NAFTA Deal To Bolster U.S.-Mexican Natural Gas Trade

August 17, 2018

After some strong rhetoric on both sides, it now looks like the Trump administration and Mexican counterparts could have a preliminary NAFTA deal by the end of the month. This would be quite timely given that Mexico's newly elected president, Andrés Manuel López Obrador (AMLO), will take office in December and has indicated he would respect renegotiations. In particular for my field, a bigger and better NAFTA would boost the growing U.S.-Mexican energy relationship built on free trade.

As the go-to fuel, natural gas will increasingly be the story between the two nations. Mexico has accounted for the bulk of U.S. gas exports, with 90% coming from pipelines and the rest from LNG. The U.S. now accounts for 60%-65% of Mexico's total gas supply. Since its domestic output comes along with crude oil extraction as "associated gas," Mexico's gas production has fallen 30%-40% since 2010, as its oil production has been spiraling since the 2004 peak.

And now, with AMLO wanting to ban fracking, U.S. gas could gain even more market share in Mexico. Although fracking isn't expected to be a significant source of domestic supply for at least five years, Mexico does have great shale potential: an EIA-reported recoverable shale gas resource of 550 trillion cubic feet. AMLO will serve just one 6-year term but has made answering the question of "When Will Mexico Start To Frack For Natural Gas?" even more difficult to gauge.

Mexico's goal is to expand oil production by 30% or so to ~2.6 million b/d, but the coming stream of new gas supply that would bring won't significantly reduce the need for more U.S. supply anytime soon. Just recently, as new pipeline capacity has been added and some lines became fully operational, pipeline imports into Mexico are breaking the 5 Bcf/d mark for the first time. That's over 6% of all current U.S. natural gas production - and could reach over 6 Bcf/d next year. Ultimately, without the Mexican gas outlet for U.S. sellers, our prices would be ~40% lower, which again, could do more harm than good...

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