Natural gas markets in Mexico – current state of the markets and new directions

During the 2017 Platts Mexican Energy Conference, PA’s Oil & Gas expert, Bill McAleb, provided an insightful presentation on the topic of “Natural Gas Markets in Mexico – Current State of the Markets and New Directions” and discussed opportunities in the Mexico market, including:

• The current state of the market
• Results of the CENAGAS open season
• Mitigation of future market imbalances
• Potential investment opportunities.

The following summary includes the highlights from the presentation.

Summary

Domestic production is expected to continue to lag demand… as a result, Mexico has a high dependence on U.S. infrastructure and exports of natural gas.

Impact of energy reform

• 2013 Mexico Constitutional Energy Reform has reorganized the Mexican natural gas market and pipeline system
• Complex and interrelated oil & natural gas value chain is modernizing and deregulating (see Figure 1)
• Mexico’s natural gas pipeline backbone is comprised of both CENAGAS operated pipelines and transmission pipelines financed by private investors
• CENAGAS formed in 2014, assigns capacity rights for pipelines previously owned and operated by PEMEX, and operates Mexico’s Integrated National Natural Gas Transportation and Storage System (SISTRANGAS) (see Figure 2)
• CENAGAS 6.3 bcf/d two pipeline open seasons were successful and conducted in two phases: Round 0 in October 2016 for Mexico allocation and Round 1 in May 2017 for foreign and domestic bidders. (see Figure 3)

Figure 1: Complex Oil and Gas Value Chain

Figure 2: SISTRANGAS Pipeline System (Source: CENAGAS)

Figure 3: CENAGAS Open Season (Source: CENAGAS)

Current lack of natural gas storage in Mexico

• Liquefied natural gas (LNG) imports mitigate lack of natural gas storage; alleviate bottlenecks
• Natural gas storage policy being developed by Energy Ministry (SENER) in 2017
• CENAGAS, private companies considering strategic natural gas storage projects.

Demand drivers

• Mexico gas consumption is dominated by: Electric power generation currently ~4.2 bcf/d (~53%) and Industrial sector currently ~3.0 bcf/d (~38%)
• Overall Mexico demand expected to grow at a rate of 2% CAGR over the next 20 years.

Figure 4: 2017 Mexican Natural Gas Demand and Supply (mmcf/d)

Supply outlook

• Domestic production will continue to decline until 2022, when the winning companies of the Rounds are expected to start production
• Natural gas imports expected to represent 70% of supply by 2022.

Conclusion

The reorganization of the Mexican energy sector through the Energy Reform has opened the door for competition and investment in deregulated Mexican oil and gas markets and infrastructure. Mexico is likely to remain a top, emerging energy market for investors, driven by continued need for build-out of Mexico’s natural gas midstream system and expansion of hydrocarbon production.

Mexico faces the twin challenges of system imbalances and domestic energy security evidenced by current lack of natural gas storage, and increasing reliance on U.S. natural gas exports. To meet system imbalances, the country currently relies considerably on LNG infrastructure system that alleviates bottlenecks. Mexico’s gas storage need is beginning to be addressed through drafting of new policy by the Secretary of Energy as well as strategic storage project development. To enhance domestic energy security, Mexico is continuing to make important hydrocarbon discoveries, and encouraging domestic production through competitive auction rounds assigning leases of reserves.

The Energy Reform is transforming the Mexican market and spurring significant growth and investment opportunities across the sector including natural gas pipelines, storage, and oil and gas production.

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