Reliance on US Natural Gas Poses Risks for Industrial Sector
By Paola Moreno
Over the last 20 years, Mexican natural gas scenario changed dramatically. During the nineties, a decrease in natural gas prices and ongoing improvements in combined cycle technology resulted in a large substitution of oil power stations by natural gas and combined cycle plants. Oil’s share of the electricity mix declined from 53% in 1990 to 10% in 2017, while the usage of natural gas rose five-fold to 60% of Mexico’s power mix over that timeframe.
When natural gas demand started to rise, Mexico was able to produce enough gas to supply all sectors. For instance, in 1999, natural gas supply was 29.4 Million tonnes oil equivalent (Mtoe) and the demand was 29.1 Mtoe. However, production did not increase at the same pace, and soon Mexico started to import natural gas, especially to supply the power sector. By 2009 natural gas imports rose to 10.8 Mtoe, just under 20% of national consumption, and by 2017, imports grew to more than half of Mexican total consumption.
How Did We Arrive Here?
Mexico not only became heavily reliant on gas imports, but also highly dependent on U.S cross-border pipelines. In 2017, 86.4% of the total natural gas imports (42.1 billion cubic meters) were done through pipelines coming from Texas, California, and Arizona, being Texas the major Mexican supplier. Texas natural gas accounts for just over 60% of total pipeline imports. These increasing imports have been followed by a rapid cross-border pipeline expansions. Most of the infrastructure occurred during the Mexico’s Infrastructure Expansion and Five-Year Plan.
Where’s the Opportunity for Investors?
Since 2012, eight new cross-border pipelines were commissioned increasing in gas flow capacity from 2.75 billion cubic feet per day (Bcm/d) to more than 11 Bcf/d up to the end of 2018. Net Midstream (Next Era), the consortium Energy Transfer – Carso Energy, and Spectra Energy have been the key players in all these developments. Since 2012, they have been awarded with contracts to increased cross-border capacity. Accounting all pipelines commissioned in this period, each one has increased cross-border capacity by 2.1, 2.5, and 2.6 Bcm/d in respectively. Other major expansions have also taken place across Mexico.
Since 2012, 4,639 km of natural gas pipelines have been added to the 15,986 km national grid. An additional 2,882 km are under construction, with TransCanada and IEnova being the main developers. Since 2012, Transcanada and IEnova have installed almost 3,000 km of combined pipeline infrastructure. We expect an additional 3,000 km of pipeline to come on-line over the next five years to supply the central and south regions of Mexico. (Next Era Energy Resources has always been one of our highest conviction recommendations to US investors looking for exposure to infrastructure in Mexico. We also recommend Sempra Energy because of its ownership interest in IEnova.)
What are the Lurking Risks?
Although natural gas imports from the U.S. have alleviated oil dependency and lowered electricity prices, it’s made Mexico vulnerable to supply risks from the U.S. which can hinder economic growth. In late-2018, gas supplies for several industries, even power plants, was limited and other sectors were told to reduce consumption. We believe the shortage was caused mainly by delays in Texas cross-borders pipelines and operational issues in some of the processing centers according to local sources. We think that this heavy reliance on Texas gas may lead to more shortages that could affect supply chains, increase electricity prices in the short-run, and slow economic growth.
According to our analysis, a 10% of shortage in natural gas supply could reduce manufacturing production by .5% percent. The Central Bank of Mexico also lowered growth forecasts and cited potential gas shortages as one of the factors.
The Mexican dilemma is a delicate balance for both long-term buyers of power, and for the government. Natural gas stabilizes electricity prices, and due to the thermodynamics of natural gas power plants they provide reliability to the power grid. However, an overreliance on U.S. gas puts Mexico at a disadvantage from both a risk and a geo-political perspective.
Paola Moreno joined Mexico Energy Partners as a consultant in 2018 and leads the renewable energy and regulatory policy initiatives at the firm. Her group analyzes the regulatory policies and industry dynamics of power markets across the country.