In July, the much-awaited 0.7 bcf/d El Encino-Topolobampo and 0.5 bcf/d Nueva Era pipelines are set to come online, but delays to pipe connections within Mexico have led us to maintain our outlook for cooling season peak net exports to Mexico in the range of 4.7-4.8 bcf/d. We continue to have concerns about a possible lack of demand downstream as a number of greenfield CCGT projects tied to El Encino-Topolobampo and Nueva Era are only expected to start operations in 2019-20. We forecast cross-border flows to average 4.6 bcf/d (+0.4 bcf/d y/y) this injection season and for that clip to be maintained in the upcoming withdrawal season, unchanged from our forecast last month. Fuel oil and LNG sendout will continue to supplement pipeline flows. We forecast Mexican LNG takes to average 0.8 bcf/d (+0.1 bcf/d y/y) in both this injection and upcoming withdrawal season.
The Mexican peak cooling season is currently underway, but in a nod to the current constraints on the system and downstream infrastructure delays, net pipeline exports have not moved out of the 4.4-4.5 bcf/d range, a range which has persisted on a monthly basis since November. It is continual downstream delays to pipelines and power plant capacity additions that lead to our conservative outlook on cross-border trade, although we expect a 0.4 bcf/d y/y uplift in the peak cooling season on a moderate ramp-up in flows on new pipelines.
The continual business-as-usual pipeline trade has happened concurrently with new records on Mexican peak power demand. The country’s power system operator CENACE announced a new historical high was reached for power generation on 6 June. According to cargo-tracking data from Kpler, June LNG takes so far stand at 0.9 bcf/d, mostly in-line y/y. Slower LNG imports may hint at some backfill for power demand being picked up by fuel oil substitution in the electric sector, especially given LNG netbacks are more attractive for cargoes to head to Asia. Unfortunately, ‘power generation by source’ statistics previously provided by SENER have been discontinued since December and therefore official confirmation of Mexico’s power mix makeup is unavailable at the moment.
El Encino-Topolobampo and the Nueva Era pipes are expected to enter operations next month. However, it is unclear how much pent-up demand there is, or how timely a ramp-up will be on these two pipelines, as detailed below. We remain conservative on our expectations for cross-border pipeline flows as pipeline additions downstream outside of these two projects are only expected to become operational towards the end of 2018, further delays cannot be ruled out, and the next major wave of new CCGT capacity is not expected online until H2 19. For the whole of 2019, we forecast flows into Mexico to average 5.0 bcf/d (+0.4 bcf/d y/y). However, if capacity utilization of new infrastructure surprised to the upside, an upward revision would be necessary.
Will this be the start of Mexico’s nueva gas era?
The much-awaited 0.7 bcf/d El Encino-Topolobampo pipeline, initially scheduled to become operational in July 2016, is now expected to be completed in July. Market chatter has indicated only a mile or so of pipeline north of Topolobampo remains to be completed. The pipe will connect upstream with the 0.85 bcf/d Tarahumara and 1.3 bcf/d Ojinaga–El Encino pipelines and downstream at El Oro with the 0.2 bcf/d El Oro–Mazatlan pipe. Local news outlets reported Gas Natural Fenosa, which is in charge of the gas interconnections in the city of Mazatlan in the state of Sinaloa, to have named the first five communities to receive gas to be Esperanza, Benito Juarez, Fraccionamiento del Bosque and Villa de Galaxia. Fenosa also commented that around 1,500 clients have been contracted for the services and there are around 6 miles (10km) of gas connections in place.
However, its immediate impact on cross-border pipeline flows might be limited. Greenfield CCGT projects that are set to feed gas from the line are only expected to start operations in late 2018 or early 2019 for the 890 MW Topolobampo II CCGT and 2020 for the 777 MW Topolobampo III CCGT. Until then, demand will depend on two converted oil-to-gas thermal power plants—the 320 MW Juan De Dios Batiz Paredes (Topolobampo I), which is set to feed gas from El Encino-Topolobampo, and the 300 MW Jose Aceves Pozos, which connects to the El Oro-Mazatlan pipe. Assuming a 100% utilisation rate, both plants combined would consume a little over 0.1 bcf/d, which is unlikely to lead to considerable growth in cross-border pipeline flows in the short-term.
The 0.5 bcf/d Nueva Era pipeline system is now expected to become operational in July. The pipe was initially set to become operational in June 2017, but was held up due to construction delays related to the Mexican portion of the pipeline, Midstream de Mexico. Howard Energy reported in early June that it had started injections to the pipeline several weeks earlier. The system is expected to feed the Monterrey II and Monterrey III CCGTs. Gas feeding these plants will be redirected to Nueva Era from SISTRANGAS and does not necessarily represent new demand, but rather a transfer from one system to the other. However, new gas demand will come from the converted oil-to-gas thermal power plant 621 MW Huinala and the currently under construction 850 MW Noreste CCGT, scheduled to begin operations in July, which together could burn as much as 0.2 bcf/d at a 100% utilisation rate. The currently-under-construction 870 MW El Carmen CCGT, which will also feed from the Nueva Era system, is only to be completed in September 2019.
El Encino-La Laguna
Local news outlets have reported construction works have paused on a lateral pipeline constructed by Gas Natural del Noroeste (GNN), which is set to go through the Dinamita community in Gomez Palacio, Durango state. This is part of the 1.5 bcf/d El Encino-La Laguna pipeline’s second phase, which runs from Delicias into Lerdo, in Durango state. Works were halted due to a legal injunction on 28 May by a federal judge on concerns of the lateral’s trajectory through a projected nature area, Sierra del Sarnoso. It is currently unclear if the lateral in question is to feed the oil-to-gas 320 MW Guadalupe Victoria thermal power plant in Ciudad Juarez, near Gomez Palacio.
The 0.9 bcf/d Tuxpan-Tula line will feed gas from the 2.6 bcf/d offshore South Texas–Tuxpan pipeline and is expected to become operational in Q4 19. Last month, we mentioned that 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 current court injunction, which has halted construction works, lifted. News outlets have reported this month that representatives of the indigenous communities of Puebla have reported TransCanada and the local government to the UN for actions such as corruption and violence against indigenous peoples.
So far, the project works seem to be halted due the court ruling, which puts at risk its Q4 19 deadline for start-up.