Investing in Mexico Natural Gas Imports

Brian Hicks

Written By Brian Hicks

Posted May 28, 2013

Information from the U.S. Energy Information Administration revealed a 21 percent increase of natural gas imports from Mexico in 2011 and 2012. Mexico imported 2.1 billion cubic feet per day of natural gas in 2012, with U.S. imports accounting for 1.7 bcfd of that 2.1 figure.

Within the confines of U.S. exports, Mexico has had a 24 percent import surge in 2011.

Mexico imports 80 percent of its natural gas from its neighbor to the north, and trends indicate that import demand in Mexico will go up in the coming years.

Liquefied natural gas (LNG) totaled .4 bcfd in 2012 – comprising 20 percent of total natural gas imports in Mexico.

Mexico’s energy expansion mostly stems from its robust industrial sector, which has largely benefited from NAFTA. And many multinational corporations prefer to send their jobs to Mexico over China because of its low property prices and educated worker base.

Mexico is also taking advantage of lower natural gas prices in the United States.

If purchasing patterns from Mexico continue to rise, it may give a boost to U.S. natural gas producers who have suffered from higher production costs and low domestic prices.

And companies will not have to worry about stringent regulations from the Department of Energy because of Mexico’s free trade agreement with the United States.

Mexican Energy Growth

Mexico’s economy has grown exponentially in the past decade – giving rise to a healthy and thriving middle class.

While we hear of Mexico’s desperate poverty through the illegal immigration debate, Mexico is becoming a largely middle class nation through higher earnings, education and lower birth rates.

One good way to follow energy trends in developing nations is to keep track of manufacturing and middle class growth. And it won’t be difficult since the two are usually intertwined. Higher incomes in developing nations will mean greater demand for washing machines, dryers, TVs and other household goods that will consume more electricity.

Manufacturing plants also need natural gas to power their factories and forge new products.

We’ve already seen these things happen in developing nations like China and India, which is why LNG imports have a much higher price in Asia.

But Mexico is looking to gain its own energy independence, and in order for that to happen there will need to be major overhauls at the national level.

It is enshrined in Mexico’s constitution to restrict foreign ownership of natural resources.

To improve Mexico’s oil production, officials may introduce amendments this year to allow foreign investment.

But there are hurdles.

From Delaware Online:

“Lifting the restrictions on foreign oil companies through a constitutional amendment would require a two-thirds majority in Congress and more than half of the country’s state governors to sign off. Peña Nieto is expected to face considerable political wrangling from the powerful oil workers union, left-leaning lawmakers and interests groups, which are content with their slice of the status quo, even as overall production has slipped.”

A drilling boom and production boom is not far-fetched, since the nation has the fourth largest natural gas reserves in the world.

But state-run oil and gas company Pemex is not exactly known for its efficiency and stellar drilling practices. The company has also been depleted of assets due to government divestment of funds – much in the same way Hugo Chavez drained Venezuela’s state-run oil company PDVSA.

Also, the Mexican government currently places greater emphasis on producing more oil.

For now at least, Mexicans will continue rely on natural gas imports from the U.S., and Texas is one state to keep an eye on – particularly South Texas. Mexico has already increased imports directly from Texas, and this trend will likely increase in the near future.

Eagle Ford Natural Gas

Mexicans have imported 60 percent of their natural gas needs from Texas, and the Eagle Ford has been a key area.

If you’re a person interested in South Texas drilling, then you already know about the wonders the shale play is doing to the local economy.

The formation is attracting so many workers to such an extent where parts of South Texas are undergoing housing shortages.

Stretching horizontally into East Texas, the Eagle Ford has layers of crude in the north followed by wet and dry gas in the southern counties.

Some natural gas-rich counties include Karnes, Gonzales and Dewitt.

$800 million in local revenue and $374 million of state revenue can be traced back to South Texas petroleum production.

Eagle Ford drillers deal with less regulation, when compared to other sites like the Marcellus in the northeast, and a lucrative investment atmosphere for energy companies.

Eagle Ford could attract $28 billion of investment capital in 2013 – not only rivaling any other formation in the country, but making the shale formation the largest developmental project in the world!

One energy company in Eagle Ford to keep on your radar is Chesapeake Energy (NYSE: CHK). Aside from the Eagle Ford shale, Chesapeake has operations in the Barnett of Central Texas and the Haynesville in East Texas. Not only does the company have specialty in U.S. natural gas, but their new CEO Robert Douglas Lawler could turn things around after a turbulent few years under former CEO and founder Aubrey McClendon.

Exxon Mobil (NYSE: XOM), the largest natural gas producer in the U.S. and centered in Texas, has been active in Eagle Ford and has doubled down on natural gas since acquiring Texas-based XTO energy. Exxon also signed a five-year non-commercial agreement with Pemex for training in drilling, exploration and hydrocarbon storage. President Enrique Pena Nieto is hoping to improve Pemex efficiency to spur more drilling and production. Exxon Mobil will get no compensation from the agreement, because of Mexico’s constitutional restrictions, but it will form business ties that could be helpful as natural gas imports rise.

Midstream Partners (NYSE: MMP) of Houston has plans of constructing a 124-mile pipeline for natural gas transportation from the Eagle Ford to Mexico. The pipeline is part of a plan to supply more natural gas to power systems and manufacturing centers in Mexico. Midstream also has two other pipelines in the Eagle Ford.

Venturing further into non-free trade markets would be a game-changer for the natural gas sector, but there is too much politicking at play for that to happen any time soon. And expansion into non-FTA countries could lead to Mexico buying fewer imports in the future. For now, natural gas producers in the U.S. will have to count their blessings and look south of the border for growing natural gas demand.

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