Natural Gas Demand - Mexico a Buyer
Posted: Wed Apr 13, 2016 2:14 pm
US-Mexico Gas Industry: LatAm Insight: Link Between US and Mexican Gas Industries Getting Stronger
Nikolaj Lippmann – Morgan Stanley
April 13, 2016 8:23 AM GMT
Expanding Mexican gas demand is a key component of our more bullish view on a medium-/long-term rebalancing of US natural gas markets. Our multi-industry deep dive suggests that this story is broadly unappreciated across sectors.
The Mexican gas demand story is key to rebalancing US gas markets.
The US natural gas market has benefited from a nearly decade-long expansion of shale supplies and improving technology, but today's prices are artificially low as demand has failed to keep up. Indeed, US gas exports to Mexico have played a small role in North American energy balances, though that is set to change. The call on US natural gas exports has the potential to double by 2020 and very roughly triple by 2025, to >6 Bcf/d and ~9 Bcf/d, respectively, driven by a tripling of the US-to-Mexico cross-border capacity, an expanding power and industrial sector in Mexico, and declining domestic gas production in Mexico over the next 5 years.
The expansion of Mexico's gas demand, among other factors, has to potential to return US gas prices to sustainably higher mid-$3 prices longer term. Our proprietary Mexican demand model suggests growth will come in two phases, with increasing upside risks.
Phase 1 will be driven by the rapid expansion of gas-fired electric power capacity by the state-run utility (CFE), combined with the expansion of cross-border and domestic pipeline capacity. Phase 2 (less appreciated) should come from the industrial sector as fuel savings; this is because switching from more expensive feedstock reduces overall electricity costs, similar to what was seen in the US shale gas boom.
All in, additional declines in domestic supply imply that import growth may outpace demand growth over the next decade (we forecast a 6-8% demand CAGR and a 10-13% CAGR for Mexican imports), which may send US exports to Mexico to ~9 Bcf/d by 2025.
Nikolaj Lippmann – Morgan Stanley
April 13, 2016 8:23 AM GMT
Expanding Mexican gas demand is a key component of our more bullish view on a medium-/long-term rebalancing of US natural gas markets. Our multi-industry deep dive suggests that this story is broadly unappreciated across sectors.
The Mexican gas demand story is key to rebalancing US gas markets.
The US natural gas market has benefited from a nearly decade-long expansion of shale supplies and improving technology, but today's prices are artificially low as demand has failed to keep up. Indeed, US gas exports to Mexico have played a small role in North American energy balances, though that is set to change. The call on US natural gas exports has the potential to double by 2020 and very roughly triple by 2025, to >6 Bcf/d and ~9 Bcf/d, respectively, driven by a tripling of the US-to-Mexico cross-border capacity, an expanding power and industrial sector in Mexico, and declining domestic gas production in Mexico over the next 5 years.
The expansion of Mexico's gas demand, among other factors, has to potential to return US gas prices to sustainably higher mid-$3 prices longer term. Our proprietary Mexican demand model suggests growth will come in two phases, with increasing upside risks.
Phase 1 will be driven by the rapid expansion of gas-fired electric power capacity by the state-run utility (CFE), combined with the expansion of cross-border and domestic pipeline capacity. Phase 2 (less appreciated) should come from the industrial sector as fuel savings; this is because switching from more expensive feedstock reduces overall electricity costs, similar to what was seen in the US shale gas boom.
All in, additional declines in domestic supply imply that import growth may outpace demand growth over the next decade (we forecast a 6-8% demand CAGR and a 10-13% CAGR for Mexican imports), which may send US exports to Mexico to ~9 Bcf/d by 2025.