Natural Gas Exports from U.S.

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New pipeline capacity additions on both sides of the border have helped U.S. natural gas pipeline exports to Mexico to jump to their highest level on record in July.

American exports are set to further increase with a number of pipelines expected to become operational by 2020, the EIA said in a note this week.

The newly commissioned pipelines benefit both countries. For the United States, more pipeline takeaway capacity gives the Permian an additional export outlet from West Texas to Mexico as producers are looking at ways to ease pipeline constraints not only on crude oil production, but also on natural gas whose production is also booming.

For Mexico, natural gas imports help to meet its rising gas demand as the country is adding gas-fired electricity generation capacity at a rapid clip while it faces a decline in its domestic gas production. More pipeline imports also mean cheaper gas than liquefied natural gas (LNG) imports, of which Mexico is the number-one customer of the United States.

However, several pipeline projects on the Mexican side of the border face delays of more than a year, capping the U.S. piped gas export surge, as well as the expected relief of Permian gas constraints via pipelines from West Texas into Mexico, the EIA warned.

In 2017, the U.S. became a net natural gas exporter for the first time since 1957, the EIA said earlier this year. Thanks to growing demand for gas-fired power generation in Mexico and favorable prices compared to LNG shipments, U.S. pipeline capacity into Mexico has also increased over the past few years along with U.S. pipeline exports to Mexico—exports which have more than doubled since 2014 to average 4.2 billion cubic feet per day (Bcf/d) in 2017.

Despite the current delays in Mexico, U.S. pipeline exports will continue to increase, according to the EIA. Total U.S. pipeline exports of natural gas are expected to average 7.0 Bcf/d this year and 8.5 Bcf/d next year, up from 6.7 Bcf/d in 2017, driven by growing U.S. production and the completion of new pipelines to demand centers in Mexico. 

Between January and May 2018, U.S. exports averaged 4.4 Bcf/d. Last month, after several key pipelines were commissioned in Mexico, U.S. natural gas exports to its southern neighbor jumped for the first time above 5 Bcf/d, the EIA said, citing data by Genscape.

Currently, about three-quarters of U.S. natural gas pipeline exports to Mexico flow from South Texas, mostly from the Eagle Ford. Yet, despite the jump in cross-border pipeline capacity in recent years, exports from West Texas have been limited, due to delays of the connecting pipelines on Mexican territory which has led to relatively low utilization of cross-border pipeline capacity from West Texas, the EIA said.

By the end of the year, however, West Texas can rely on two additional pipelines in Mexico expected to become operational in November—La Laguna-Aguascalientes (1.2 Bcf/d) and Villa de Reyes-Aguascalientes-Guadalajara (0.9 Bcf/d). While these two pipelines will carry natural gas from West Texas into central and western Mexico, they may displace some LNG imports at the Manzanillo LNG terminal, according to the EIA.

Mexico is the single largest market for U.S. LNG exports, having taken nearly 20 percent of all American exports since LNG shipments began in February 2016, U.S. Department of Energy data shows.

Rising U.S. natural gas exports to Mexico, regardless of whether they are shipped via pipelines or LNG cargoes, will help Mexico to meet its growing gas-fired power generation demand at a time when its domestic production is declining. The future of Mexico’s energy sector overhaul is unclear under incoming president Andrés Manuel López Obrador who has been critical of the reform that outgoing president Enrique Peña Nieto enacted in 2013 to end the monopoly of state firm Pemex.

For example, Pemex signed in March this year a contract with San Antonio-based Lewis Energy to assess and develop an unconventional field, which is the extension of the Eagle Ford in Mexico, with investment expected at US$617 million.

A month after López Obrador was elected president of Mexico, he said that the country would not use fracking anymore, dashing hopes that Mexico could replicate the U.S. shale gas boom in 10 years’ time.

With or without domestic shale gas production, Mexico will increasingly need natural gas, while the U.S. has an outlet—and a very close one at that—for both its pipeline exports and LNG shipments.

Tsvetana Paraskova for OilPrice.com