Guest Post: A Surprising New Twist in the U.S. Natural Gas Market

Tyler Durden's picture


Submitted by Keith Schaefer via,

The U.S. natural gas market may be on the verge of a big swing.

And it’s not about the talk of the town, Liquid Natural Gas (LNG).

It's about an unexpected source of natural gas demand:


Mexican imports of U.S. gas have skyrocketed 92% since 2008. And with export capacity projected to grow to over 7 billion cubic feet per day (Bcf/d), Mexico could start taking 10% of U.S. production—in a very short time frame, with very low capital costs compared to the LNG boom unfolding.

There is a lot less risk, and a lot less cost in getting huge natural gas exports to Mexico, compared to LNG—and the volumes may be enough to move margins in the North American market.

At least six new pipeline projects are now on the books, aimed at sending gas southward.

Today, I’ll explain what’s happening now, and what potential impact this extra demand could have on natural gas prices.

To find out, we take a look below at exactly what’s happening in Mexico, what’s getting built, and who’s positioned to take advantage.

The Not-So-Slow Death of a Gas Producer

Mexico used to have a pretty decent gas industry.

Between 1990 and 2008, the nation’s nat gas production grew steadily, nearly doubling over the two decades.

The bulk of this output comes from national oil and gas company Petroleos Mexicanos, or Pemex. With strong natural gas prices between 2003 and 2008, Pemex stepped up its drilling, growing gas production from 4.5 Bcf/d to nearly 7.5 Bcf/d.

But with the collapse in gas prices in early 2008, that changed. Pemex stopped a lot of its gas drilling activity. Instead, the Mexican government made a strategic decision to meet domestic demand by importing now-cheap gas.

Since that time, Pemex’s gas production has fallen steadily, by about 15% from 2008 levels.

The lack of investment in the gas sector has also had a big effect on Mexican reserves. In the late 1990s, the nation had more than 60 Tcf of proven reserves. Today, gas in the ground has fallen off a cliff, with only about 17 Tcf proven reserves remaining.

At the same time as production has been falling, Mexico’s gas demand is ramping up.

Gas consumption across the country has risen 160% since 1990 to 2.36 Tcf per year. Since 2007—while domestic production has been nose-diving—Mexico’s gas use has jumped 16.7%.

Much of the rise in demand has been driven by fuel-switching. In 2000, only 20% of Mexican power generation was fueled by natural gas. But by 2007, nat gas use increased to account for 50% of power output. Largely displacing oil-fired generation.

On the back of this rising demand, Mexico’s natural gas supply-demand balance is—for the first-time ever—near deficit. Current gas usage amounts to nearly 6.5 Bcf/d, and Pemex is now producing less than that.

The Switch is On

Faced with a supply short-fall, Mexican nat gas imports have been on a tear.

Between 2003 and 2007, Mexico was bringing in between 350 and 400 Bcf a year of imported gas. But since gas got cheap in 2008, imports have jumped 92%. Total imports hit 767 Bcf in 2012.

Overall, imported gas now accounts for about 30% of total Mexican supply. The majority coming through pipeline feed from the U.S. Only about 20% is supplied via LNG.

Mexico is now importing about 2.1 Bcf/d. Or about 3% of total U.S. gas production. Numbers that are starting to get significant.

The really interesting part of this story is the growth potential.

The switch from oil- to gas-fired power generation is continuing across Mexico. Just this month, gas infrastructure providers GDF SUEZ Mexico and GE Energy Financial Services announced they will extend their Mayakan pipeline into the Yucatan Peninsula—underpinned by a 300 MMcf/d gas-supply contract with Mexican electric utility CFE, who are switching power plants in the Yucatan to gas generation.

A slate of other gas-fired projects are on the books, particularly in northern Mexico. Overall, the nation is looking to add 28 gigawatts of new generating capacity. With all this activity, the national Secretaría de Energía forecasts that Mexican gas demand will grow 3.3% annually through 2016.

The Northern Natural Gas Neighbour

For gas-hungry Mexico, the collapse of U.S. natural gas prices couldn’t have been better-timed.

