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Ohio Utica Shale

U. S. shipments of natural gas to Mexico are soaring

By Bob Downing Published: October 8, 2013

From Bloomberg News:

By Naureen S. Malik

Oct. 7 (Bloomberg) -- For all the investment in new projects to liquefy and ship U.S. natural gas overseas, the country is already benefiting from soaring exports of the fuel in its raw form via traditional pipelines to Mexico.

The U.S. is piping about 2 billion cubic feet of gas across its southern border every day, or about 3 percent of the nation’s entire output, according to Kinder Morgan Energy Partners LP. That’s poised to double because new power plants and factories are adding to demand, said Anas Alhajji, chief economist at NGP Energy Capital Management LLC. Mexico is consuming gas at the fastest pace ever while domestic output slows, BP Plc data show.

Pipeline expansions may take daily capacity to 5.31 billion cubic feet by the end of 2014, compared with the 6.37 billion planned for LNG terminals that won’t start coming online until late 2015, U.S. government data show. The rising flows to Mexico raise the prospect of a rebound in U.S. prices after they tumbled 74 percent in the past five years amid unprecedented output from shale deposits in states from Texas to Pennsylvania.

"The big story in natural gas is the exports to Mexico, not the LNG exports," Alhajji at NGP, a private equity firm based in Irving, Texas, that oversees $13 billion, said in a Sept. 27 interview. "We are going to export an amount that is probably equal to LNG exports but as a matter of cost, it’s a small fraction of LNG."

Natural gas futures have climbed 8.3 percent this year on the New York Mercantile Exchange. They rose 12.3 cents, or 3.5 percent, to settle at $3.629 per million British thermal units today.

Pipeline Flows

Daily volumes to Mexico may double to 4 billion cubic feet by the end of 2014, while U.S. LNG exports may reach 3 billion to 4 billion a day by 2020, Alhajji said.

Cross-border shipments to Mexico may reach 3.5 billion cubic feet a day by the end of next year because of the additional pipeline capacity, according to estimates by the U.S. Energy Information Administration, the Energy Department’s statistical arm.

A Societe Generale SA analyst predicted last month in an interview that pipeline exports to Mexico may take five years to reach 4 billion, while Barclays Plc said in an Oct. 1 note to clients that it expects flows to reach 4.5 billion by 2016.

Increased pipeline capacity to Mexico "actually overshadows the U.S. LNG export story, at least for the next three years," said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.

Kinder Morgan

Kinder Morgan volumes topped 1.9 billion cubic feet a day in July out of total U.S. exports to Mexico of about 2 billion, Chief Executive Officer Richard Kinder said in a July 17 conference call with analysts.

"That’s significant at the present time, and we think we’ll get even bigger as we bring these various expansions into fruition over the coming months and years," he said.

The 60-mile Sierrita pipeline project in Arizona, with a daily capacity of 200 million cubic feet, will cost Houston- based Kinder Morgan $204 million, or about $3.4 million a mile.

By comparison, Cheniere Energy Inc. estimates that costs for the first four trains of its Sabine Pass LNG terminal in Louisiana, with a processing capacity of 2.2 billion cubic feet a day, will be between $9 billion and $10 billion, excluding financing costs. The first train is scheduled to begin operations in the fourth quarter of 2015 with the other three starting up in 2016 and 2017.

Capacity Expansion

Kinder Morgan companies, which operate about 80,000 miles of pipelines in North America, added 788 million cubic feet of daily export capacity at the U.S.-Mexico border during the second and third quarters and will increase that by a further 475 million in 2014, company records show. A potential Arizona expansion may boost capacity by 608 million beyond that, according to Barclays.

NET Mexico Pipeline LP, based in Houston, plans a 124-mile pipeline expansion from the Eagle Ford deposit in Texas, the largest cross-border project to Mexico since at least 1997, according to EIA data. The line, with capacity of 2.1 billion cubic feet a day, is projected to be in service in December 2014.

Within Mexico, eight pipelines with the ability to deliver 5.6 billion cubic feet a day will start this year through 2016, and three of them will connect to the U.S. grid and mirror projects north of the border, Biliana Pehlivanova, a New York- based analyst with Barclays, said in the Oct. 1 note.

"Several will deliver gas to areas currently lacking sufficient distribution infrastructure, and will spur new demand," she said.

Gas Deficit

Mexico, Latin America’s second-largest economy, faces a domestic gas deficit of about 33 percent this year and has alerted companies of possible shortages 15 times in the past year, Energy Minister Pedro J. Coldwell said Aug. 13 in Mexico City. Gas consumption rose 8.9 percent to 8.1 billion cubic feet a day in 2012 from the previous year, a record based on data going back to 1965, according to BP’s 2013 Statistical Review of World Energy. Demand is climbing from users ranging from households to steelmakers such as Ternium SA and ArcelorMittal.

Mexico’s gas production averaged 5.6 billion cubic feet a day in each of the past three years, after peaking at 5.7 billion in 2009, according to BP.

Power Plants

The country plans to add about 28 gigawatts of new electric generating capacity between 2012 and 2027, mostly in northern Mexico, according to the EIA. The data is based on reports from Comisión Federal de Electricidad, Mexico’s state-run electricity provider. Increased power generation may boost gas needs by 5.1 billion cubic feet a day by 2027, the EIA said.

Shipments to Mexico totaled 173.1 billion cubic feet in the second quarter at an average price of $4.23 per million Btu, according to a report from the Energy Department’s Office of Fossil Energy.

U.S. gas is a cheaper alternative for Mexico than importing LNG. International prices range from $10 to $18 or $20 per million Btu, Francisco Blanch, head of commodity research at Bank of America Corp. in New York, said in a Sept. 18 interview.

"While Mexico’s demand is poised to grow, the supply of LNG will remain tight and prices will be much higher than the U.S., attracting very little LNG into Mexico," Blanch said.

U.S. Resources

The U.S. has the world’s largest base of technically recoverable shale gas resources, totaling 1,161 trillion cubic feet, according to a June 13 EIA report. The Marcellus and Utica in the Northeast are the largest shale regions, followed by the Haynesville in Louisiana and Eagle Ford in Texas.

Marketed gas production in the U.S. will gain for a sixth straight year, rising 1.1 percent to average 69.91 billion cubic feet a day in 2013, the EIA said in its Sept. 10 Short-Term Energy Outlook.

The U.S. produced 87 percent of its own energy in the first six months of this year, on pace to be the highest annual rate since 1986, EIA data show.

Increasing use of U.S. supplies gives Mexico little immediate incentive to develop its own shale resources, Jeremy Friesen, natural gas strategist with Societe Generale in New York, said in a Sept. 12 telephone interview.

"They are not going to ramp up shale production in the next five to 10 years and there is no need to because they have such cheap gas available," he said.

For U.S. consumers, the increasing shipments to Mexico may leave the market vulnerable to price surges this winter, when consumption of the heating fuel peaks, John Kilduff, partner at Again Capital LLC in New York, said in a Sept. 12 interview.

"For the winter, it’ll be pretty easy for us to get prices of $5 or $6 or even $7, given this emerging dynamic with Mexican demand," Kilduff said. "It’s going to take some real close watching."

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