Summary
- Natural gas pipeline exports from the US to Mexico have increased significantly as Mexican demand grew and production declined.
- Several LNG export projects are currently being developed that will source US-produced gas and could add nearly 1 billion cubic feet per day (Bcf/d) to demand by the end of 2026.
- Midstream companies have invested in natural gas pipelines to the border and are well-positioned to capture continued growth.
As Mexico’s demand for natural gas has grown, so has its reliance on supply from the United States. Exports from the US to Mexico have increased significantly over the last decade. Demand growth has stemmed mainly from domestic power consumption but will increasingly be driven by exports of liquefied natural gas (LNG). Midstream companies have invested in pipelines to Mexico and are likely to see incremental growth opportunities from rising exports. Today’s note looks at Mexico’s growing demand for US natural gas and the midstream companies playing a supporting role in meeting that demand.
Mexico’s Nascent LNG Industry Augments Demand Growth
Mexico has imported increasing volumes of natural gas from the US as its own production has declined and demand has grown. Much of the demand growth has stemmed from Mexico’s electric power sector, with domestic demand increasing from 6.5 billion cubic feet per day (Bcf/d) to 8.4 Bcf/d between 2010 and 2022.
Since 2016, Mexico’s domestic gas production declined from over 4 Bcf/d to below 3 Bcf/d, while imports from the US rose from 3.7 Bcf/d on average to 6.2 Bcf/d in 2023. Pipeline exports from the US to Mexico reached a monthly record high in August 2023 at almost 6.9 Bcf/d. Exports to Mexico tend to rise during the summer months when electricity demand spikes for air conditioning.
Future demand growth could be augmented by an emerging LNG export industry, with just under 1 Bcf/d of liquefaction capacity sourcing US natural gas expected to come online by the end of 2026. New Fortress Energy (NFE) is developing a Fast LNG project in Altamira. The floating LNG facility is Mexico’s first LNG project and will source gas from the US via the Sur de Texas pipeline owned by TC Energy (TRP CN) and IEnova, a Mexican infrastructure company. On the west coast, Sempra Energy (SRE) is constructing Phase 1 of the Energia Costa Azul (ECA) terminal in Baja California, Mexico, which will have 0.4 Bcf/d of LNG export capacity. Phase 1 is expected to be in service by mid-2025. ECA is expected to source US gas via TRP’s recently expanded North Baja pipeline system.
Additional LNG export projects are under development but have not yet reached a final investment decision (i.e., the point at which the developer has secured financing and commits to move forward with the project). Mexico Pacific is developing Saguaro LNG, a 2 Bcf/d LNG facility that would source its gas from the Permian basin. SRE is also developing ECA Phase 2 and Vista Pacifico LNG, which would add around 0.84 Bcf/d to demand growth if completed. Similar to LNG projects in British Columbia, Saguaro, ECA, and Vista Pacifico benefit from easier shipping routes to Asia and avoid issues related to the Panama Canal (read more).
Which Midstream Companies are Positioned to Benefit?
Midstream companies have invested in natural gas pipelines to Mexico to meet demand, which has grown steadily over the last decade. Recently, Kinder Morgan (KMI) acquired STX Midstream assets from NextEra Energy Partners for $1.8 billion. The deal included the NET Mexico gas pipeline connecting the Agua Dulce hub in South Texas to the border. NET Mexico’s 2.2 Bcf/d capacity is a significant portion of current export capacity to Mexico. Outside of NET Mexico, KMI also has ownership in the El Paso, Sierrita, and Mier-Monterrey gas pipelines that connect to the border. KMI expects US natural gas exports to Mexico to increase by 3 Bcf/d by 2030.
Energy Transfer (ET) also owns significant pipeline capacity from the US to Mexico. In 2017, ET completed the Trans Pecos and Comanche Trail pipelines, which have a combined capacity of 2.5 Bcf/d. These lines connect the Waha gas hub in West Texas to Mexico. During its 3Q23 earnings call, ET management said there was unused capacity in those pipelines.
Available line capacity creates potential operating leverage for midstream companies. In other words, KMI and ET could see volume growth (and therefore additional revenues) without incurring additional costs. KMI is currently in discussions to transport an additional 0.34 Bcf/d to Mexico on its existing pipelines.
Meanwhile, ONEOK (OKE) has proposed the Saguaro Connector Pipeline, a 2.8 Bcf/d pipeline from Waha to the border. Gas from the pipeline is intended to be transported to the Saguaro LNG project, which will likely need to reach FID in order for the pipeline to move forward. OKE also owns the Roadrunner Gas Transmission pipeline with up to 0.57 Bcf/d of gas transport capacity to Mexico.
Growing demand in Mexico and ample supply in the US contribute to a constructive long-term outlook for US natural gas pipeline exports. KMI, TRP, OKE, and ET are constituents of the Alerian Midstream Energy Select Index (AMEI), and KMI, SRE, and NFE are constituents of the Alerian Liquefied Natural Gas Index (ALNGX).
Bottom Line:
As growing LNG export capacity contributes to growing demand, Mexico is expected to continue importing increasing amounts of US-produced natural gas with midstream companies playing a vital role in connecting US gas supply with demand in Mexico.
Related Research:
Midstream Positions for Ballooning U.S. LNG Exports
Canadian LNG Projects Advance to Meet Asian Demand
Global LNG Market Poised for Long-Term Growth
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