Sources say growing Mexico-US natural gas interdependency proving sound

Author: Emily Pickrell

2020/09/23

  • Economic fundamentals support Mexico-US natural gas links
  • US gas production robust despite fall in oil production
  • US pipeline gas still cheapest option - sources

MEXICO CITY (ICIS)--When president Andres Manuel Lopez Obrador (AMLO) assumed office in 2018, part of the national debate around energy focused on the need for security, especially in the case of an unforeseen emergency.

Many analysts and politicians have acknowledged that more domestic access to natural gas and security of supply should be part of a long-term energy security strategy. Yet despite the shock of the coronavirus and its economic effects, many say Mexico’s heavy reliance on the US for its natural gas has so far been a solid economic bet.

SUPPLY SIDE

The economic repercussions from the coronavirus in the US have meant a drop in US oil production and the associated natural gas.

US domestic crude production has tumbled to 10.7m bbl/day, down from its peak of 13.1m bbl/day in mid-March, according to data from the US Energy Information Administration (EIA). Global oil demand, too, is expected to fall by nearly 10% in 2020, compared with 2019, according to the International Energy Agency.

The fall in oil production has impacted the production and price of natural gas, but not as dramatically. The US produced 86 billion cubic feet (bcf)/day of natural gas in August of this year, down from 94bcf/day in February before coronavirus and the oil price shock fully hit the country. The spot price of Henry Hub natural gas fell to $1.68/MMBtu in mid-June, down from $2.06/MMBtu at the beginning of 2020. The spot price was back at $2.06/MMBtu on 15 September, according to EIA data.

DEMAND SIDE

For Mexico, which depends on US gas for more than 60% of its total supply, the fall in production has bumped up prices for its import contracts, many of which have variable rates for the fuel pegged to Henry Hub prices.

Yet it is still the most economic option for Mexico, given the pipeline infrastructure that has been built up with south and west Texas, allowing Mexico to enjoy the benefits of cheap shale gas, especially that flowing from the Permian basin.

“We don’t have another economic alternative,” said Daniel Salomon Sotomayor, an energy attorney at Gonzalez Calvillo, and former legal director of hydrocarbons regulation at energy regulator CRE. “Our Gulf of Mexico production is decreasing and there have been several technical problems with the kind of natural gas we are extracting.”

And in the larger picture, any additional costs for piped gas are compensated for by the ability to phase out expensive LNG that Mexico had been using to meet the final 10% of its import needs. The Sur de Texas-Tuxpan submarine pipeline, which started operations in 2019, has been especially key.

“What we are seeing with the marine pipeline, the balance has shifted,” said David Rosales, a partner at Talanza Energy and former undersecretary for natural gas and petrochemicals at energy ministry SENER. “We are seeing that we haven’t had any need to import LNG in the past few months, even in the moments in which the system would have had a high demand.”

Meanwhile, back in Texas, any drop in production of the shale gas upon which Mexico relies is expected to reverse as oil prices continue to recover from their startling fall this spring. This, too, secures the price range upon which Mexico relies for its energy strategy.

“We know that people were willing to drill for oil when prices were in the $50 range and gas in the $2 range,” said Craig Pirrong, a professor of finance at the University of Houston. “If there were a complete shutdown of production, prices would go up and people would be back.”