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U.S. Natural Gas Export Boom Quietly Begins

While many are breathlessly waiting for liquefied natural gas (LNG) exports from the United States to begin in 2015, there’s a natural gas export boom already happening right under the noses of most investors.

I’m talking about rapidly growing gas exports from the United States to our southern neighbor, Mexico. LNG exports, which are travelling via pipeline, are at their highest levels ever and growing.

Soaring Demand South of the Boarder

Mexico’s national energy secretary (SENER) reports that U.S. natural gas exports to Mexico doubled between 2009 and 2013. Exports in 2013 alone averaged 1.8 billion cubic feet (bcf) per day, and SENER predicts that will more than double by 2018 to 3.8 bcf per day.

Citigroup (C) is even more aggressive with its forecast, saying that Mexico will import approximately 5 bcf of U.S. natural gas per day by 2018.

The exact amount will likely depend on how quick Mexico’s new energy revolution unfolds.

The chart below shows Mexico’s projected natural gas imports for the next 25 years. All imports from the United States are expected to steadily rise.

Mexico's Natural Gas Demand Soars: Imports from the United States expected to rise through 2017

The main reason for the uptick in imports is increased demand. Mexico plans to add at least 28 gigawatts of power generating capacity over the next 12 years.

This alone should boost natural gas demand by 5 bcf a day, since Mexico is adding a lot of gas-fired electric generating capacity. The country’s Federal Electricity Commission (CFE), confirms that natural gas will provide 72% of the total electricity generated by the country by 2027.

The New Manufacturing Powerhouse

Mexico’s need for additional power stems from the fact that more and more global manufacturers are moving operations there to take advantage of cheap energy prices. Boston Consulting Group says imports of cheap U.S. shale gas have reduced energy costs for companies in Mexico by 37% over the past decade.

Mexico is now a cheaper manufacturing hub than China!

The auto industry is one major manufacturer taking advantage of this new production environment. Mexico now makes a quarter of all vehicles imported into the United States.

Last year, Daimler AG (DDAIY) and Nissan Motor ADR (NSANY) announced plans to invest $1.4 billion to build compact luxury cars in Mexico. And on August 27, Kia Motors Corporation (KSE) announced a plan to build a $1 billion plant there.

Nissan already opened a $2-billion small-car plant there in 2012.

Many other auto companies are jumping onboard. In the past six months, BMW, Renault, Audi, Honda (HMC), and Mazda (MZDAF) have either begun manufacturing vehicles in Mexico or announced plans to do so.

The Biggest Beneficiary

But it’s not international manufacturers that are set to benefit the most from the natural gas export boom from the United States to Mexico.

The companies that are set to win this race will be the pipeline companies that transport gas from Texas gas fields – mainly the Eagle Ford Shale – to Mexico.

Mexico’s state-owned energy giant, Pemex, is building a $3.3-billion pipeline from the Eagle Ford to Mexico.

Among U.S. companies, Energy Transfer Partners, LP (ETP) recently received approval for an extension to an existing pipeline that will bring 140 million cubic feet of gas into Mexico a day. And the international unit of Sempra Energy (SRE) has a contract in Mexico to construct and operate a $1-billion gas pipeline.

But the biggest beneficiary here is Kinder Morgan (KMI), which already ships most of the gas going to Mexico, either directly or through its subsidiary, El Paso Natural Gas, and its Sierrita pipeline.

The company forecasts that it’ll spend approximately $3 billion over the next 15 years in order to build out the sufficient pipeline capacity to meet Mexico’s growing natural gas needs.

The reason?

KMI believes that Mexico will focus its energy on expanding its oil production instead of natural gas.

If KMI leadership is right, its midstream business in Mexico will be a bright spot for years to come.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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