US pipeline exports to Mexico are on the rise as demand in Mexico has begun to recover from the COVID-19 pandemic. After numerous delays, the long-awaited Wahalajara pipeline system has been completed and its impacts are already being felt in the Mexican gas market. Yet while the displacement of LNG imports has provided a short-term boost to pipeline exports, Mexico’s power demand has not seen the type of growth needed for a substantial increase in demand for US gas.
Following the February winter storm that led to a sharp decline in US exports, pipeline gas flowing to Mexico has surged in the past two months to record highs. Total pipeline exports to Mexico averaged over 6.1 Bcf/d in May with peak daily exports approaching 7 Bcf/d. The increase has been driven by an increase in exports out of West Texas on the recently completed Wahalajara pipeline system. West Texas exports have averaged nearly 0.9 Bcf/d since October 2020 after averaging under 0.7 Bcf/d in the prior six months. Despite the recent increase, constraints further downstream remain a barrier to full utilization of the nearly 4 Bcf/d of cross-border pipeline capacity. The completion of the Samalayuca – Sasabe pipeline later this year should help alleviate some of the constraint by increasing westbound capacity out of the Permian. However, it is unlikely to significantly increase exports. While the pipelines in Northwest Mexico are mechanically complete, demand in the region has lagged available capacity leaving much of the pipeline capacity perpetually underutilized.
Exports out of South Texas have also been strong as summer demand has emerged. South Texas exports have been driven, in part, by TC Energy’s Sur de Texas – Tuxpan pipeline, which has averaged over 1.5 Bcf/d in both April and May after previously averaging 1.3 Bcf/d from January – March.
One of the primary factors behind the recent increase in exports out of West Texas has been the displacement of LNG imports to the Manzanillo terminal in Colima, Mexico. While the Manzanillo terminal is ideally located to serve demand in Guadalajara, Mexico’s second-largest city, the recent completion of the La Laguna – Aguascalientes pipeline, the final leg of the Wahalajara pipeline system, allows cheap gas out of the Permian to serve that demand instead. In 2019, Manzanillo imported approximately 357 MMcf/d of LNG. In 2020, that average fell to 209 MMcf/d, with imports dropping to 0 in January 2021. This mirrors the decline in imports seen at Mexico’s other major import terminal, Altamira, coinciding with the start-up of the Sur de Texas pipeline. After the pipeline entered full commercial service in September 2019, Altamira imports fell from averaging 454 MMcf/d to under 10 MMcf/d by December 2019. However, displacement of more expensive LNG imports represents low-hanging fruit that has now mostly been picked. With Altamira and Manzanillo effectively empty, future growth in piped exports will need to be driven by new demand, rather than replacement of existing supply sources.
Continued buildout of natural gas generation and transmission lines within Mexico should provide the needed demand for increased US exports. Plans for increased natural gas generation, particularly in Northwest Mexico, was one of the primary driving forces behind the development of natural gas pipelines between the Permian and Mexico from 2013 – 2020. However, although those pipelines are now mostly complete, power demand in Mexico has not seen a significant increase nor is it expected to any time soon. According to data from Mexico power operator CENACE, average peak daily demand in Mexico has increased just 3% YTD relative to 2019 levels. According to the most recent development plan put forth by the Mexican government, power demand is expected to grow by an average of 3% per year through 2030, much like the growth rate today. While that will likely contribute to growing levels of US exports for the foreseeable future, a sudden surge appears increasingly unlikely.
While US LNG exports receive most of the attention in the US gas demand market, pipeline exports to Mexico remain an important outlet for US gas, especially in the Permian. With natural gas production set to grow in the coming years, continued growth in exports to Mexico will largely depend on the ability for Mexico to continue to build out natural gas generation facilities. BTU Analytics’ forecast for US exports to Mexico and the impact on the US gas market can be found in our Henry Hub Outlook.