Mexico Fracking Decision Opportunity for U.S. and Marcellus Producers

Tom Shepstone
Shepstone Management Company, Inc.

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A Mexico fracking decision by its new even more socialist government promises hardship for them but opportunity for the U.S. and Marcellus producers.

Mexico made a fateful decision to go further down the socialist path with its recent election, one that will ultimately lead to results not unlike Venezuela and still more illegal immigration to the United States. The new leadership, in fact, has already made a decision  not to pursue a Mexico fracking revolution. This is sad in the sense it may be one of the best economic opportunities the country could ever have and would allow Mexico to pull itself up by its own bootstraps. Yet, it will mean an unparalleled opportunity for us to supply them with the gas Mexico needs even as it embarks on its downhill socialist slide.

The Mexico fracking decision, which may be temporary if the nation later regains its mind, was discussed in an OilPrice.com article earlier this month:

…President-elect Andres Manuel Lopez Obrador said last week,“We will no longer use that method to extract petroleum.”

…The Energy Information Administration (EIA) estimated in 2013 that Mexico has unproved but technically recoverable shale gas resources of 545.2 trillion cubic feet. Most of this, around 343 trillion cubic feet plus about 6.3 billion barrels of oil (half of the total shale oil resource base), is located in the Burgos Basin, which is connected to the Eagle Ford shale play in Texas and covers a much larger area.

While these resources remain largely untapped, Mexico’s natural gas demand is rising, and with it, the country’s dependence on U.S. imports…

A subsequent OilPrice.com article puts the U.S. opportunity in perspective (emphasis added):

New pipeline capacity additions on both sides of the border have helped U.S. natural gas pipeline exports to Mexico to jump to their highest level on record in July.

American exports are set to further increase with a number of pipelines expected to become operational by 2020, the EIA said in a note this week.

The newly commissioned pipelines benefit both countries. For the United States, more pipeline takeaway capacity gives the Permian an additional export outlet from West Texas to Mexico as producers are looking at ways to ease pipeline constraints not only on crude oil production, but also on natural gas whose production is also booming.

For Mexico, natural gas imports help to meet its rising gas demand as the country is adding gas-fired electricity generation capacity at a rapid clip while it faces a decline in its domestic gas production. More pipeline imports also mean cheaper gas than liquefied natural gas (LNG) imports, of which Mexico is the number-one customer of the United States…

In 2017, the U.S. became a net natural gas exporter for the first time since 1957, the EIA said earlier this year. Thanks to growing demand for gas-fired power generation in Mexico and favorable prices compared to LNG shipments, U.S. pipeline capacity into Mexico has also increased over the past few years along with U.S. pipeline exports to Mexico—exports which have more than doubled since 2014 to average 4.2 billion cubic feet per day (Bcf/d) in 2017.

Despite the current delays in Mexico, U.S. pipeline exports will continue to increase, according to the EIA…

Mexico is the single largest market for U.S. LNG exports, having taken nearly 20 percent of all American exports since LNG shipments began in February 2016, U.S. Department of Energy data shows.

As the article notes, continued growth is partly dependent on new pipelines that are being delayed, but are likely to happen eventually. However, gas will still reach Mexico via LNG even if those pipelines aren’t built. And, among the LNG terminals from which that gas will leave for Mexico is Cove Point, which is shipping primarily Marcellus Shale (and utica Shale) gas. Indeed, according to this analysis, one of the earlier shipments out off Cove Point was, in fact, to Mexico.

More importantly, Mexico received 20% of total U.S. LNG exports between February, 2016 and June, 2018 — some 80 cargoes worth. That means the door is open with great future opportunity for Marcellus producers even if those pipelines don’t get built. The Mexico fracking decision may well put more dollars in the hands of Susquehanna and Washington County landowners as well those of Texans. Still, it would be nice for Mexico and U.S. if the former smartened up and got off this socialist path that has given it nothing and promises only more destitution down the road. A true capitalist economy in Mexico would open up even more opportunity for all of us.

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