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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A slate of other gas-fired projects are on the books, particularly in northern Mexico. Overall, the nation is looking to add 28 gigawatts of new generating capacity. With all this activity, the national Secretaría de Energía forecasts that Mexican gas demand will grow 3.3% annually through 2016.Skip to next paragraph
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The Northern Natural Gas Neighbour
For gas-hungry Mexico, the collapse of U.S. natural gas prices couldn’t have been better-timed.
Cheap nat gas from abundant shale production in the southern states has provided a ready source of imports. What’s more, a good deal of pipeline infrastructure is already in place. This pipe used to bring Mexican gas to U.S. consumers—but increasingly flows have been reversed to feed Mexico’s demand.
Mexican purchases of U.S. gas have been driven by pricing. Between 2000 and 2004—with low nat gas prices prevailing—Mexico’s imports from the U.S. jumped 10-fold, from 4 Bcf per month to 40 Bcf per month.
Import growth slacked off with the high prices of 2005 through 2008. But as of 2010, imports are on the rise again. In March 2010, Mexico imported 20.7 Bcf. By October 2012, imports hit a record 60.5 Bcf.
The numbers imply that Mexico’s peak demand for U.S. gas is currently something like 1.95 Bcf/d. And there’s room for that to grow. Total U.S. export capacity to Mexico was estimated at 3.8 Bcf/d in 2012.
The really interesting thing is that some of the biggest players in U.S. gas transmission are betting Mexican demand will rise well beyond current export capacity.
Major pipeline operator El Paso Natural Gas recently commissioned an expansion of export capacity at its Wilcox Lateral transmission site at the eastern Arizona/Mexico border. The upgrade added 0.185 Bcf/d of gas throughput. (Related article: Israel Approves 40% Gas Exports, But to Where?)
At least five other similar projects are on the books across Arizona and Texas. All told, these could add up to 3.3 Bcf/d of additional gas export capacity to Mexico. Taking total capacity to more than 7 Bcf/d.
What Does This Mean for Natural Gas Prices?
The question then becomes: what would increased exports mean for gas prices?
At current peak demand levels of 1.95 Bcf/d, Mexico is taking about 3% of total marketed U.S. gas (about 69 Bcf/d as of March 2013).
There is some evidence that this demand is already pushing up prices.
In 2012, Mexican buyers of U.S. gas paid an average of $2.94/Mcf. Considerably higher than the price at many trading hubs near in the southern U.S.
Mexican export prices were 7.3% higher than the average Henry Hub price for 2012. The premium to U.S. hubs near the Mexican border was even larger. Exported gas prices were 8.9% higher than 2012 average prices at Houston Ship Channel, Texas. And 10.5% higher than the El Paso Permian hub on the Texas/New Mexico border.
It thus appears that Mexican consumers are willing to pay more than U.S. buyers to secure supply—the marginal price is higher in that region.
And that’s at today’s export levels. If existing export capacity of 3.8 Bcf/d is filled as Mexico takes more gas, we’re talking about 5.5% of U.S. production heading south. And if currently-slated expansion projects come online on top of that, we could see over 10% of current U.S. supply going to Mexico. Then the marginal buyer could impact prices outside that region.
All in, Mexico could create an extra 5 bcf/d demand in the coming three years. As context, an extra 5 bcf/d demand from the power sector in 2012 sent natural gas prices doubling in the US from $2-$4/mcf in one year.
This story was written by Dave Forest, contributing editor to Oil & Gas Investments Bulletin
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