Mexico faces an election in June amid rising natural gas demand and infrastructure needs. See what NGI analysts gleaned from the recently completed 4Q2023 earnings season.
- SLB Corp. (SLB): CEO Olivier Le Peuch told investors on SLB’s 4Q2023 earnings conference call that “in the international markets, we expect full year revenue growth reaching the mid-teens [on a percentage basis], led by the Middle East and Asia, and Europe and Africa.” Conspicuously absent from that is Latin America, which would be a continuation of the lack of momentum from the past year. In fact, according to Baker Hughes statistics, the average rig count in Latin America for February was 165, down from 181 year/year. All those other regions Le Peuch mentioned are up year-over-year. Now that's certainly not to say there aren't pockets of relative strength in Latin America. For example, management expects "strong activity” out of Brazil, and it certainly makes sense that Brazil would want to increase oil and gas production if for no other reason than to serve as a backstop to its largely intermittent and seasonal power supply.
- But the clear leader in Latin America? Mexico, with 11 more rigs working in February than the year before. This is great to see, but it does little to change our expectation that Mexico will need to import 9 Bcf/d of natural gas from the United States by 2030, up 50% from the average run rate in 2023.
- Nabors Industries Ltd. (NBR): Only Colombia has seen a greater drop in Latin American drilling rigs over the past year than Argentina, but things there may be picking up. Nabors Industries noted their activity in the Vaca Muerta continues to expand, and that expansion could receive an even more significant longer-term boost if YPF & Petronas reach positive FID on a proposed LNG export facility from the region. The first phase would be for 5 million metric tons/year (mmty) but could end up being six times larger. We are talking long-term, though, since a final investment decision (FID) on the first phase isn’t expected until mid-2025. Still, we cannot help but wonder if the pause in U.S. liquefied natural gas non-FTA export permits are helping to open the door for this.
- Oneok Inc. (OKE): We've been hearing overtures to this effect for several quarters now, but Saguaro LNG may be getting closer to reaching a formal FID decision. To that end, Oneok announced that in February FERC approved the Saguaro connector pipeline's presidential permit, and that the company expects an FID on the pipeline by mid-year 2024. Saguaro would be the feeder pipeline on the U.S. side of the border that would ship gas to Saguaro LNG via the proposed Sierra Madre pipeline in Mexico.
- No U.S. companies are involved with the Sierra Madre project, at least not at the moment. But considering the difficulty in building new natural gas pipelines in the United States, how likely would it be for U.S. midstream companies to be involved in the future buildout of the gas network in Mexico? Which companies may be involved in that?
- Kinder Morgan Inc. (KMI): Probably not them. Kinder Morgan's management noted they would look at international opportunities, but they have found that it's difficult to get the risk adjusted returns they like outside of the U.S. “International” screams Mexico to us, not only because some of Kinder Morgan's pipes connect directly to the Mexican gas grid, but also since the company has significant experience operating in Mexico via its Kinder Morgan Gas Natural de Mexico (Mier-Monterrey) pipeline that went into service more than 20 years ago.
- TC Energy Corp. (TRP): It's not likely to be TC Energy, either. Management reported their Mexico gas pipelines hauled an average of 2.7 Bcf/d during 2023's fourth quarter, up 30% year-over-year. More volumes are coming, with the South section of the Villa de Reyes pipeline expected to enter service during the second half of the year, and with things looking good for the 1.3 Bcf/d Southeast Gateway pipeline to enter service during the summer of 2025. The "problem" is that management has stated publicly that they do not wish for Mexico to represent more than 10% of their total company EBITDA. Mexico accounted for just 6.7% of that in 4Q23, but Southeast Gateway going into service will most likely push that number above that 10% threshold. TC Energy may be more in the mode of shedding or selling down their interest in assets in Mexico than adding to them. Hey, maybe TC Energy should start an infrastructure consulting business to advise others on what they've learned? Regardless, this is a second company not likely to participate in any new Mexico natural gas midstream projects.
- Energy Transfer LP (ET): Make that possibly a third? We’ve heard no indications that Energy Transfer, whom we estimate trails only Kinder Morgan in terms of total gas pipeline capacity in the United States and one that also ships gas to the U.S./Mexico border, has any interest in pursuing opportunities in Mexico either.
- Sempra Energy (SRE): No, we believe the logical choice is a company that has a more Mexico-based management team and presence. That includes (but is not necessarily limited to), IEnova, a subsidiary of Sempra Energy, and companies like Esentia (formerly Fermaca) and Grupo Carso SAB.
- Fortunately for those aforementioned U.S.-based midstream companies, they may have an opportunity to work with Mexico's state power company Comisión Federal de Electricidad (CFE) after all, if they so choose. In late February, CFE announced an open tender for a new storage field in South Texas. That’s a pretty significant development on its own, considering that Mexico currently has no underground storage capacity anywhere within its borders. So why now? Mexico continues to grow natural gas for power generation, but CFE is also a partner in several proposed LNG projects in the country. Starting to get some dedicated gas storage supply in place, even if for a small amount, could help make Mexican LNG export projects a bit more attractive, everything else being equal. Wouldn’t it be ironic if CFE plans to build storage in another country to facilitate shipping gas to other countries? For more, check out this piece.
- New Fortress Energy Inc. (NFE): Speaking of LNG, New Fortress Energy now expects the first commercial cargo at its Fast LNG Terminal #1 located just offshore of Altamira in April. Construction on 2nd Fast LNG, located at the existing onshore Altamira import terminal, is kicking off and is expected to be in service during 1Q2026 (assuming no hiccups, of course). Management intends to ship supply from FLNG 2 to free trade agreement (FTA) countries and therefore is not impacted by the current Biden non-FTA export permit pause. It will end up taking NFE three years to get FLNG 1 in-service, but that is still several years faster than traditional on land projects and could provide a way to get U.S.-sourced LNG to market faster if the Biden pause proves to lengthen the expected in service time for U.S. onshore too much for would-be customers.
- NFE: The company also provided a helpful breakout of the capacity utilization for its international LNG import terminals, and we were surprised to see that its Mexico terminal in La Paz (Baja California) is only running at an average capacity utilization of 10%, especially considering the remoteness of the area. Per NFE's recently filed 2023 10-K, “under an amended gas sales agreement with CFE, we expect to sell approximately 38,000 MMBtu/day.” La Paz has taken in four LNG cargoes between April 2023 and early March 2024, and we estimate the average daily volumes of those are roughly 30,000 MMBtu/day. Sure seems like another case of CFE overbuilding and underutilizing.
