With gas prices at the Henry Hub pricing point bordering on US$2/MMBtu, producers continue to eagerly seek additional markets to monetize their gas reserves beyond domestic gas demand.
In the past several years, LNG exports have emerged as a greatly anticipated opportunity for their promise to arbitrage cheap North American gas with premium Asian markets. But LNG prices have declined steeply beginning in 2014, driven by the simultaneous collapse of crude oil-indexed contracted prices and new volumes of LNG capacity entering the market. With prices in the key East Asian market in the US$8/ MMBtu range, and given the added costs of pipeline transit, liquefaction, shipping and regasification, LNG exports from North America are highly challenged.
In the meantime, however, an export opportunity has emerged in the form of increasing pipeline exports to Mexico. In the current projection from Stratas Advisors’ Global Gas Service, Mexican natural gas demand is expected to rise some 55% from 2012 to 2030, from just over 6 Bcf/d to 9.7 Bcf/d.
Growth within the electricity sector will make up the greatest share of this expansion. Thanks to rising demand across sectors and escalating interest in using both domestic and imported natural gas for power generation, Mexico’s use of gas will move from 51% of its energy mix to 72% by 2030, according to Stratas’ projections. This advance will stem partially from minor losses within the coal sector, but primarily from proliferation beyond current hydroelectric power generation capacity and a decline in fuel oil usage.
Overall demand within the energy sector will also rise from a current 2.5 Bcf/d to just over 3 Bcf/d by 2030. This increase is more a function of cross-sector expansion, however, as Stratas does not project natural gas’ share within the sector to shift from its current 63%.
Stratas’ Global Gas Service projects rising Mexican demand for natural gas will come primarily in the form of existing and developmental pipelines from North America.
Mexican production will be largely insufficient to meet this demand. Although current efforts to increase domestic production through opening the market to international investment have received a great deal of attention, fairly little of this new production will be natural gas. Instead, Stratas projects that most attention and new investment will focus on oil-oriented production, including deepwater offshore and unconventional projects. As a result, natural gas production growth will remain stagnant at roughly 4.3 to 4.4 Bcf/d until 2030.
Given this concentration on oil, rising natural gas growth will come primarily from existing and under-construction pipelines from the U.S. Stratas projects this demand will reach just under 4 Bcf/d by 2020 and grow to more than 4.9 Bcf/d by 2030, with volumes coming from a variety of pipelines into major demand centers across northern Mexico.
While Mexico does possess several LNG import facilities on both the Atlantic and Pacific coasts, the lower prices of pipeline gas from North America compared to internationally traded LNG prices will make the pipeline route, when possible, more attractive. Although Stratas projects some volumes will continue to enter the market through LNG import facilities, ultimately pipeline gas imports will serve as the primary source for meeting growth in Mexican gas demand.
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