Cheap nat gas from abundant shale production in the southern states has provided a ready source of imports. What’s more, a good deal of pipeline infrastructure is already in place. This pipe used to bring Mexican gas to U.S. consumers—but increasingly flows have been reversed to feed Mexico’s demand.
Mexican purchases of U.S. gas have been driven by pricing. Between 2000 and 2004—with low nat gas prices prevailing—Mexico’s imports from the U.S. jumped 10-fold, from 4 Bcf per month to 40 Bcf per month.

Import growth slacked off with the high prices of 2005 through 2008. But as of 2010, imports are on the rise again. In March 2010, Mexico imported 20.7 Bcf. By October 2012, imports hit a record 60.5 Bcf.

The numbers imply that Mexico’s peak demand for U.S. gas is currently something like 1.95 Bcf/d. And there’s room for that to grow. Total U.S. export capacity to Mexico was estimated at 3.8 Bcf/d in 2012.

The really interesting thing is that some of the biggest players in U.S. gas transmission are betting Mexican demand will rise well beyond current export capacity.

Major pipeline operator El Paso Natural Gas recently commissioned an expansion of export capacity at its Wilcox Lateral transmission site at the eastern Arizona/Mexico border. The upgrade added 0.185 Bcf/d of gas throughput.

At least five other similar projects are on the books across Arizona and Texas. All told, these could add up to 3.3 Bcf/d of additional gas export capacity to Mexico. Taking total capacity to more than 7 Bcf/d.

What Does This Mean for Natural Gas Prices?

The question then becomes: what would increased exports mean for gas prices?

At current peak demand levels of 1.95 Bcf/d, Mexico is taking about 3% of total marketed U.S. gas (about 69 Bcf/d as of March 2013).

There is some evidence that this demand is already pushing up prices.

In 2012, Mexican buyers of U.S. gas paid an average of $2.94/Mcf. Considerably higher than the price at many trading hubs near in the southern U.S.

Mexican export prices were 7.3% higher than the average Henry Hub price for 2012. The premium to U.S. hubs near the Mexican border was even larger. Exported gas prices were 8.9% higher than 2012 average prices at Houston Ship Channel, Texas. And 10.5% higher than the El Paso Permian hub on the Texas/New Mexico border.

It thus appears that Mexican consumers are willing to pay more than U.S. buyers to secure supply—the marginal price is higher in that region.

And that’s at today’s export levels. If existing export capacity of 3.8 Bcf/d is filled as Mexico takes more gas, we’re talking about 5.5% of U.S. production heading south. And if currently-slated expansion projects come online on top of that, we could see over 10% of current U.S. supply going to Mexico. Then the marginal buyer could impact prices outside that region.

All in, Mexico could create an extra 5 bcf/d demand in the coming three years. As context, an extra 5 bcf/d demand from the power sector in 2012 sent natural gas prices doubling in the US from $2-$4/mcf in one year.

This story was written by Dave Forest, contributing editor to Oil & Gas Investments Bulletin

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Thu, 07/04/2013 - 21:07 | 3722522 FieldingMellish
FieldingMellish's picture

Thanks to the miracle of modern finance, commodities are now completely unnecessary. Everything can be cured by continuously supplying the world with more reserve currency which magically only ever goes up in value. Carry on.

Thu, 07/04/2013 - 23:45 | 3722756 WayBehind
WayBehind's picture

As they do in California, they will sell it back to us at even higher prices.

Fri, 07/05/2013 - 03:37 | 3722881 LetThemEatRand
LetThemEatRand's picture

And thanks to the government (backed by the US military) Skilling is out in a few years.  And Corzine is free.  And Goldman Sachs' executives are richer.  Happy Fucking Independence Day.

Fri, 07/05/2013 - 07:11 | 3722953 Bearhug Bernanke
Bearhug Bernanke's picture

Yeah, but at least we nailed Martha Stewart for insider trading! That'll show 'em (who's above the law and who isn't)!

Thu, 07/04/2013 - 21:17 | 3722534 Handful of Dust
Handful of Dust's picture

Wasn't UNG over $100/share at gas' peak?

Thu, 07/04/2013 - 21:38 | 3722566 El Oregonian
El Oregonian's picture

All the gas our politicians are burping out? Priceless...

