Viewpoint: Mexico reliance on US gas to strengthen

Market: Electricity, Natural gas
03/01/22

Mexico's demand for US natural gas grew to a record high in 2021, with imports expected to grow in 2022 despite political uncertainty.

Even as President Andres Manuel Lopez Obrador calls for energy independence, Mexico remains heavily reliant on gas imports for power generation, most of which comes into the country via US pipeline interconnections. Gas imports from the US made up 76pc of Mexico's supplies by the middle of 2021, according to the US Energy Information Administration (EIA), a 36 percentage point increase from the same time in 2015.

US exports by pipeline to Mexico averaged around 6 Bcf/d (170mn m³) in January-August, according to EIA data, 12pc higher than the same eight months in 2020. Pipeline exports reached a peak of 7.4 Bcf/d on 17 June as cooling needs combined with recovering industrial demand from the Covid-19 pandemic.

Mexico's own gas production and LNG imports have fallen as pipelines between the two countries come on line. State-owned Pemex produced an average 4.6 Bcf/d of gas in October, down by 4.1pc from the same time in 2020.Pemex aims to boost production to 5.25 Bcf/d of natural gas by 2022, but it has frequently missed output targets.

Gas demand will likely increase over the next several years as Mexico's electricity needs grow with industrial activity returning to pre-pandemic levels. Though power reform remains a key 2022 concern among the country's business community, the question is whether Mexico's public sector can provide sufficient generation capacity, not whether demand will abate.

Lopez Obrador sent a constitutional electricity reform bill to congress in October that would cap private-sector participation at 46pc. The move would cancel private-sector permits for power generation totaling 40,924MW, or 48pc, of Mexico's installed capacity, essentially making Mexico's state-owned Federal Electricity Commission (CFE) dominant in the power sector.

CFE has announced plans for several power plants, indicating expected demand growth. Though little public information is available, CFE's combined projects would increase gas demand in Mexico by approximately 785mn cf/d, according to Eduardo Prud'homme, co-partner at energy consulting firm Gadex. More than half of the projects have estimated start dates of 2024.

Despite the anticipated demand growth for gas-fired power, private-sector investments for gas and power in Mexico are uncertain following Lopez Obrador's shift away from 2013 energy policy reforms. Lopez Obrador's regulatory and legislative moveshave led to postponements of power and manufacturing projects, potentially stunting growth through the remainder of his term, which is set to end in September 2024.

Increased gas interconnection projects within Mexico remain jammed by environmental grievances, negotiations with state agencies and other political issues. TC Energy has repeatedly postponed the completion of its 886mn cf/d Tula-Villa de Reyes natural gas pipeline to 2022. Delays first stemmed from issues related to the Covid-19 pandemic, followed by contract negotiations with CFE. Other lines have been delayed as indigenous groups opposed the pipeline routes.

But pipelines connecting to Mexico have continued to progress in the US, increasing potential US export capacity. The 2 Bcf/d Whistler pipeline — which came on line in July — added a new connection from the Permian basin of west Texas and New Mexico to the Agua Dulce Hub in southeast Texas. Agua Dulce is a supply point for several pipelines that cross the Texas-Mexico border.

TC Energy plans to expand its North Baja natural gas pipeline system — which serves power generators in southern California and Mexico's Baja Peninsula — with a potential startup in 2022, according to EIA data.

Mexico's gas market conditions have also started to more closely track US market conditions as the US-Mexico pipeline network has expanded, particularly between northern Mexico states and west US hubs. Prices at the Waha hub — the main indicator for the value of Permian gas — averaged $3.28/mmBtu for flow in December 2021, up by 36pc from December 2020. The El Encino index in Chihuahua state, which is supplied by the Permian basin, averaged $3.89/mmBtu for December 2021, a 61¢/mmBtu premium to Waha for the same period. El Encino prices averaged a slightly wider 68¢/mmBtu premium in November 2021.

