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Mexico’s Natural Gas Production Expected To Increase

By: Jude Clemente

October 25, 2016

Mexico Natural Gas

The catalyst for Mexico’s historic 2013 Energy Reforms was the 2004 peaking of the Cantarell oil field in the Gulf of Mexico, once responsible for over half of Mexico’s energy production and the second largest oil field in the world. The subsequent production collapse has devastated because oil sales for Pemex, Mexico’s eight-decade-old energy monopoly, have traditionally constituted more than a third of the federal government’s budget.

In short, Pemex lacks the technical expertise and money to reverse its own decline. As is true for most energy monopolies, revenues are typically not re-invested in future production but siphoned off to pay for more social programs. Mexico’s reforms will critically allow for more foreign energy investment, and major forecasting bodies predict domestic production will significantly increase.

Although 85% of domestic hydrocarbon output has been oil, Mexico’s natural gas outlook is of increasing interest. Gas accounts for 60% of Mexico’s electricity generation, and since 2010 imports from the U.S. have more than quadrupled to nearly 4 Bcf/d. Pipeline capacity from the U.S. is projected to more than double to 15 Bcf/d by 2020 – far more than anticipated imports.

Since 2010, Mexico’s gas production has fallen 20% to about 1.5 Tcf a year. The EIA, however, estimates that Mexico is sixth globally with 545 Tcf of technically recoverable shale gas, the center being an extension of the highly successful Eagle Ford play in south Texas that runs down into northeastern Mexico.

Mexico’s reforms, however, will need time to make a material difference. Oil and gas companies are contracting, not expanding, in today’s historically low price environment.  This is especially relevant for Mexico since shale development is more expensive than conventional development. Mexico requires many more experimental wells and can more easily import cheap gas from the U.S.

In addition, Mexico’s gas resources have not been explored as fully as those in the rest of North America, so there is great uncertainty surrounding their true size and potential. And Mexico’s northeast is turf of Los Zetas, the country’s most brutal drug cartel that kidnaps, kills, and rakes in billions by illegally tapping into state-owned pipelines.

Yet, there are encouraging signs that Mexico’s gas production will significantly increase post-2020. After all, the point of the energy reforms was to tie Mexico’s energy future to its own domestic production, not outside suppliers. Helping as well, gas import prices from the U.S. are sure to eventually increase as the U.S. market consumes and exports more.  

Opening up Mexico’s energy sector has already led to nearly $25 billion in investment commitments from international oil companies. Shale acreage could be auctioned off as soon as second quarter 2017.

Ultimately, Mexico’s latent gas demand potential is what has everybody interested. Production opportunities are considerable due to rapid economic growth, an ongoing manufacturing revival, and a switch from petroleum to gas-fired power generation. On average, Mexicans still consume just 1/6 of the electricity that Americans do. Given more influence by the energy reform, gas consumption for private and independently operated power plants, for instance, is expected to increase 8% per year.

Indeed, as market conditions continually improve, the survivors of the Texas shale downturn will be turning more of their attention to fast-growing Mexico. Some 25 pipeline projects worth $12 billion will be completed in the country by 2025. Mexico’s gas pipeline system is expected to extend nearly 90% by 2018 alone, helped along by less environmental regulation and public opposition than faced in Canada or the U.S.

Looking forward, the EIA projects that Mexico’s gas output will increase by about 3% per year, compared to just 1% for both the U.S. and Canada. Considering the small baseline though, Mexico’s absolute incremental growth in gas production will not be huge but still a very solid reversal from what was previously expected.  

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