US-Mexico cross-border flows are largely flat y/y in July, sitting in the 4.4-4.5 bcf/d range despite new pipeline capacity—the 0.5 bcf/d Nueva Era and 0.7 bcf/d El Encino–Topolobampo—entering service, as initial downstream demand appears limited due to delays to CCGTs currently being built. Pipeline supply capacity continues to be supplemented by imports of LNG in July, which totalled a whopping 1.2 bcf/d (+0.5 bcf/d y/y), the highest level since October 2014. For the injection season as whole, we expect LNG takes at 0.9 bcf/d (+0.2 bcf/d y/y) and cross-border flows to expand to 4.6 bcf/d on average. For the upcoming heating season, we peg cross-border flows at 4.7 bcf/d (+0.3 bcf/d y/y) and LNG takes at 0.7 bcf/d (flat y/y). Looking further ahead into the 2019 injection season, we forecast that pipeline imports will average 5.0 bcf/d (+0.1 bcf/d y/y) as limited demand downstream on major power infrastructure delays, will cap any further growth.
Net Mexican pipeline imports in July are on track to average 4.4-4.5 bcf/d, nearly flat y/y. This is despite the 0.7 bcf/d El Encino-Topolobampo pipeline becoming operational this month. We expect initial utilisation of the pipeline to remain low given that major CCGT projects that will take gas from the pipe are still under construction (for details, see our E-mail alert: Mexican El Encino-Topolobampo gas pipe starts up but initial downstream demand limited, 19 July 2018). Given the dearth of intrastate pipeline reporting in Texas, coverage on flows from West Texas into El Encino–Topolobampo via Ojinaga–El Encino is limited. However, based on what we can monitor, pipeline flows from Ojinaga–El Encino to El Encino–Topolobampo appear jumpy, with some days hitting as high as 52 mmcf/d. TransCanada Mexico postings reveal flows of 76 mmcf/d on average from El Encino to Mazatlan, through El Encino–Topolobampo and El Oro–Mazatlan pipelines. While CFE has indicated it expects the El Encino–Topolobampo pipeline to flow at a rate of 0.3 bcf/d in Q3 18 and ramp up to 0.5 bcf/d in Q4 18, we currently only expect up to 0.1-0.2 bcf/d of flows through Q3 18–Q4 18 because of the aforementioned demand limits downstream.
The 0.5 bcf/d Nueva Era pipeline also became commercially operational this month, but it is reportedly only taking linepack gas for now. Howard has stated it will issue more details on its project in the coming weeks. The system is expected to feed four CCGTs, including the operational 471 MW Monterrey II and 1.0 GW Monterrey III (Dulces Nombres), which will be switching from the SISTRANGAS system to the Nueva Era pipeline for supply and thus do not represent new gas demand. In January 2019, the under-construction 850 MW Escobedo (Noreste) CCGT is set to start up, with the 870 MW El Carmen CCGT due online in September 2019. Assuming both operate at 60% utilisation, each will add 85 mmcf/d of demand. As such, we only expect partial capacity utilization of the Nueva Era system in Q4 18.
While the pipeline bottlenecks continue, LNG imports will backfill gas demand in central Mexican consumption hubs. Mexico’s LNG imports are on track to total 1.2 bcf/d in July, according to preliminary Kpler cargo-tracking data, which is a 0.5 bcf/d increase y/y. Higher temperatures in July helped spur cooling demand, with CDDs 5% higher y/y. Some of the CCGT power plants that the Altamira LNG terminal feeds are the 1.1 GW Altamira V, 495 MW Tuxpan V and 1.2 GW Tamazunchale, while the Manzanillo LNG terminal feeds the 1.5 GW Manzanillo (General Manuel Alvarez Moreno) CCGT.
Tender your optimism?
On 17 July, a CFE subsidiary released a request for offers (RFO) for a three-year supply deal at the Trans-Pecos Waha header. The supply is set to start between 1 October and 1 November and the requested volumes are for 0.13–0.15 bcf/d in Q4 18, 0.2-0.3 bcf/d in Q1 19, 0.6-0.9 bcf/d in Q2 19 to Q4 19, and 0.95–1.15 bcf/d in 2020 and 2021.
These requested volumes appear to assume that the capacity on Mexican downstream pipes, including El Encino–Topolobampo, El Encino–La Laguna, La Laguna–Aguascalientes and other additions targeting West Texas supply – will be grown into over time.
The 1.5 bcf/d El Encino-La Laguna, 1.2 bcf/d La Laguna–Aguascalientes, 0.9 bcf/d Villa de Reyes–Aguascalientes–Guadalajara and 0.9 bcf/d Villa de Reyes–Tula (also known as Huasteca) are scheduled to become operational by year-end. SENER’s latest infrastructure update lists the El Encino-La Laguna system as operational since March 2018, but local news outlets have reported that only phase 1—which runs from El Encino to Delicias—has been be completed. Following reports that construction works have paused on a lateral pipeline on phase 2—which starts in Delicias and ends in Lerdo—on concerns of the pipeline’s trajectory through a projected nature area, we currently expect the project to become operational by December. The pipeline will feed two thermal power plants converted to burn gas instead of fuel oil—the 316 MW Francisco Villa in Delicias and the 320 MW Guadalupe Victoria in Lerdo—which would add a combined 64 mmcf/d of gas demand at a 50% utilisation rate. The system is also expected to connect to the under-construction 957 MW Norte IV CCGT, expected to come online this December (95 mmcf/d of demand assuming a 60% utilisation rate). The 0.9 bcf/d Villa de Reyes-Aguascalientes-Guadalajara will feed the already operational 480 MW Norte Durango CCGT. However, this connection should not be a source of additional demand as it currently connects to the SISTRANGAS system but will switch to the new pipeline once completed.
Looking forward, the impact of IMO 2020 shipping fuel rules is a risk to some downstream power sector gas demand in Mexico. Given compliance with IMO 2020 will grow from H2 19, we anticipate weakness in fuel oil prices. In the past, when fuel oil prices have weakened perceptibly or gas has been unavailable, we have noted a step up in Mexican fuel oil burn. Thus far in 2018, SENER has stopped releasing statistics on power generation by fuel type, but as highlighted by this month’s incredibly high LNG import number, higher-priced LNG, in comparison to pipeline gas, has been backfilling demand. From H2 19 onwards we expect that, where possible, fuel oil-to-gas conversions could substitute back to fuel oil if the liquid falls to a discount to natural gas. We consider substitution with fuel oil to be a risk to LNG imports from then onwards, where the system has enough interconnections to substitute one another.
|Fig 1: Selected CCGTs under construction|
|Source: Company websites, various, SENER, Bloomberg, Energy Aspects|