Texas, home to the Eagle Ford Shale and Permian Basin, accounts for 91% of U.S. piped-gas exports to Mexico. The piped-gas trade with Mexico has increased 554% over the last 21 years, peaking at 6.1 Bcf/d in 2023.
Mexico鈥檚 demand for U.S. piped gas will continue to rise to meet growing demand from its electric and industrial sectors to come from nearshoring, followed by massive demand that will emerge from its nascent LNG exporting sector. The latter, in particular, provides Permian producers with a crucial outlet for rising production. But as analysts tell Midstream Business (MB), headwinds related to moving gas molecules persist on both sides of the border.
Mexico鈥檚 rising demand for U.S. piped gas has been driven by two key factors, according to Mexico鈥檚 Energy Secretariat (Sener). The first is financial strain at Petr贸leos Mexicanos (Pemex), including payment obligations to the federal government, which limit the state-owned company鈥檚 ability to increase gas production. The second is the availability of cheap U.S. shale gas.
Unlike Argentina and Venezuela, Mexico is neither sitting on the largest technically recoverable shale resources in the Americas nor the world鈥檚 largest oil reserves. Mexico is simply a manufacturing powerhouse.
Although rising electric and industrial sector energy demand has been increasingly met by growth in piped gas from the U.S., Mexico will need to manage its energy supply or risk growth impacts to its nearshoring boom, already happening, and a looming LNG export boom.
Mexico attracted inward foreign direct investment (FDI) flows of around $36 billion in 2023, the highest level in 18 years, according to data published by BMI, a Fitch Solutions company. This compares to around $14 billion in 2006.
鈥淭he inability to supply affordable and reliable energy (electricity and natural gas) risks Mexico鈥檚 prospects to fully grasp the nearshoring opportunity. Amid the trade war between the U.S. and China, especially in the realm of electric vehicles, Mexico must up its game to attract investments from firms like Tesla [Motors], which seeks to be competitive vis-脿-vis its Chinese counterparts. The current energy landscape in Mexico does not serve that purpose,鈥� Adrian Duhalt, a non-resident scholar at the Center for the U.S. and Mexico at the Baker Institute told MB.
For Ricardo Falc贸n, Wood Mackenzie research manager, natural gas markets - commodity trading data & analytics, there is room for a U.S. piped-gas-to-Mexico-based nearshoring boom, considering Mexico鈥檚 takeaway capacity at the border with the U.S.
鈥淭he challenge here is more associated with the risk exposure and the capabilities of all the Teslas and Amazons of the world who are seeking to enter the Mexican market. To date, price signals and demand growth in the power and gas sectors continue to be dictated by a few players, especially Mexico鈥檚 CFE [Federal Electricity Commission],鈥� Falc贸n said. 鈥淎lthough this has helped anchor demand to galvanize the execution of large-scale projects, it has also inhibited participants鈥� diversification. This situation has become more critical in recent years, owing to private investors鈥� perception of increasing non-technical risk, particularly in the political and regulatory frameworks.鈥�
In late-July 2024, Tesla鈥檚 CEO Elon Musk said his company would pause development of a $5 billion gigafactory in Santa Catarina, Nuevo Le贸n, in Mexico until after the U.S. presidential elections.
Over the coming decades, both the Washington-based Energy Information Administration and the Paris-based International Energy Agency (IEA) expect Asia to take center stage as the growth center for LNG imports sourced from Australia, Qatar, the U.S. and elsewhere鈥擬exico included.
Gas-hungry Mexico, which until recently also relied on LNG imports, is now betting big on LNG exports, owing to the country鈥檚 proximity to Texas, which gives it direct access to Permian feed gas. Mexico鈥檚 five initial Pacific Coast liquefaction projects could offer Permian producers a relief valve for their associated gas and connect the U.S.鈥� cheapest gas to Asia.
Sempra affiliate Sempra Infrastructure, Mexico Pacific and LNG Alliance Pte Ltd. Singapore are leading the five projects that could bring to market around 7.8 Bcf/d or 59 mtpa. According to a recent analysis by Rystad Energy, such volumes could propel Mexico to the ranking of the third-largest LNG exporter in the Americas, trailing only the U.S. and Canada.
But Mexico鈥檚 ability to achieve LNG exporting glory will not be easy. It will depend on completion of the Pacific Coast-based liquefaction plants as well as pipelines from the Permian to counter supply bottlenecks and even more necessary pipelines in Mexico.
