Gas glut produces record U.S. exports to Mexico

U.S. natural gas is flowing to Mexico at a record pace as demand for the fuel south of the border provides an outlet for surging supplies that have battered prices.

Exports by pipeline to Mexico, which can’t pump enough gas to meet local needs, reached 42.9 billion cubic feet in April as yields from shale formations drove U.S. output to an all-time high. Producers are shipping the fuel as prices at the Waha hub in west Texas, about 100 miles (161 kilometers) from Mexico, have dropped 65 percent from pre-recession levels in 2008.

Rising shipments to Mexico signal that U.S. gas exports may keep expanding as onshore production climbs, said Biliana Pehlivanova, an analyst at Barclays Capital in New York. U.S. regulators are weighing three proposals to build terminals to liquefy gas and send it to overseas buyers.

“We certainly have the production capabilities to export,” Pehlivanova said. “Output is growing at a pace higher than demand can absorb, even in this depressed price environment.”

Gas at the Waha hub declined 0.6 percent yesterday to $4.3469 per million British thermal units on the Intercontinental Exchange, down from $12.327 on June 24, 2008.

Futures for August delivery of gas to the Henry Hub in Louisiana rose 13.6 cents, or 3.1 percent, to $4.514 per million Btu at 1:40 p.m. on the New York Mercantile Exchange.

Growing Output

Gas production in the U.S. climbed 0.5 percent to a record 78.58 billion cubic feet a day in April from 78.16 billion a month earlier, the Energy Department said June 29 in the monthly EIA-914 report. The data covers gas gross withdrawals, which include supplies that aren’t sold in the gas market.

Net U.S. exports to Mexico rose 53 percent from April 2008 to a record in April 2011, according to the Energy Department. Deliveries to Mexico in April equaled 2.2 percent of marketed output.

Thirty percent of Mexico’s energy consumption is natural gas, the department said in a July update to its Mexico Country Analysis Brief. Mexico produced 2.1 trillion cubic feet of gas in 2010, while consuming 2.2 trillion, according to the department.

Companies including Cheniere Energy Inc., Southern Union Co. and Freeport LNG have applied to federal regulators to build liquefied-natural-gas export terminals on the Gulf of Mexico. Shipments to Mexico, Canada and overseas may grow if the U.S. market doesn’t expand enough to absorb output, said Kim Pacanovsky, an equity research analyst at McNicoll, Lewis & Vlak LLC in New York.

Petrohawk’s Shale Gas

Rising demand for U.S. gas will be a boon to companies including Melbourne-based BHP Billiton Ltd., the world’s largest mining company, which said today that it agreed to buy shale gas producer Petrohawk Energy Corp. for about $12.1 billion in cash.

“If we’re in a situation where we can’t significantly boost gas consumption due to natural gas vehicles and increased electric generation, the most natural place for that gas to go would be out for export,” Pacanovsky said.

U.S. deliveries to its southern neighbor may grow as Mexican demand for gas to run power plants increases, Edgar Rangel-German, a member of Mexico’s hydrocarbons commission, said in a telephone interview from Quito, Ecuador. Power generation in Mexico more than tripled from 1999 to 2009, according to Barclays.

Mexican Demand

“Mexico is going to continue importing gas,” Rangel- German said. “For environmental reasons, several power plants have been reconfigured from fuel oil or coal to natural gas.”

Gas emits about 50 percent less carbon dioxide than coal. The Mexico electricity industry’s share of total natural gas consumption increased to 48 percent in 2009 from 29 percent in 2000, according to the U.S. Energy Department.

Mexican demand has also risen as state-owned Petroleos Mexicanos, or Pemex, Latin America’s largest oil producer, uses gas to extract crude from the aging Cantarell Field in the Bay of Campeche, Pehlivanova said. Gas is sometimes injected underground to force oil out of tight fissures.

Pemex is Mexico’s largest consumer of natural gas, representing about 40 percent of domestic demand in 2010, according to the company.

Mexican gas output is declining. From January through April, production not associated with oil drilling fell 13 percent from a year earlier, according to Barclays. Exports to Mexico may climb 53 percent in 2011 to 1.3 billion cubic feet a day, averaging 1.5 billion a day in 2012, Pehlivanova said.

Production from shale formations won’t become a major component of Mexico’s gas output until about 10 years from now, Rangel-German said. Pemex produced its first shale gas in March from an exploratory well in the Eagle Ford formation in the northeastern state of Coahuila.

“It’s going to take some time to develop the capacity needed to really produce shale gas on a massive scale,” Rangel- German said. “Pemex is going to have to drill thousands of wells.”