With two new pipelines entering service in June (Nueva Era and El Encinco-Topolobampo), U.S. piped gas to Mexico has been soaring to all-time highs.  Exports to our southern neighbor have recently surpassed 5 Bcf per day (Bcf/d), more than 10% above the 4.5 Bcf/d ceiling seen in previous months.  Approximately 75% of shipments to Mexico flow from South Texas, mostly sourced from the Eagle Ford shale play.

Yet, there are even more opportunities for Mexico to import U.S. natural gas on the horizon.  For example, Mexico’s intake from West Texas, home to the low-cost Permian Basin shale play, has been well below its potential.  Long delays in connecting pipelines on the Mexican side of the border have left pipeline capacity underutilized.  There is actually 12 Bcf/d of capacity waiting to supply Mexico with U.S. gas, or more than double what the country is currently importing.

Most of the delay has been in Mexico itself.  As environmental and indigenous rights groups continue to push back on new builds more than expected, some pipeline connections in Mexico have been delayed by a year or more from their original expected in-service dates.  Additionally, the goal to better link the U.S. and Mexico has been slowed by pipeline builders not receiving the exemptions they seek from the Trump administration’s tariffs on imported steel.

Looking forward, Mexico will need increasing supplies of natural gas.  The pipeline bottleneck within Mexico has forced it to become the largest buyer of U.S. LNG, taking in around 20% of all shipments.  LNG imports from the U.S., however, cost nearly 80% more than gas that gets piped in, a major problem for a country where half the people live in poverty.

Still, the lacking domestic pipeline system now has Mexico building its 4^th LNG import facility as more north-to-south pipe connections are required within Mexico to lower LNG imports.  The good news is that imports from the U.S. are surely coming.  The recent start-up of two major pipelines between the countries will be joined by four to six additional pipelines that are expected to begin commercial operations by the end of the year.

Yet, despite being lauded by the International Energy Agency as a model for other countries looking to deregulate, Mexico’s newly elected President Andrés Manuel López Obrador (AMLO), who takes office December 1st and will serve one six-year term, and his incoming cabinet picks have been vocal critics of the 2013 Energy Reforms – a transformative plan to allow large-scale foreign investments in the country’s energy sector for the first time.

Moreover, AMLO has indicated that he will “ban fracking.”  Although this shale gas extraction technique hasn’t yet been a significant source of domestic supply, Mexico does have an EIA-reported 545 trillion cubic feet of gas available for fracking, previously expected to be produced in material volumes in the mid-2020s.  AMLO has also now suspended oil auctions in the country for at least two years, another nationalist decision that will simply increase reliance on the U.S.  A newly signed preliminary trade deal, however, will help ensure that the energy flows between Mexico and the U.S. remain strong.

For Mexico, with or without new domestic shale gas production, the growth in natural gas demand will be significant.  Today, although it has 40% of the population that the U.S. has, Mexico consumes just 10% of the gas. The fact that natural gas emits 50% less CO2 than coal and 30% less than oil, and the ability of gas to help back-up intermittent wind and solar generation, makes natural gas the favored go-to fuel in the climate change fight. In fact, gas now supplies 60% of the country’s electricity generation. And a widening focus on manufacturing to grow the economy and the goal to increase household access will significantly increase the need for electricity.  Per capita, for instance, Mexico consumes just a third of the power that other OECD members do.

As for the U.S., exports to Mexico will remain a critical baseload gas demand market.  To illustrate the importance, without the Mexican outlet, U.S. gas supplies could become oversupplied, potentially driving prices lower.  Exports to the country are expected to reach over 6 Bcf/d next year, or around 7% of total U.S. gas production, with even more coming after that.