鈥淣atural gas demand in Mexico will certainly increase on the back of additional power generation capacity and LNG exports projects that are expected to come online in the next few years. Nearshoring may also drive demand up as it could lead to a boom in manufacturing activities, especially in border states,鈥� said Duhalt, who also is a non-resident scholar at Southern Methodist University鈥檚 Texas-Mexico Center.
鈥淲ithout a doubt, Mexico will be under pressure to expand its capacity to transport greater volumes of natural gas, and failing to do so could become a key constraint to meet expected demand increases,鈥� Duhalt said. 鈥淧olitics can also be another factor to consider as the government of [President-elect] Claudia Sheinbaum will have to first recognize how important pipelines are for the country鈥檚 economic activity and then support the development of this critical infrastructure.鈥�
Numerous projects that will add capacity are already underway in Mexico, Rodrigo Rosas, Wood Mackenzie Senior Analyst, Americas Gas Research told MB.
鈥淭he CFE anticipates the completion of nearly 4 GW of capacity set to gradually enter operation by 2025. Additionally, with announcements forthcoming, the National Electric Development Program (Prodesen) plans to build a total of 6 GW of combined cycle plants between 2024 and 2027,鈥� Rosas said. 鈥淪ince 2021, gas-to-power demand has been steadily increasing. Power burns have risen by 0.5 Bcf/d, reaching 4.6 Bcf/d in 2024. This trend is expected to continue, with projections indicating a further increase to 4.7 Bcf/d in 2025.鈥�
Texas dominates piped-gas flows to Mexico
Pemex, which is the world鈥檚 most indebted oil company with around $101 billion in debt, has struggled to boost Mexico鈥檚 reserves and production. Mexico has had no other option but to look abroad for necessary gas supply. Expensive LNG imports have been pushed aside for a preference for the advantaged low-carbon, low-cost gas just north of Mexico鈥檚 border.
Between 2003 and 2023, U.S. piped-gas exports to Mexico followed an impressive upward trajectory, owing to Mexico鈥檚 positive economic growth. These exports peaked at 6.1 Bcf/d in 2023 compared to just 0.9 Bcf/d in 2003, according to data from the EIA, growing 11% per year on average over this 20-year period. Based on the U.S. piped-gas export data published by the EIA for the period between January and April 2024, annualized by MB, these exports could average 6 Bcf/d in 2024.
Beyond any limitations imposed by Mexico鈥檚 economic growth鈥攁 main pacesetter for natural gas demand鈥攖here are constraints to rapid expansion of U.S. piped-gas exports to Mexico, Wood Mackenzie鈥檚 Falc贸n said.
鈥淥n the U.S. side of the border, supply bottlenecks, localized competition for marginal gas molecules, and price action have affected the deliverability of U.S. pipeline exports to Mexico at different U.S. exit points, especially during peak demand seasons,鈥� Falc贸n said.
鈥淥n Mexico鈥檚 side, takeaway capacity of U.S. piped gas is still significant, considering that the average utilization rate remains roughly at 45% (relative to a nominal 14 Bcf/d),鈥� he said. 鈥淗owever, inadequate system reinforcements and interconnections have limited more liquid transactions between privately run and state-controlled routes, restricting deeper integration of demand centers across regions.
鈥淥n top of that, the Mexican natural gas market is yet lacking strategic and commercial storage capacity. Apart from securing better response mechanisms to external shocks, robust gas storage would enhance physical optionality for better supply/demand balancing, which in turn, would give Mexican fundamentals a more stable platform for long-term growth,鈥� Falc贸n said.
Only three states benefit from the uptick in U.S. piped-gas trade with Mexico: Arizona, California and Texas. But this is far from an even three-state race. In 2024, piped-gas exports from Arizona will account for just 3% of the total volume sent to Mexico, with California contributing 6% and Texas supplying 91%, according to MB calculations.
Within Texas, the border cities of Brownsville, Presidio, Rio Grande and San Elizario are on track to account for 65% or 3.9 Bcf/d of the U.S. piped-gas exported to Mexico in 2024. Piped-gas exports from West Texas to South Texas have grown steadily since around 2017, owing to an increase in pipelines that have come into service connecting Central and Southwest Mexico according to the EIA.
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