Thu, 07/04/2013 - 22:25 | 3722625 mofreedom
mofreedom's picture

the mexicans get our nat gas at market and we get their pinto bean farters and have to pay for all their shit at jacked up gub prices...

Thu, 07/04/2013 - 23:08 | 3722703 mofreedom
mofreedom's picture

fine, they want our gas they take all the illegal aliens back, period.

Thu, 07/04/2013 - 23:27 | 3722724 merizobeach
merizobeach's picture

Good luck affording fruits and vegetables without Mexicans in the fields harvesting them.  Good luck affording dinner at a restaurant without Mexicans in the kitchen.  Good luck affording your landscaping without Mexicans bundled up in the blasting summer heat.  Etc.  Get the point, you racist cock?

Thu, 07/04/2013 - 23:35 | 3722737 mofreedom
mofreedom's picture

seasonal laborers can stay when kids can bus your dishes...i do all my own cock sucker.

Fri, 07/05/2013 - 01:13 | 3722829 MisterMousePotato
MisterMousePotato's picture

@ merizobeach

This carnard? Again? Really?

It's probably been about 15 years now, but a real study was done concerning field labor costs as a percentage of the cost of produce by (I think it was at USC, but wherever it was, it was no hotbed of conservatism, that I do recall).

Field labor, it turns out, is about 15% of the cost of your head of lettuce. And field laborers are not paid as little as what most people seem to think. In fact, from personal experience in the orange groves of Florida several decades ago, I know for a fact that it can actually pay pretty damn well if one is willing to work, if not all that hard, at least pretty hard and pretty diligently for more hours than, oh, say, your average government employee puts in.

Accordingly, one could double the pay of field labor to $20-30 an hour, and your head of lettuce would go up about fifteen cents.

In fact, the study went on to conclude that, before we would all be subjected to the dreaded Five Dollar A Head lettuce, field labor wages would have to rise to $500 an hour or thereabouts (literally).

In other words, it's pretty damn obvious that there is some room here to increase wages, here in America, for Americans, without making lettuce or strawberries unaffordable.

For that matter, someone point out to me why it would be horrible to allow field labor wages to rise. To $20 an hour or $30 or whatever? All of a sudden, there'd be a glut of good paying jobs here in the Central Valley of California. That's bad? Well, sure. It'll mean that your socks or your lettuce are going to cost ten or twenty cents more. So what? At least compared to the pathologies associated with illegal immigration? Or taxpayers picking up the tab for making that labor life sustaining?

Well, Americans are lazy and etc. Mexicans work hard. Right?

About ten years ago (right around the time of George Bush's amnesty push), there was an article in The Wall Street Journal, I think it was, that went into some detail about a [nursery in California, I think it was] where, every April, a slew of Mexicans arrived (legally) to work until November or thereabouts. They lived in barracks type accomodations provided by the company and were paid $12 an hour.

Now, I'd be the first to admit that that doesn't sound particularly appealing. (Perhaps I'd feel differently if I or my family were starving, but we're not.)

However, in the article, they interviewed a few of the Mexican field hands, and one of them was a little surprised, saying, "Are you kidding? This is great. I can make more money here in a day than I can make in a week back home [(in Mexico)]."

See what the problem is? We pay Americans $12 an hour, but we pay the Mexicans - what? - $80 an hour?

For $80 an hour, I'll live in a barracks and pick strawberries like a motherfucker. All day long.

And for that kinda dough, I guarantee you that I would have no problem filling the bus with enthusiastic and grateful workers no matter where I went ... the parking lot of Beverly Hills High School or the EBT line on Michigan Avenue in Detroit.

In other words, it's not just that we pay Mexicans more than we pay Americans, we pay them so much more that they are incentivized to work hard.

If you really think Mexicans work harder than Americans (well, *certain* Americans, anyway) in any sort of abstract sense, well, first off compare and contrast the two countries. Too, I'd bet my life that 'an American' is no more inclined to sit in the shade and drink cervasas than a Mexican. Considering the word "siesta," and its origins, one might even wonder if Mexicans might even be more predisposed thus.

Fri, 07/05/2013 - 01:34 | 3722844 Freddie
Freddie's picture

Thank you.

