Mexico’s natural gas production continues to decline and this situation is the main reason for the sustained increase in imports from the US. Even during the current Covid-19 crisis of lower economic activity, natural gas imports have remained at levels of approximately 5,300 million standard cubic feet per day (mmcfd) during the first quarter of 2020. The US is the primary exporter of natural gas to Mexico, with volumes reaching an all-time high in July 2019 with 6.2 billion cubic feet per day (bcfd), mainly by pipeline and further supported by the growing presence of the US in liquefied natural gas (LNG) exports.
Mexico dependency on natural gas will continue to grow as the national oil company focuses on crude oil production while benefiting from the convenience of cheap natural gas from Texas. Moreover, price differentials between the US incentivise imports as natural gas prices in Mexico are generally higher. At the same time, new pipeline capacity that connects Mexico’s northern natural gas network with pipelines, distributing gas in the central parts of the country, are sustaining import flows, particularly from Texas.
Figure 1 – Mexico Natural Gas Imports from US Increase Year-on-Year
In the short term, there are no planned assets in Mexico that can significantly increase domestic natural gas production. There is potential for undeveloped resources in the onshore region of Burgos on the northeastern part of the country across the same geological basin, continuing from southeast Texas. However, on average, the required breakeven price for the full development of such reserves is on average higher than the price of imported natural gas, challenging the viability of potential new projects.
As for deepwater and unconventional resources for these type of developments, the national oil company (NOC), Pemex, would have to partner with other operators to share risk and capital investment. Given the more technical and capital intensive nature of such projects, it has long been established this is the most effective manner for the NOC to exploit these resources.
Mexico’s current government policy is to favour and support Pemex, and this means stopping all bidding rounds that can bring new participants to the sector. Yet, there are not sufficient natural gas resources to be developed in Pemex’s portfolio to reverse the decline in gas production, and therefore, imports from the US will continue to be more than necessary over the current decade.