One of midstream’s major financial analysts and I were chatting at his office, 40 stories above downtown Houston, discussing various trends in the industry.
Natural gas came up, of course, and I asked if there were any overlooked answers to the lingering oversupply of gas in the U.S. He gave a one-word reply: “Mexico.”
A week later and just a few blocks away, I met with a leading midstream investment banker. I asked a similar question about gas production and received the exact same reply: “Mexico.”
Potential upstream projects have received most of the energy industry’s attention following Mexico’s reform of its energy laws. But the nation also has substantial, unmet midstream needs as well. It needs natural gas, and it needs the midstream infra-structure to get it to market.
The formation of state-owned Petróleos Mexicanos in 1938 may have been well intentioned, but the out-come is instructive in the problems of all vast state bureaucracies—they do not work very well. Mexico has huge proved/probable/possible oil and gas reserves and a large domestic market. Also, it had the opportunity to serve a next-door neighbor—the U.S.—that
needed those reserves badly until the recent shale boom. But stifling that potential was endless bureaucracy and politics.
Global Hunter Securities noted in a recent research report that already there is “an increasingly material impact from Mexico pipeline exports.” It estimated May gas flows under the Rio Grande averaged 2.75 billion cubic feet per day (Bcf/d). That may sound small, compared to U.S. production of around 70 Bcf/d but Global Hunter’s numbers reveal a 36% increase in Mexican exports at the same time domestic gas demand nudged up by less than 5%, according to U.S. Energy Information Administration statistics.
“In light of developments … we expect that pipeline exports to Mexico could evolve toward approximately 5% of combined U.S. consumption and Mexico export flow, perhaps by the end of the current Mexico summer demand season,” the report added.
The structural situation is slightly positive for U.S. benchmark natural gas pricing over the longer term, assuming U.S. natural gas production is to grow at a slower pace near term.”
And there’s lots of U.S.-produced gas available nearby, Global Hunter pointed out.
“Four states with good proximity to Mexico pipeline infra-structure—Texas, Louisiana, Arkansas, and Oklahoma—represented a stunning 39.5 Bcf/d in May 2015—and compelling reasons to see further evolution of Mexico’s import of U.S.-sourced natural gas. The Texas-Louisiana-Arkansas-Oklahoma production story might be leveling off a bit, but reversal flows via pipeline from the Appalachian Basin will make some Marcellus gas available to the export market, in our view, offsetting a slower output story from the Texas-centered natural gas region,” Global Hunter said. Several midstream players certainly see opportunity when they look south. Kinder Morgan Inc. held a binding open season in August for increased capacity on its Mier-Monterrey line. Looping could raise capacity to 1.3 Bcf/d by fourth-quarter 2017. ONEOK Partners LP announced plans for a $500 million joint venture with a Mexican partner to build the Roadrunner Gas Transmission system that will move gas out of the Permian Basin’s Waha hub to the Chihuahua Corridor Pipeline at San Elizario, Texas. ONEOK projected gas exports to Mexico will double by 2018 to 3.8 Bcf/d. Current trends indicate that estimate may be conservative.
Mexico will be just one of the fascinating topics discussed at Hart Energy’s Midstream Texas conference, set for Oct. 25 to 27 in San Antonio. The conference agenda is available online at midstreamtexas.com. Take a look and then look south.

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