Border Crossings
How Mexico is benefiting from the North American natural gas glut.
“Nothing is as obnoxious as other people's luck.” – F. Scott Fitzgerald
The price of natural gas in North America got so cheap that it was only a matter of time before something had to give. With front-month contracts recently trading for as low as $1.55 per million BTUs (mmBTUs)—an energy equivalent price of less than $10 per barrel of oil—and production surging into an unusually warm winter, the market was screaming for voluntary reductions. On Monday, the largest producer of natural gas in the US became the latest to yield, announcing a significant pullback from its near-term production plans:
“EQT Corporation (NYSE: EQT) ("EQT" or the "Company") today announced it made the strategic decision to curtail approximately 1 Bcf per day of gross production beginning in late February in response to the current low natural gas price environment resulting from warm winter weather and consequent elevated storage inventories. The Company expects to maintain this curtailment through the month of March and will reassess market conditions thereafter. Curtailments are expected to total approximately 30 to 40 Bcf of net production during the first quarter.”
Price action responded modestly favorably to the news, which came on the heels of a similar move by Chesapeake Energy and others in the sector, posing the question as to whether the bottom is now in for one of the world’s largest and cheapest sources of hydrocarbon fuels:
The production side response to the glut is but one factor in considering how the US natural gas market might correct itself. Analysts must also consider the effect of existing flows into and out of the country. For all the focus on exports via liquefied natural gas (LNG) terminals, there also exist myriad land pipelines connecting the three member countries of the North American Free Trade Agreement (NAFTA) zone, and natural gas volumes exchanged between the US, Canada, and Mexico via these assets are material:
The size of the Mexican relief valve may come as a surprise to some readers. Per an analysis published by RBN News in January titled “Down in Mexico,” there is capacity for further growth (emphasis added throughout):
“With all the talk about U.S. LNG exports and plans for more LNG export capacity, it can be easy to forget that more than 6 Bcf/d of U.S. natural gas — mostly from the Permian and the Eagle Ford — is being piped to Mexico. That’s more than 3X the volumes that were being piped south of the border 10 years ago, a tripling made possible by the buildout of new pipelines from the Agua Dulce and Waha hubs to the Rio Grande and, from there, new pipes within Mexico. And where is all that gas headed? Mostly to new gas-fired power plants and industrial facilities — a handful of new LNG export terminals being planned on that side of the border will only add to the demand…
Taken together, these three [pipeline] corridors have the capacity to pipe more than 11 Bcf/d across the U.S./Mexico border. Given that U.S. gas exports to Mexico averaged 6.2 Bcf/d in the first 10 months of 2023 — and peaked at about 7 Bcf/d in August — there is clearly plenty of room for growth as Mexican gas demand increases and the pipelines transporting gas to those new demand centers come online.”
Mexico serves as a prime example of the Doomberg axiom that energy plays the central role when analyzing an economy. Because of its privileged position within NAFTA, the country has been simultaneously able to gorge on cheap primary energy from the US and directly serve the gigantic US market with the output of its factories. Mix in ready access to affordable labor aided by the urgent rush to friend-shore critical supply chains and the result is an underreported economic boomlet, one that has resulted in solid growth, a strengthening currency, and robust foreign direct investment. These developments have more than overcome Mexico’s well-known domestic challenges. Let’s take a look at the numbers.