Over the past week, Mexican pipeline imports have finally begun to trend at 4.4-4.5 bcf/d, which is more or less in line with summer peaks. Meanwhile, higher LNG takes have persisted as Mexico looks to overcome downstream congestion problems and meet demand. According to preliminary ship-tracking data from Kpler, LNG imports in November should stand at 0.7 bcf/d, 0.1 bcf/d higher y/y, while October imports stood 0.2 bcf/d higher y/y at 0.8 bcf/d. For both months, LNG imports from Sabine Pass made up roughly 50% of Mexico’s total LNG haul. We expect higher LNG takes until the new wave of domestic pipeline additions come online, ramp-up and debottleneck current congestion. Of course, pipeline project delays are an ongoing risk. Given the recent high levels of LNG takes, we have raised our LNG imports expectations higher by 0.1 bcf/d y/y to 0.6 bcf/d for this heating season. This figure assumes that the recent run-rate of cross-border trade in the near 4.5 bcf/d range holds.
The release of official Mexican statistics for September shed light on the demand losses from both the hurricanes and earthquake that struck Mexico during the month, severely affecting the country’s power sector and Pemex’s refining and production activities. These losses translated into a 0.6 bcf/d (7%) y/y drop in total gas demand to 7.6 bcf/d. Our modelled power sector gas demand, which includes figures reported by government agencies and implied demand for independent power producers, showed a 0.3 bcf/d drop in power sector gas demand to 3.9 bcf/d over September.
The data reported by the Federal Electricity Commission (CFE) represents only a portion of total power generation, but the breakdown of its statistics nonetheless highlights the broader trends in the power markets and the crosscurrents of various fuel usages. CFE total power demand shrank by 0.7 TWh (3%) as total loads were dented by the earthquake and hurricanes. Gas-fired generation declined the most, by 1.1 TWh y/y to 11.3 TWh, with CFE reporting a 0.7 bcf/d y/y fall in gas use to 0.7 bcf/d. The slack from this sector had to be picked up by other sources of generation. A lack of gas storage in the country intensified the impact on gas supply of the August hurricane Harvey. As a result, steam generation, mostly fuel oil, increased by 0.2 TWh (7%). Hydro generation increased by 0.6 TWh (21%) y/y, while nuclear power generation declined by 0.4 TWh (42%) y/y on planned maintenance. Prior to these disruptions, gas-fired generation demand through June and July expanded by 0.3 bcf/d y/y on average and we anticipate it will grow by 0.4 bcf/d y/y this heating season.
Pemex refinery runs during September plummeted to their lowest since 1990 as maintenance was moved forward following several hurricanes. The country’s largest refinery, Salina Cruz, was offline between June and October after various natural disasters damaged the facility, propelling Pemex’s own gas use 0.1 bcf/d lower y/y to 1.9 bcf/d. Through June to September, Pemex gas demand declined by an average of 0.2 bcf/d, almost double last year’s decline over the same period, inflated by these major disruptions. However, Pemex’s own use is on track to decline by 0.1 bcf/d y/y in 2017, following similar annualised losses in 2015 and 2016. For the remainder of the heating season, our model indicates a y/y loss in line with recent levels, as we expect a slight recovery in refining operations from November.
Gas production woes increase the need to complete pipeline projects
While domestic gas production has been consistently declining since at least 2015 due to the mature nature of Mexico’s fields, gas output in September tumbled further due to hurricanes. Reported gross non-associated gas production stabilised near 1 bcf/d based on the latest SENER data, although gross associated gas production stepped down by 1.2 bcf/d y/y to 3.3 bcf/d, in line with crude output declines. Crude hit a new record low of 1.73 mb/d in September, surpassing the 1.9 mb/d clocked in October 1995. The largest decline came from the Ku-Maloob-Zaap field as output fell by 0.15 mb/d y/y to 0.7 mb/d, due to maintenance and hurricane disruptions. Given maintenance disruptions, which cut oil output by some 20% in September, and steadying levels of non-associated production, there appears to be a disconnect as the reported series of dry total production only showed a relatively minor 0.3 bcf/d y/y fall. For September, we have not used the SENER series of dry production and instead have adjusted the data to indicate a production decline of 0.7 bcf/d y/y.