Fri, 07/05/2013 - 03:15 | 3722863 Simplifiedfrisbee
Simplifiedfrisbee's picture

"Many people get degrees and educate themselves straight into stupidity." It is a fact that none of us are excluded from error. Good that we all agree. Now, regarding this article, for one to conclude that these "barracks" are actually named labor housing or labor camps, one would have to experience California. So experience it for yourself, by taking a trip to these seasonal labor locations so to understand how "truthful" certain parts of the referenced article were. Furthermore, these well furnished and well maintained camps far exceed the living standards of those who inhabit them seasonally because of American housing standards and the inferior Mexican housing standards. Mexico is extremely rich in natural resources and has some of the most fertile land in the entire world, but lacks in so many other regards. Huge lacking. Cmon, China is competing with Mexico in cheap labor wars. So it is no surprise that the laborer was extremely enthused of working the vines seasonally while having an air conditioner and newer accommodations. That worker poses no threat, financially, to the "true" American worker. Heck, all the ranchers I have ever met welcome hard working folks. Problem is, they can not find them "sons of bitches" around as easily any more. According to them they have "gotten fat off of mom's tities." "They ain't worth a shit but to ask for money and hang out with their friends." Race matters diddly squat. It is the output they look for. More output, more harvest, more money. Regarding the hourly wages garnered, the "working effort" in many work areas have dropped significantly. We have gotten lazier as Americans. Admit to it, so to possibly change it! I'm behind a computer as you are. I have seen it first hand! Most work forces today have routine zombie environments that facilitate more of the workers lacking than talent. Most of us are over priviladged, wining people who exclude our culpability. Easily we point the finger however. Our work force is mentally inferior to withstand pruning a vineyard, pruning an Orange orchard or picking pomegranates. In my opinion, today's generation can not psychologically cope being with their own thoughts while attending a living organism because of the desolation that technology has brought to our culture. The ego is far too entitled and it translates today. Americans are awesome. Mexicans are awesome. Zimbabweans are awesome. Even South Africans can ride along. I simply can not allow such ignorance to manifest itself because of the economic implications regarding time and output.

Fri, 07/05/2013 - 06:39 | 3722930 sherryw
sherryw's picture

Paragraphing makes it more readable.

Fri, 07/05/2013 - 08:57 | 3723189 Bobbyrib
Bobbyrib's picture

What bullshit. If the 1% can pay someone $12 an hour, they will not pay an American $20 to do the same job. Those ranchers are full of shit.

Fri, 07/05/2013 - 01:29 | 3722840 Freddie
Freddie's picture

LOL! You idiot. That is the John McCain pro-amnesty speech about $10 lettuce and other BS. Pushed by big business whore like McDonalds, Big Ag, Yum (Taco Bell dog food house).

Hire American kids and other people. Maybe pay them .50 cents more an hour and you might get better American workers.

Fri, 07/05/2013 - 08:37 | 3723098 Doowleb
Doowleb's picture

What race are Mexicans again?

In Canada we send them back home after the harvest.

Thu, 07/04/2013 - 23:31 | 3722729 mofreedom
mofreedom's picture

what about illegal don't you understand.

the current illegal doesn't want to be legal and have to pay taxes.

the current illegal doesn't want more illegals to come in and further depress wages.

go to a naturalization ceremony, you won't see one person there from mexico.


Fri, 07/05/2013 - 03:08 | 3722869 MisterMousePotato
MisterMousePotato's picture

My curiousity piqued by this comment, I went and looked up the official statistics and figures.

And, you know what?

mofreedom is right. 2009 - 2011 (latest figures I could find) showed naturalizations were 15%, 10%, and 13% for Mexicans.

Fri, 07/05/2013 - 03:19 | 3722872 Simplifiedfrisbee
Simplifiedfrisbee's picture

The ego will be your demise. Refrain from being guided by such thoughts. Far more worthy it is to look up and pray.

Thu, 07/04/2013 - 21:19 | 3722535 espirit
espirit's picture

Nat gas used to be the ace-in-the-hole for a post peak oil future, but...

since we're going to ship it all southward and beyond to economies that have transitioned to it's effective utilization, we get what we get when all the fossils run out.

No future planning = no future.

