Before the Deluge, Part 2 - More Mexican Gas Pipelines on the Way, But Challenges Loom

The Mexican market is critically important to Permian producers. Rising gas demand south of the border — along with expected gains in LNG exports from new liquefaction/export facilities along the Gulf Coast — are key to their plans to significantly increase production of crude oil, which brings with it large volumes of associated gas. All that gas needs a market, and nearby Mexico is a natural. For a number of years now, Mexico’s Comisión Federal de Electricidad has been working to implement a plan to add dozens of new gas-fired power plants and to support the development of new gas pipelines to transport gas to them from the U.S. The new pipelines have been coming online at a slower-than-planned pace. But what pipeline capacity has been added across the border from West Texas is already changing Mexico’s gas market. The El Encino Hub in Northwest Mexico is one such area where there are signs of a shifting supply-demand balance. Today, we continue a blog series on key gas pipeline developments down Mexico way and the implications for gas flows, this time delving into the dynamics at the El Encino Hub.

The aim of this series is to provide an update on pipeline development in Mexico. In Part 1, we focused on pipelines entering Mexico from far West Texas. We noted that natural gas enters Northwest Mexico on three pipelines from the U.S.: Kinder Morgan’s El Paso Natural Gas (EPNG; aqua-green lines), the ONEOK-operated Roadrunner (orange line), and the Energy Transfer-operated Comanche Trail (brown line). Note that Roadrunner is owned in a 50/50 joint venture between Fermaca and ONEOK, while Comanche Trail is owned by a consortium comprising Carso Group (51%), Mastec (33%) and Energy Transfer (16%). Volumes on these three pipelines have been running around 400 MMcf/d combined, about half of which is delivered to power plants and local distribution companies (LDCs) near the town of Samalayuca, which is just south of the major Northwest Mexico industrial center of Ciudad Juarez. The rest of the gas then flows south toward El Encino, mostly on Fermaca’s Tarahumara Pipeline (yellow line) or on SISTRANGAS (light blue line). In the future, gas from West Texas will also be able to access the Samalayuca-Sasabe Pipeline (dashed purple line).

Before we get to the focus of today’s blog — the El Encino gas hub in the Chihuahua/El Encino area — we should provide an update on the status of the three major Mexican pipeline projects we discussed in Part 1. First, we had previously expected the Carso Group-led Samalayuca-Sasabe project to be completed in 2019, but the developer recently announced that the project is facing delays at 16 locations totaling more than 40 miles. In our view, these delays likely mean that the pipeline won’t be finished until early next year, but at this point, we are just making an educated guess on the start date. As for the series of planned Fermaca-owned pipelines into and through central Mexico — El Encino-La Laguna, La Laguna-Aguascalientes and Villa de Reyes-Aguascalientes-Guadalajara (dashed yellow-and-black lines in Figure 1) — we still expect them to be finished this spring. Then there’s TransCanada and IEnova’s jointly owned Sur de Texas-Tuxpan Pipeline (dashed red line in Gulf of Mexico), which we also expect to be completed this spring, though the developers continue to cite delays in completing the pipeline’s interconnect with the SISTRANGAS pipeline (blue line) near the Altamira LNG terminal (green dot on Mexico’s eastern coast).

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