While production has declined, part of the fall is being cushioned by reductions in gas flaring volumes, which fell towards 0.2 bcf/d in August and September vs 0.3 bcf/d in June and July. The change is even more substantial on a y/y basis, with flaring in August and September 2016 around 0.7 bcf/d. The reduction in flared gas has effectively propped up supply by 0.5 bcf/d y/y without any new drilling.
In our forecasts, we currently expect a 0.5 bcf/d y/y decline in Mexico’s total production in 2017 owing to a lack of investment by Pemex and the mature nature of its producing fields, and for 2018 to stay broadly flat y/y. During the current heating season, we see a total production decline of 0.2 bcf/d y/y.
Infrastructure delays continue
In the meantime, pipeline exports from the US can only fill so much of the gap as infrastructure projects continue to experience delays, which is a recurring problem for Mexico. While the 1.5 bcf/d El Encino–La Laguna pipe has recently been confirmed to us for an end-December start date, tie-in projects south of that pipe will not be online for several more months at the current rate of progress. The next stretch of pipe following El Encino–La Laguna is the 1.2 bcf/d La Laguna–Aguascalientes, which has been delayed to a July 2018 start-up from the initial date of January 2018. Anecdotally, the 0.89 bcf/d Villa de Reyes–Aguascalientes–Guadalajara pipe, which would feed gas from La Laguna–Aguascalientes, could be delayed until October 2018 from its initial January 2018 start-up date.
While the more southern portions of pipelines tied into the El Encino-La Laguna project remain delayed (and further slippage cannot be ruled out), its relatively large size (1.5 bcf/d), and its connectivity to Waha should at least help to pull some gas from the region versus the relatively minor volumes seen on a time-lagged basis from the EIA once the pipe comes online. The most recent data point for August indicates 0.07 bcf/d being pulled from an interconnect at San Elizario, TX, representing very minimal usage of the new cross-border capacity, which came online in H1 17 and draws gas from the Permian Basin.
During this heating season, the 0.89 bcf/d Tula-Villa de Reyes pipeline is set for start-up in March 2018, although permitting issues we have reported last month call this date into question. Right-of-path issues delaying the Tuxpan-Tula offshore section threaten its timely completion too. The 0.67 bcf/d El Encino–Topolobamo pipeline is expected to become fully operational in March 2018 after it launched at 0.46 bcf/d partial capacity recently. Again, assuming a timely completion, this should help to pull more gas from Waha into central Mexico.
The 0.46 bcf/d Samalayuca–Sasabe pipeline, initially due to start in April 2018, has now been delayed to October 2018 on reports that the progress in construction is only 36% as of early November. The offshore Texas-Tuxpan pipeline has also run into problems as construction has been halted due to potential disruption to the local fishing communities. Construction of the pipeline currently stands at 50% complete and is expected to resume in early 2018 according to local sources, which would push its start date no earlier than year-end 2018.
We continue to forecast that cross-border pipeline flows will expand by 0.6 bcf/d y/y this heating season. While delays on pipeline infrastructure loom as a risk, we assume a level nearing 4.6 bcf/d, marginally higher than peak flows this summer. Considering the recent uptake in LNG imports, we have revised our forecasts for this heating season, with LNG takes now 0.1 bcf/d higher y/y compared to the 0.2 bcf/d decline we had previously forecast.
For this heating season, we expect a 0.4 bcf/d y/y increase in power generation, but the extent of this growth is dependent on the timely completion of domestic pipelines and power projects. Last month, we reported on the 770 MW Empalme I CCGT, which began its testing period in September, being temporarily shut down due to permitting issues. There remains no news of a resolution to this situation.