Another month just means further delays in Mexico, with the pipeline projects we monitor signalling yet more hold ups. For 2019, we have cut our outlook for net imports from the US to only a 0.3 bcf/d increase y/y at 4.8 bcf/d to reflect these delays, which stem primarily from prior consultation issues related to indigenous and collective ownership rights. The issues we are tracking downstream of both South Texas and West Texas, lead us to our more conservative net import outlook. For the remainder of this injection season we forecast Mexican imports from the US to average 4.6 bcf/d (+0.3 bcf/d y/y), peaking at 4.7 bcf/d in the peak summer months, which is unchanged from last month. LNG takes will continue to backfill gas demand averaging 0.8 bcf/d (+0.1 bcf/d y/y) through the season.
Our outlook for net Mexican imports this injection season uses a business-as-usual scenario, with current cross-border flows of 4.4-4.5 bcf/d growing seasonally to near 4.7 bcf/d in the peak cooling season, with limited upside due to infrastructure delays. Pent-up demand for gas will be satisfied through LNG imports. According to cargo-tracking data from Kpler, LNG takes in May are pegged at 0.8 bcf/d, 0.3 bcf/d higher y/y, with five of the seven cargoes originating from Sabine Pass. Domestic production remains in decline with time-lagged data from SENER showing output down by 0.4 bcf/d y/y to 2.8 bcf/d in March. Partially offsetting this decline was reduced gas flaring, reported at just 0.2 bcf/d, the lowest level since at least 2013.
Looking beyond summer to the heating season, we forecast cross-border pipeline flows to average 4.7 bcf/d (+0.3 bcf/d y/y) as some domestic pipeline capacity becomes operational, namely the Nueva Era system, slated to become operational in November 2018 and allow an increase in cross-border flows this winter, as well as Texas-Tuxpan, which TransCanada and IEnova have publicly stated will be online by late Q4 18. However, as we detail below, ramp-up of these pipes could easily be limited due to ongoing delays to infrastructure downstream of these additions. We see LNG imports at 0.1 bcf/d (+0.1 bcf/d) through the heating season. The wild card for 2019 remains how natural gas will be back-filled, particularly given our outlook on low fuel oil price. Indeed, for a time, fuel oil could displace gas burn in the electric power sector.
El Encino-La Laguna
SENER’s latest infrastructure update this month says the pipe was completed in March, with some market chatter also suggesting it is physically complete. However, there remains uncertainty here, with several local sources in the State of Durango having reported that environmental disputes have delayed construction works. Nevertheless, we maintain our view that we need to see a fairly high capacity utilisation on the pipe to help provide relief to Permian gas. We currently expect the project to become operational by December.
The 1.5 bcf/d pipeline is divided into two phases. The first runs from El Encino to Delicias in Chihuahua State and the second starts in Delicias and ends in Lerdo, Durango state. It is in the municipalities of Lerdo and Gomez Palacios in Durango that environmental issues have been reported. The project is set to cross the Sierra del Sarnoso mountain range, which is considered a protected natural area. While the local community and environmental organisations have sought legal counsel on how to halt works, the Mexican Secretariat of Environment and Natural Resources (SEMARNAT) confirmed in mid-May that the project’s second phase has all necessary permits and its trajectory will go through a pre-existing mountain path that does not affect flora or fauna. Local news reports that the Energy Secretariat’s study also points out the pipeline’s route does not cross any protected natural area and the machinery being used is light in order not to damage the surroundings. We consider construction works to now be underway in Durango and through the Lerdo and Gomez Palacios municipalities—we think that market chatter refers to the first phase of the pipe being completed in this area, rather than the full project.
The 1.2 bcf/d pipeline will feed gas from El Encino–La Laguna project and we expect it to become operational in December.
According to local reports however, construction works in the municipalities of Santiaguillo and Panuco, Zacatecas State, have been blocked by the members of the local ejidos (land collectives) and are applying to the National Agrarian Registry (RAN) to have the works halted until land and consultation issues are resolved, although at the time of writing there has been no news on this from RAN. The ejidos claim that construction works have been undertaken on their land without prior notice or the necessary documentation and have requested reforestation of the affected areas or monetary compensation. Local ejido representatives met on 30 April with GDI Sicim Pipeli, the company undertaking construction, but no agreement was reached. As of 5 May, the town hall of Fresnillo in the Zacatecas State, had notified the company that it will need reach an agreement with the local ejidos directly in order to be able to carry out the works.
The 0.9 bcf/d line will feed gas from the 2.6 bcf/d offshore South Texas–Tuxpan pipeline and is expected to become operational in Q4 19. However, as we have reported previously, works on Tuxpan-Tula are currently halted following a court ruling due to ‘right of path’ issues. This issue has become yet more complicated, as authorities in Puebla have begun an investigation into allegations that public officials falsified the signatures of local community leaders in the states of Puebla and Hidalgo in a bid to have the above court injunction lifted. While there is still time for Tuxpan-Tula to meet its slated Q4 19 start-up date, ongoing legal issues are beginning to cast doubt on this, particularly given that the terrain that this pipe must transverse is more difficult than many other recent pipeline additions as it will cross the mountain ridges of Otomi-Tepehua in the State of Hidalgo.
Tula-Villa de Reyes
The 0.9 bcf/d Tula-Villa de Reyes pipeline is set to connect to the Tuxpan–Tula pipeline to the east and to the existing 0.6 bcf/d Tamazunchale and the under-development 0.9 bcf/d Villa de Reyes–Aguascalientes–Guadalajara pipe to the west. We expect Tula-Villa de Reyes to become operational in December, but there are headwinds here.
The project, which is 90% completed according to the developer TransCanada, has been halted by Mexico’s National Institute of Anthropology and History (INAH) due to archaeological findings on the pipe’s route. INAH says works cannot resume until all 60 archaeological sites found in the area have been classified. As of 19 April, it has been reported that only 5 of the 60 sites have so far been classified by the INAH, with TransCanada looking to recruit a team of at least 20 archaeologists to speed up INAH’s task completion. This puts at further risk a timely December 2018 completion.
Pajaritos FSRU update
At the end of 2017, CFE and Pemex announced plans to place in service an FSRU at the port of Pajaritos, in Coatzacoalcos (Veracruz) towards the end of 2018 or start of 2019. We reported last month of a spare FSRU completed by Hoegh, initially planned for the Penco-Lirquen LNG import terminal in Chile. As the Chilean LNG terminal has now been delayed to 2021 there was reports of ongoing negotiations to temporarily relocate the vessel to a different project, making Mexico an obvious candidate. However, earlier this month reports emerged of China’s CNOOC chartering the 5 Mt vessel in question for this upcoming winter. Further to that, CFE announced this month it will no longer take part in the Pajaritos FSRU project as the expected start-up of pipeline projects such as the 2.6 bcf/d South Texas-Tuxpan no longer made it of interest. While Pemex is still involved in the project, and the more recent revision to SENER’s five-year plan included pipeline additions to access the FSRU, CFE’s departure from the tender, and its delay well beyond the original schedule, make it look unlikely.