Thu, 07/04/2013 - 21:56 | 3722589 ISEEIT
ISEEIT's picture

My name is Eyore?

Evil, forwardist... 'thinking?' = Their version of the future.

Not mine.

Peak oil is shit.

Mankind's excuse won't be that easy.

The wall isn't ability, the 'wall' is fiction.

We need energy.

They need us not to have it.

Hence the 'transparency' of this regime.....


If it's this obvious today?


Next thing ya 'know' Captain Kirk will be in your face saying "wake-up"...

Spock is getting ready to explain this shit!


Thu, 07/04/2013 - 22:02 | 3722594 CPL
CPL's picture

<fingers snapping as applause>

That cat sure ain't square.

Thu, 07/04/2013 - 22:47 | 3722669 BigJim
BigJim's picture

Man's got some serious shit, knowimsayin?

Thu, 07/04/2013 - 21:23 | 3722543 adr
adr's picture

Another reason to add massive export tariffs and fuck over the garbage country sending an invasion army to tale over America.

I get to pay more to heat my home so some fucking Mexican drug lord can have power for his operation.

The most likely case is probably related to the auto manufacturers and tech companies setting up shop in Mexico. They need a lot of power and infrastructure.

Thu, 07/04/2013 - 21:37 | 3722564 tip e. canoe
tip e. canoe's picture

solution : ween your home off natgas ASAP.

Thu, 07/04/2013 - 22:19 | 3722621 tip e. canoe
tip e. canoe's picture

keep junkin bitchez

you know i'm right

Fri, 07/05/2013 - 09:12 | 3723250 marathonman
marathonman's picture

Mexicans became drug lords because we idiots believed that the War on Drugs was a good idea.  It's prohibition economics all over.  Want to kill off the Mexican drug lords?  Quit the War on Drugs!  Watch the price drop and all those drug lords business implode.  You might have a few more crack heads, but at least they won't have to knock over your house or car-jack you to afford their habit.

Thu, 07/04/2013 - 21:25 | 3722544 AGuy
AGuy's picture

"Nat gas used to be the ace-in-the-hole for a post peak oil future, but..."

It never was, NatGas is Local in the sense its difficuilt to ship oversea (ie LNG). NatGat prices are likely to rise as drilling for NatGas is now none existant and Shale gas well have a very short life of about 18 months. With Obama and the EPA forcing the closure of at least 15 GW of Coal fired power plants by 2015 its very likely that NatGas prices will double, triple or quadruple in the next five years.



Thu, 07/04/2013 - 21:29 | 3722553 FieldingMellish
FieldingMellish's picture

Thankfully, energy is not considered a "core" part of CPI. Even if it was, we could always hedonically substitute it out for iPads.

Thu, 07/04/2013 - 21:52 | 3722585 Poor Grogman
Poor Grogman's picture

Now you are catching on.

Stop worrying, and start borrowing,* fiat money for everyone at a super low introductory rate of .002%

Would you like a lolly little girl?

*my own work!

Fri, 07/05/2013 - 00:32 | 3722807 LongBallsShortBrains
LongBallsShortBrains's picture

I'd like my lolly licked, little girl

Fri, 07/05/2013 - 01:23 | 3722836 cpzimmon
cpzimmon's picture

I knew somebody would say it.

Thu, 07/04/2013 - 22:50 | 3722674 Jim in MN
Jim in MN's picture

You just use the app with a video of a little blue flame, and like cook and heat in the winter with it.  iEnergy!

Fri, 07/05/2013 - 06:36 | 3722928 sherryw
sherryw's picture

I was in a restaurant not of my choosing last week and on all four sides of a post in the middle were four large video screens of a fire burning! True! I walked close by it but there was no warmth.........

Thu, 07/04/2013 - 22:27 | 3722627 nflux
nflux's picture

I believe that 18 months is the point where the average production is 50% of the orginial. with around 8% declines annually after that. Total productive life of a well is around 7-8 years on average.

Fri, 07/05/2013 - 09:15 | 3723263 AGuy
AGuy's picture

"I believe that 18 months is the point where the average production is 50% of the orginial."

