A surprising source of demand for US natural gas
The US natural gas market is on the verge of a big swing, Forest writes, but it doesn't have to do with liquid natural gas. Instead, there's an interesting and unexpected source of demand for US natural gas.
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And it’s not about the talk of the town, Liquid Natural Gas (LNG).
It's about an unexpected source of natural gas demand:
Mexican imports of U.S. gas have skyrocketed 92% since 2008. And with export capacity projected to grow to over 7 billion cubic feet per day (Bcf/d), Mexico could start taking 10% of U.S. production—in a very short time frame, with very low capital costs compared to the LNG boom unfolding.
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There is a lot less risk, and a lot less cost in getting huge natural gas exports to Mexico, compared to LNG—and the volumes may be enough to move margins in the North American market.
At least six new pipeline projects are now on the books, aimed at sending gas southward.
Today, I’ll explain what’s happening now, and what potential impact this extra demand could have on natural gas prices.
To find out, we take a look below at exactly what’s happening in Mexico, what’s getting built, and who’s positioned to take advantage.
The Not-So-Slow Death of a Gas Producer
Mexico used to have a pretty decent gas industry.
Between 1990 and 2008, the nation’s nat gas production grew steadily, nearly doubling over the two decades.
The bulk of this output comes from national oil and gas company Petroleos Mexicanos, or Pemex. With strong natural gas prices between 2003 and 2008, Pemex stepped up its drilling, growing gas production from 4.5 Bcf/d to nearly 7.5 Bcf/d.
But with the collapse in gas prices in early 2008, that changed. Pemex stopped a lot of its gas drilling activity. Instead, the Mexican government made a strategic decision to meet domestic demand by importing now-cheap gas.
Since that time, Pemex’s gas production has fallen steadily, by about 15% from 2008 levels.
The lack of investment in the gas sector has also had a big effect on Mexican reserves. In the late 1990s, the nation had more than 60 Tcf of proven reserves. Today, gas in the ground has fallen off a cliff, with only about 17 Tcf proven reserves remaining.
At the same time as production has been falling, Mexico’s gas demand is ramping up.
Gas consumption across the country has risen 160% since 1990 to 2.36 Tcf per year. Since 2007—while domestic production has been nose-diving—Mexico’s gas use has jumped 16.7%.
Much of the rise in demand has been driven by fuel-switching. In 2000, only 20% of Mexican power generation was fueled by natural gas. But by 2007, nat gas use increased to account for 50% of power output. Largely displacing oil-fired generation. (Related article: How to Profit from the Developing Shift in the Natural Gas Market - Interview)
On the back of this rising demand, Mexico’s natural gas supply-demand balance is—for the first-time ever—near deficit. Current gas usage amounts to nearly 6.5 Bcf/d, and Pemex is now producing less than that.
The Switch is On
Faced with a supply short-fall, Mexican nat gas imports have been on a tear.
Between 2003 and 2007, Mexico was bringing in between 350 and 400 Bcf a year of imported gas. But since gas got cheap in 2008, imports have jumped 92%. Total imports hit 767 Bcf in 2012.
Overall, imported gas now accounts for about 30% of total Mexican supply. The majority coming through pipeline feed from the U.S. Only about 20% is supplied via LNG.
Mexico is now importing about 2.1 Bcf/d. Or about 3% of total U.S. gas production. Numbers that are starting to get significant.
The really interesting part of this story is the growth potential.
The switch from oil- to gas-fired power generation is continuing across Mexico. Just this month, gas infrastructure providers GDF SUEZ Mexico and GE Energy Financial Services announced they will extend their Mayakan pipeline into the Yucatan Peninsula—underpinned by a 300 MMcf/d gas-supply contract with Mexican electric utility CFE, who are switching power plants in the Yucatan to gas generation.
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