Can Mexico Rescue The US From The Natural Gas Glut?

With the growing awareness about climate change, the world is moving towards the use of cleaner and environment-friendly sources of energy. In this quest, natural gas, which is considered to be the safest and cleanest of all the existing hydrocarbons, has emerged as a clear winner. Consequently, the demand for natural gas has seen a steady growth of more than 3% annually over the last decade, and this trend is expected to continue in the future. According to International Energy Agency (IEA), the global gas demand is likely to grow by 1.6% annually for the next five years. A large majority of this demand will be driven by the emerging countries, such as China, India, and Mexico, who have decided to move away from a coal-based economy to a gas-based economy.

In our previous analysis – How Will The Rising Natural Gas Output Impact The Ongoing Commodity Slump? – we had discussed how the US markets are facing a gas glut and the severe consequences it could have on the oil and gas companies and the overall economy. In this note, we talk about why Mexico could emerge as a key driver of US gas demand in the coming years and reduce the dire consequences of the gas glut on the US economy.

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Despite holding close to 8.6 trillion cubic feet (Tcf) of proved natural gas reserves ^[1], Mexico’s gas output has been unable to meet its consumption needs. In 2016, the country produced about 4.4 Bcf/d of natural gas, while its consumption was close to 7.5 Bcf/d. Since the country’s domestic gas production has been declining at around 10% annually, it has to increasingly depend on gas imports to meet its energy needs. Hence, the country is a net importer of natural gas, most of which is transported from the US due to the proximity and excess supply of gas in the neighboring country.

At present, Mexico imports roughly 55% of its total gas needs from the US. However, the country’s demand for gas is expected to rise drastically in the coming years, as more than 60% of its power is generated through gas. According to the US Energy Information Administration, Mexico’s demand for natural gas is projected to increase by 31% between 2015 to 2029. Consequently, its gas imports from the US are likely to shoot up to 75% of its total gas needs by 2020. In fact, the US imports to Mexico are expected to roughly double in the next two years.

Currently, there are nearly 20 pipelines, 4 of which are under construction, that transport gas from the US to Mexico. However, these are not enough to meet the increasing gas needs of the country. Thus, in order to augment the import of gas from the adjoining country, Mexico is constructing several natural gas pipelines that will connect the two countries. These projects are expected to increase the pipeline capacity of the country by more than 7 Bcf/d by 2020. In addition, Mexico has also approved the construction of a number of new natural gas-fired power plants across the country in order to meet the growing need for gas in power generation.

That said, this proposed gas distribution infrastructure and power plants in Mexico are presently under construction and are not expected to come online before 2019, leaving the US gas market oversupplied for the next few quarters. This would force the oil and gas producers to curtail or cap their oil and gas production over the next year or so, until new pipelines to the Gulf Coast are built and planned power plants come online in Mexico. In consequence, the upstream operations of these US producers are likely to suffer severely due to lower output as well as weaker commodity prices.

However, if the US producers can transport their gas supply to Mexico using some of their LNG tankers, it would not only help them to deliver large quantities of gas and reduce the oversupply in the market, but would also open channels for LNG trade with Mexico in the future. This would be a win-win situation for both the countries, as it will rescue the US producers from the negative impact of the gas glut on the one hand, and aid in meeting the rising gas demand in Mexico on the other hand.

1. BP Statistical Review of World Energy 2017 [↩]