‘Bridge to Nowhere’ leaves pent-up Permian gas problems unsolved

NEW YORK (Bloomberg) -- A major Mexican pipeline opened this week after almost two years of delays. That’s the good news for drillers across the border who are seeking an expanded market for natural gas siphoned from the pent-up Permian basin.

The bad news: The conduit won’t fill to capacity until construction is completed on the new power plants it’s designed to serve. As such, the pipeline joins two others recently opened that carry minimal amounts of gas.

Welcome to the stop-and-go world of Mexico power.

Most recently, Mexico has offered “a bridge to nowhere” for American gas supplies, said Esteban Trejo, a Genscape Inc. analyst in Boulder, Colorado. “It’s just another example of where the pipelines are declared in-service and there isn’t demand.”

TranCanada Corp.’s $1.2 billion, 348-mi (557-km) line, running from El Encino to Topolobampo on the coast, officially went into service recently, about 700 days after it was initially scheduled to open. It is one of several slated to start up this year in Mexico that have long been marked as a hoped-for solution for Permian drillers struggling to get their gas more easily to market at a time when production is booming and pipelines built years ago are full.

It’s an answer coming at an agonizingly slow pace. Together, the nine pipelines have been delayed an average of 415 days beyond their originally scheduled completion dates. At the same time, the amount of gas flowing through the few pipelines that have been completed is far less than they’re designed to carry.

How much less? Mexico now imports an average of 4.2 Bcfd, or about 6.2 billion short of what it could bring in even with just the existing infrastructure, according to Bloomberg NEF and Genscape data. That comes as daily gas output from West Texas and New Mexico jumped 25% to average 10.7 Bcfd in July from a year ago.

One example is a pipeline built by Sempra Energy’s Ienova unit that runs 138 mi from Ojinaga at the U.S. border to El Encino. There it meets other lines that send gas around the country. That line opened a year ago with the ability to ship almost 1.4 Bcfd south. But gas has flowed on fewer than four dozen days and its peak was just 10% of capacity on May 1, Trejo said.

A similar solution holds true for a slightly bigger pipeline that Fermaca Enterprises completed in the first quarter, running from from El Encino to La Laguna. While it’s designed to move 1.5 Bcfd, it’s operated with barely any flows from Ienova’s line.

The Fermaca line’s operations are so minimal that scheduled gas volumes aren’t being published via the typical electric bulletin board, according to Genscape. Almost all flows seen across both systems were to perform tests or to pressurize the lines, he said.

As a result, gas at the West Texas pipeline hub in Waha this year has been trading at the steepest discount to the national benchmark since 2009. Waha gas is fetching, on average, 73 cents per million BTU's less than supplies traded at the Henry Hub in Louisiana.

Still, there’s hope for the future.

Barring further delays, the nine pipelines scheduled to begin service this year and next will offer a combined capacity of 9.6 Bcfd, the equivalent of 11% of total U.S. gas output, according to data from Mexico’s Energy Ministry, the U.S. Energy Information Administration and TransCanada.

These projects “will provide some relief for the constrained Permian production” and boost total U.S. gas exports south of the border to 5 Bcfd, Victoria Zaretskaya, a Washington-based analyst for the U.S. Energy Information Administration, said in an email. “In the second part of this year we see the beginning of the pivotal stage in U.S.-Mexico pipeline exports as more pipelines are commissioned on Mexico’s side.”

For the Permian, the most immediate relief will come from the start of the rest of the three-legged network being built by Fermaca that’s unofficially called the “Wahalajara” system, which is a play on Waha hub and Mexico’s Guadalajara region, Trejo said.

While the first segment from the border at Ojinaga to El Encino is largely idle, volumes are poised to climb with the start up of the segments from La Laguna to Aguascalientes and to Guadalajara. The final segment is especially critical because it “punches into heavy demand markets” for industrial gas consumers, Trejo said.

Once those come online, Permian gas exports may climb 25% in the next year to about 1 Bcfd from current levels, he said. But because the buildout of infrastructure across Mexico is still a work in progress, the larger flows from West Texas shale will likely come at the expense of other exports, Trejo said. He expects Mexico to receive fewer gas deliveries from the Eagle Ford in South Texas and a drop in tankers delivering LNG.

Right now Mexico is the largest buyer of U.S. exports of LNG from Louisiana, accounting from 19% of the cargoes out of Cheniere Energy Inc.’s Sabine Pass terminal there, according to vessel tracking data compiled by Bloomberg.

That said, South Texas exports may create some competition with the planned start this year of the 497-mile underwater Sur de Texas pipeline that TransCanada is jointly building with Ienova. Its capacity is 2.6 Bcfd.

As for the newest addition, gas flows on TransCanada’s El Encino-Topolobampo line reached 75,000 cubic feet per day over the past week just 11% of its capacity, Genscape data show.

“I expect a slow ramp on this pipeline” with the next big step change in gas flows coming in January 2019 with the planned start-up of the Topolobampo II power plant and then another one a year later with a third one, Trejo said.