In Part I of this series, we saw how
Mexican demand for U.S. gas exports
has surged by 92% over the last 5 years. And with proposed new
export projects slated to take up to 10% of U.S. production, Mexico
could be the surprise driver of marginal demand and gas prices.
Part II: Who is Poised to Benefit from the "Mexico
But this Mexican export boom does have some intrigue - complete
with hastily formed shell companies and mysterious partners - that
could become a risk to this mega trend about to happen… I'll get to
those in a moment.
But first, where exactly will supply for growing Mexican exports
- up to 7 Bcf/d based on current projections - come from?
The answer, in short, is the Eagle Ford.
The chart below shows gas exports from the 14 U.S. exit points
that serve Mexican markets. There are a few export points in
California and Arizona, but the majority are in Texas.
(Click to enlarge)
There are three geographic clusters of exit points in Texas - in
the west near El Paso, the southwest near Rio Bravo, and the south
near Roma. Of these, the southern export terminals - shown in
purple - have by far seen the largest growth in Mexican exports
over the last few years.
Exports from south Texas exit points have grown by 600%, or 240
Bcf/year, since 2009. At the same time, exports from all other U.S.
exit points have increased by only 15%, or 43.5 Bcf/year.
The south Texas exits draw gas mainly from the Eagle Ford shale
play, the southernmost of all the major shale gas basins in
(Click to enlarge)
The Eagle Ford is also an obvious choice to supply more gas to
Mexico. The play is seeing some of the fastest production growth
amongst U.S. shale basins. (The only other basin that's growing at
the same pace is the Marcellus. But that play is located in exactly
the wrong place - the northeast States - to provide Mexican
South Texas and the Eagle Ford also benefit from infrastructure
on the Mexican side. Pemex pipelines here are some of the only ones
in northern Mexico that currently have excess transport capacity.
Other pipelines across the border from Arizona and California are
more than 90% full.
For all these reasons, planned export expansion projects are
mostly aimed at south Texas. Of the 3.3 Bcf/d in expansion capacity
currently planned or being built, 2.4 Bcf/d - about 75% - is
centered on south Texas exit points, and Eagle Ford gas.
(Click to enlarge)
Another 0.6 Bcf/d in increased capacity is planned for west
Texas. Gas for these projects will likely be supplied by the
Does this mean producers in the Permian and Eagle Ford are a
screaming buy? In theory, increased exports should be good for most
southern U.S. producers. The gas grid is pretty well connected
between producing centers. So increasing prices spurred by growing
Mexican demand should transfer across the region.
That said, price dislocations do happen - when gas can't move
fast enough to a high-demand region. This is part of the reason why
gas prices in the northeastern States averaged 42% higher than
Henry Hub in 2012.
If gas shipping does bottleneck as Mexican exports grow,
near-at-hand producers in the Eagle Ford and Permian could find
themselves best positioned to reap higher prices.
Gas-weighted Eagle Ford producers include Energy Transfer
), DCP Midstream Partners, L.P. (
), NuStar Energy, L.P. (
), Southcross Energy Partners, L.P. (
), Pioneer (
) and EOG Resources (EOG).
But Wait a Minute…
All of the above is a big plus for the U.S. gas market - and
particularly for producers near Mexico. Assuming it goes as
There are however, a few possible wrinkles that investors should
keep an eye on.
The good news is that demand for increased exports looks to be
strong. At the "Wilcox Lateral" expansion project in Arizona,
operator El Paso Natural Gas has already pre-sold its increased
pipeline capacity to two Mexican consumers. Other export projects
are also getting "reservation" deals, with Mexican buyers paying up
front to reserve gas output from the beefed-up pipelines.
So what could go wrong?
The biggest obstacles are regulatory. So far, the Federal Energy
Regulatory Commission has been pretty good about moving export
expansion projects smoothly through permitting. But other groups in
the U.S. may be setting up to make the process more difficult.
Power generators, for one. In early June, Calpine Energy
Services - the subsidiary of gas-fired power operator Calpine Corp.
(CPN) that secures fuel supplies for the company's plants - filed a
Motion to Intervene in the permitting of the Eagle Ford export
expansion project in south Texas.
In the motion, Calpine cites concerns that the company's "terms
and conditions for natural gas service… may be affected." No other
details are given, but it's a safe bet the company is concerned
about increased Mexican exports driving up prices of its currently
cheap natural gas supply.
This could be the set-up for a battle between gas exporters and
domestic consumers. The former looking for higher prices, the
latter trying to keepnatural gas more affordable. You can bet those
old axes "national interest" and "domestic security" are going to
get trotted out.
Calpine has likely chosen the Eagle Ford project because it's by
far the largest export expansion on the books. But the project also
has a few other oddities that make it notable.
The project operator is NET Midstream, a major player in
pipeline infrastructure for the Eagle Ford shale.
However, when NET applied for its export expansion in May 2013,
it didn't submit the application directly from head office.
Instead, it created a new subsidiary - NET Mexico Pipeline Partners
- to make the submission.
Here's the really strange part: NET formed the subsidiary just
three days prior to submitting the application. Why such haste to
create a new vehicle for a project that must have been in planning
for months or even years?
The application document gives a clue. Buried in the boilerplate
text is this brief note:
"NET Mexico's ownership is expected to change in the near
future to reflect the addition of a new minority equity member,
MGI Enterprises USA, LLC ("MGI Enterprises"). MGI Enterprises is
a newly-formed indirect subsidiary of Pemex Gas y Petroquímica
Básica, a Decentralized Public Organism of the United Mexican
States ("Pemex Gas"). Pemex Gas is a subsidiary of Petroleos
Mexicanos, the Mexican state-owned petroleum company
It thus appears that NET is intent on bringing in
state-controlled Pemex as part owner of the Eagle Ford export
Digging deeper into the filing, it seems the ownership juggling
is being done - perhaps hastily - so NET can avoid time-consuming
permitting. The application notes that Pemex will "use its existing
Department of Energy/Office of Fossil Energy blanket authorization
to export the natural gas."
If Pemex becomes an owner and uses its existing export
authorization to get gas out of the country, it saves the American
owners a lot of hassle. Right now, NET Midstream is not an
international exporter. If they shouldered the project alone, they
would need to apply for their own export authorization. An onerous
All of this makes sense from a business point of view. But it
will be interesting to see how regulators take it if a foreign,
government-controlled firm tries to buy ownership in U.S. pipeline
These issues could delay or even de-rail the massive Eagle Ford
expansion. Given that this project accounts for nearly two-thirds
of planned new export capacity, it's critical to watch proceedings
here. The fate of the "Mexican export boom" may hinge on it.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Business relationship disclosure:
The Oil and Gas Investments Bulletin is a team of writers. This
article was written by Dave Forest, one of our contributing
authors. We did not receive compensation for this article, and we
have no business relationship with any company whose stock is
mentioned in this article. The author of this article has no
positions in any stocks mentioned, and no plans to initiate any
positions within the next 72 hours.
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