Nope, after about a year production declines to about 50% after 18 months production drops by 80% to 95%. They can refrack the well to stimulate production but is still less than 50% of the original production rate. Fracking is about 90% hype and marketing and about 10% of real production. FWIW: Fracking is literally squeezing oil and gas from a stone.

Here is one article that I found about depletion rate I found with a quick google search

" the depletion rate on fracking wells is 63-85 percent in the first year, according to Dave Hughes of the Geological Survey of Canada."

Fri, 07/05/2013 - 10:50 | 3723644 WallowaMountainMan
WallowaMountainMan's picture

true cost of fracking can be measured by comparing the amount of energy it takes to recover from sea water the amount of water lost to gain an equivalent amount of energy from fracking.


Thu, 07/04/2013 - 22:43 | 3722658 firstdivision
firstdivision's picture

You do realize that Obama only said new regulations are needed as a way to boost donations from energy companies to the democratic party. In other news, the neighbor to the north has wised up on which team will win

Fri, 07/05/2013 - 01:18 | 3722834 MisterMousePotato
MisterMousePotato's picture

Democrat Party, not "democratic." Big difference. Common mistake.

Fri, 07/05/2013 - 01:29 | 3722839 Bloodstock
Bloodstock's picture

Demon-rat party. They are demon rats!

Fri, 07/05/2013 - 07:48 | 3722991 granolageek
granolageek's picture

It's not Obama, it's Adam Smith.

Combined cycle plants, that weren't perfected till the 90s are just as efficient as coal, and a whole lot cheaper. Unless coal is predictably a lot cheaper than gas, which it has not been, also since the 90s, utility capex will be on gas. 

We're 20 years into a 40 year depreciation cycle. No wonder coal is butt-hurt.

Fri, 07/05/2013 - 11:18 | 3723719 AGuy
AGuy's picture

NatGas is too important to use for electricity production. NatGas is the only economical resource for many petro chemicals, such as fertializer, plastics and industrial chemicals (Nitric Acid, etc). Nat gas is also very useful for commericial heating especially in big cities.



Thu, 07/04/2013 - 21:31 | 3722555 samsara
samsara's picture

That's's what happens when your petroleum production goes into terminal decline. Like the US, Like the UK, et al.

Mexico ( which had the 3rd largest oil we'll in the world. Cantarell) went into decline,

How ironic, weren't we importing like 15% of our Nat Gas From Canada(which was 50% of their production?

Fri, 07/05/2013 - 01:04 | 3722821 MikeMcGspot
MikeMcGspot's picture

It does not matter that wells go into decline, there is an infinate number of new ones to replace the old. Ray Kurizwiel says pretty soon energy won't matter, moores law will take over. the law of entrophy will be broken in the trans human age.

We will all be safe.


Thu, 07/04/2013 - 21:33 | 3722557 Seasmoke
Seasmoke's picture

I switched from Oil to NG to heat my home 6 years ago. Fucking Mexico better not mess it up.

Thu, 07/04/2013 - 21:33 | 3722559 Mr. Hudson
Mr. Hudson's picture

: "Mexicans used to have a pretty decent gas"

It's because they used to soak their beans in water overnight before cooking them.

Thu, 07/04/2013 - 22:52 | 3722678 Jim in MN
Jim in MN's picture

You need to go see more Carlos Mencia shows to upgrade your racism, dude. 

Thu, 07/04/2013 - 21:55 | 3722563 earleflorida
earleflorida's picture

Keep the Government out of 'Free Market Enterprise'?... and/or-- is the 'Greenie-agenda', behind the 2.0 Arab Spring?!    Mar. 29, 2012  

Note: [worthy?] China is weaning the coal industry off of the power grid?! In a big push for alternates: hydropower, nuclear power, solar/electric panels, and natural-gas/ fracking-shaleGas and Thermal/Wave&Tidal energy... not to forget light-water Nuke-Thorium Reactors modules.

funny how the clusterfuck congress and k-street have set america back by a century or so--- where catching-up means we've got too kill moar nations off to prove our bravado!!! like a brainless bully that finally gets outwitted by a nerd in a chess-pit? 

Thu, 07/04/2013 - 21:40 | 3722570 eddiebe
eddiebe's picture

Smart for Mexico to import their energy and send us pesos. They are learning.

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