity at approximately 17 Bcf/d until 2028.
BTU Analytics’ view on pipe utilization into Mexico is more conservative than any of these scenarios. Much of the new capacity is going to serve combined cycle power plants and seeing as the northern tier of Mexico has very little natural gas storage, pipe capacity is built to meet peak power demand. In addition to serving power plants, an aging pipeline grid and new energy market reforms are fostering competition with PEMEX to serve existing load and improve reliability and redundancy. All of these factors lead us to expect much lower average utilization of pipelines into Mexico through 2020 with only 4 to 5 Bcf/d of total annual average natural gas exports to Mexico by 2020. To learn more about how Texas production can grow and serve pipes to Mexico, sign up today for BTU Analytics’ free Production Scenario Analyzer.