Enciende Mi Fuego (Light My Fire)—Moving U.S. LPG To Mexican Consumers

Mexico has become an important market for U.S. natural gas exports, and it is now opening up as a market for U.S.-sourced crude oil exchanges. There’s also potential for more exports of liquefied petroleum gas, particularly now that national oil company Pemex’s monopoly as LPG-import middleman is about to end and Mexico is planning to deregulate retail LPG prices. Today we continue our analysis of Mexico’s LPG market with a look at how the vast majority of U.S. propane and butane is transported to Mexican consumers.

Despite the slowdown in oil and natural gas drilling, U.S. production of propane, butane and other natural gas liquids (NGLs) remains near the all-time highs reached in April 2015; propane production now tops 1.4 MMb/d, with more than 1.1 MMb/d of that coming from natural gas processing plants/fractionators and 300 Mb/d from refineries.  Inventories are off the charts, literally – approaching 100 million barrels, or more than 20 million barrels over last year’s record volumes.  That is because only about half of current propane production can be consumed domestically (or stored for future use), which means the other half (more than 750 Mb/d in August) has to find a home in export markets. The resulting propane export boom has created tremendous opportunities for midstream companies like Enterprise Products Partners, Targa Resources, and ETP/Sunoco Logistics, which have expanded or built export dock facilities capable to ship LPG (propane, butane or both)) to Latin America, Asia and Europe. LPG is also being shipped by pipeline, rail and truck across the U.S.-Mexico border.

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As we said in Episode 1, big changes are coming to the LPG market in Mexico, which is the world’s 7th largest consumer of LPG and which imports significant volumes from the U.S.  The total volume of LPG sold and consumed in Mexico is about 280 Mb/d, about two-thirds of which is produced domestically; the rest (about 93 Mb/d) is imported, with about 70% of imports (66 Mb/d; or nearly one-fourth of Mexico’s total needs) coming from the U.S. But the Mexican market has some quirks, mostly related to legacy regulation of Mexico’s energy sector that is now being opened up. Historically PEMEX has been the only legal LPG importer of record meaning that while Mexican distributors acquire propane imports, its ownership flows through Pemex. Also, the Mexican government for years has been setting the retail price for LPG, generally at subsidized prices below the international market. All of this is set to change, though. Starting in January 2016, Pemex will lose its mandatory-middleman status, and the government’s role as price-setter for retail LPG will end in January 2017. If all goes as planned, the retail price for LPG will be market-based—that is, the price will float and will reflect supply, demand, the variable cost of distribution to different locales, and other factors (like they do in the U.S.). The opening up of the domestic market could make exports to Mexico more attractive for international producers – especially the U.S. The opportunity coincides with a recent slide in Mexican propane production that averaged only 185 Mb/d in the first half of 2015; compared with 211 Mb/d in the same period in 2014. And it certainly doesn’t hurt that the U.S. is physically closer to Mexico than any other propane-exporting nation (thereby keeping transportation costs to a minimum), or that--as luck would have it--U.S. propane prices are flirting with their 21st century lows.

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