U.S. Natural Gas Exports to Mexico Beating Expectations as Pemex Production Growth Fizzles

By Christopher Lenton  April 20, 2021 naturalgasintel.com

Only a few months after President Andrés Manuel López Obrador vowed to end his nation’s dependence on natural gas imports from the United States, Mexico’s need for Lower 48 gas is surging.

April is usually a month of lower energy demand in Mexico, when natural gas infrastructure undergoes maintenance and gas imports drop, but this month has been different. Natural gas imports from the United States are currently surprising the market and analysts are now revising their summer forecasts to the upside.

On April 14, a single day U.S.-to-Mexico record was broken when exports reached 7.1 Bcf/d. U.S. exports to Mexico averaged 7.0 Bcf/d last week. Tudor, Pickering, Holt & Co. (TPH) analysts said exports during the period outpaced their model by around 1.5 Bcf/d.

“It’s a situation we’ll continue to monitor but our 2Q2021/3Q2021 modeling at 6.2 Bcf/d looks materially low at this point,” TPH analysts said.

Some of the higher demand for U.S. gas in Mexico is attributable to new pipelines. Thanks to the Waha-to-Guadalajara system, or Wahalajara, which was developed by Mexican company Fermaca and came online last year, exports from West Texas can now reach Mexican demand on the Pacific side of the country. The system has basically replaced the need for liquefied natural gas (LNG) imports from the Manzanillo terminal.

Exports of Permian Basin gas from Waha to Mexico were running around 1.3 Bcf/d last Friday (April 16) on strong flows to industry, which increased power demand, RBN Energy LLC analyst Jason Ferguson said.

That’s up from about 0.8 Bcf/d in the first half of April, according to Wood Mackenzie. More than 70% of Wahalajara’s flows are now heading to the system’s lower end, Villa de Reyes-Aguascalientes-Guadalajara. That would be a near 100% replacement of LNG sendout from the Manzanillo terminal.

“Barring new disrupting events such as those hitting the U.S. and Mexican gas/power markets in mid-February, this substitution trend will likely continue throughout the summer,” Wood Mackenzie analyst Nicole McMurrer said.

Mexico gas demand is also likely to be boosted by higher economic activity, with the International Monetary Fund forecasting 5% growth this year.

Falling Domestic Production

One factor in the increased need for imports from the United States is dropping Mexico production.

Local gas production in Mexico has dropped by around 400 MMcf/d since last September. Analysts at Wood Mackenzie attributed the decline to technical failures and maintenance events reported at the Ciudad Pemex, Nuevo Pemex and La Venta gas processing complexes, as well as high gas flaring and venting.

In its recently released business plan, state oil company Petróleos Mexicanos (Pemex) said it aims to hit natural gas production of 4.19 Bcf/d in 2021, from 3.64 Bcf/d realized in 2020. However, Pemex has seen dry natural gas production declining since 2009, while flaring levels are up.

Because of high nitrogen content in its gas and other processing issues, 513 MMcf/d was flared from Pemex production in 2020, versus 305 MMcf/d in 2019. Dry natural gas production, meanwhile, averaged 2.08 Bcf/d in February, down from 2.18 Bcf/d in January and from 2.19 Bcf/d in February 2020.

Based on these trends, Wood Mackenzie revised higher its forecast for this summer, setting U.S.-to Mexico pipeline exports at an average of 6.7 Bcf/d for April-October. “This figure is 0.4 Bcf/d higher than what was projected in our February review, right after the weather-triggered U.S. gas supply shock,” McMurrer said.

Not everyone is as bullish. Analysts at Energy Aspects maintained a more cautious stance “not only based on the consistent gap between flow data and time-lagged” data from the U.S. Energy Information Administration, “but also because a large proportion of the Mexican growth appears to be headed out of West Texas and toward El Encino.”

Energy Aspects analysts suggested only “relatively minor growth across several points,” and put U.S. export growth closer to 500-600 MMcf/d over a previous export baseline of 5.9 Bcf/d.