By David Haydon

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23/12/24

Viewpoint: US LPG cargo premiums poised to fall

Houston, 23 December (Argus) — The booming US LPG export market has fueled record spot fees this year for terminal operators that send those cargoes abroad, but those fees are poised to fall next year as additional export capacity comes online. US propane exports surged over the past two years, hitting an all-time high of 1.85mn b/d in the first quarter of this year, according to data from the US Energy Information Administration (EIA). Terminal fees for spot propane cargoes out of the US Gulf coast hit an all-time high of Mont Belvieu +32.5¢/USG (+$169.325/t) in mid-September. US propane production is expected to grow by another 80,000 b/d in 2025 to 2.22mn b/d while the outlook for domestic consumption is fairly steady, at 820,000 b/d next year — meaning even more propane will be pushed into the waterborne market. But that is dependent on US infrastructure keeping up with the pace of production. US export terminals in Houston, Nederland and Freeport, Texas, have run at or above capacity for the last two years given the thirst for cheaper US feedstock, largely from propane dehydrogenation (PDH) plant operators in China. This demand has created bottlenecks at US docks, and midstream operators like Enterprise, Energy Transfer, and Targa have rushed to ramp up spending on both pipelines and additional refrigeration to stay ahead of the wave of additional production. US gas output spurs LPG exports As upstream producers have ramped up natural gas production ahead of new LNG projects, most producers are counting on LPG demand from international outlets in Asia to offload the ethane and propane the US cannot consume. For the past four years, Asian buyers have been more than happy to oblige. US propane exports to China rose from zero in 2019, when China imposed tariffs on US imports, to an average of 1.36mn metric tonnes (t) per month in January-November 2024, according to data from analytics firm Kpler, making China the largest offtaker of US shipments. US exports to Japan averaged 480,000t per month throughout most of 2024, and exports to Korea averaged 460,000t per month in the first 11 months of 2024. China, Korea, and Japan received 52pc of US propane exports in 2024, up from 49pc in 2020, according to data from Vortexa. Strong demand in Asia has kept delivered prices in Japan high enough to sustain an open arbitrage between the US and the Argus Far East Index (AFEI). Forward-month in-well propane prices at Mont Belvieu, Texas, have remained well below delivered propane on the AFEI. In 2020, Mont Belvieu Enterprise (EPC) propane averaged a $143/t discount to delivered AFEI — a spread that has only widened as additional PDH units in Asia have come online. During the first 11 months of 2024, the Mont Belvieu to AFEI spread averaged a hefty $219/t, leaving plenty of room for wider netbacks in the form of higher terminal fees for US sellers, especially as a wave of new VLGCs entering the global market has left shipowners with less leverage to take advantage of the wider arbitrage. The resulting wider arbitrage to Asia has kept US export terminals running full for the last two years. So when a series of weather-related events and maintenance in May-September limited the number of spot cargoes operators could sell and delayed scheduled shipments, term buyers willing to resell any of their loadings could effectively name their price. This spurred the record-high premiums for spot propane cargoes in September. New projects may narrow premium An increase in US midstream firm investments in additional dock capacity and added refrigeration in the years ahead could narrow those terminal fees, however. Announced projects from Enterprise and Energy Transfer, in particular, will add a combined 550,000 b/d of LPG export capacity out of Houston and Nederland, Texas by the end of 2026. Enterprise's new Neches River terminal project near Beaumont, Texas, will add another 360,000 b/d of either ethane or propane export capacity in the same timeframe. These additions are poised to limit premiums for spot cargoes by the end of 2025. Already, it appears the spike in spot cargo premiums to Mont Belvieu has abated for the rest of 2024. Spot terminal fees for propane sank to Mont Belvieu +14¢/USG by the end of November. The lower premiums come not only as terminals resume a more normal loading schedule, but at the same time a surplus of tons into Asia ahead of winter heating demand has narrowed the arbitrage. The spread between in-well EPC propane at Mont Belvieu fell from $214.66/t to $194.45/t during November. A backwardated market for AFEI paper into the second quarter of 2025 means US prices are poised to fall more in order to keep the spread from narrowing further. By Amy Strahan Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

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