Analysis: Delayed Wahalajara system startup risks West Texas exports, Permian gas prices

Denver — Delayed startup of Fermaca's Wahalajara gas pipeline system could significantly lower US exports to Mexico this summer, as the incremental outlet for West Texas supply potentially remains offline.

In March, scheduled startup of the project was forecast to provide a meaningful boost to US export volumes -- an outcome not reflected in recent flow data collected by S&P Global Platts Analytics.

In a further sign of delay to the system's startup, Mexico's state-owned power generator, CFE, recently announced a tender for two April-delivered cargoes at the Manzanillo LNG import terminal -- a location where imports are eventually expected to be mostly displaced by pipeline supply from Wahalajara.

Potential construction delays to the Wahalajara system have yet to be confirmed directly with Fermaca, as attempts by S&P Global Platts to contact the developer by email in early April and again Monday have gone unanswered.

Information posted to Fermaca's website suggests that preventative health-safety actions taken in response to the coronavirus pandemic, could be responsible for the project's apparent delay.

Flow data

In April, West Texas export volumes on El Paso Natural Gas, Ojinaga-El Encino Pipeline, San Isidro–Samalayuca Pipeline and Tarahumara Pipeline have averaged 575 MMcf/d -- marginally lower compared to flows averaging nearly 615 MMcf/d on the four pipelines last month.

In 2019, West Texas exports to Mexico witnessed a similar 4% to 5% decline from March to April as lower shoulder-season demand took hold. This year, though, a startup to Fermaca's Wahalajara system in March would likely have lifted export volumes by this month -– if only marginally –- as line packing and testing on the project's southernmost segment began.

According to Platts Analytics, flows from West Texas to Mexico would see their biggest uptick by summer when the Wahalajara system had been forecast to boost regional exports to over 1 Bcf/d.

DOWNSTREAM ACCESS

Fermaca's Wahalajara system is composed of four major pipeline segments: Tarahumara in the north, the central, El Encino–La Laguna and La Laguna–Aguascalientes segments, and the southernmost Villa de Reyes–Aguascalientes–Guadalajara, or VAG, half-loop pipeline.

The system's startup currently hinges on the completion of VAG segment, long scheduled to reach completion by March. Upon startup, the horseshoe-shaped VAG pipeline loop would give the Wahalajara system capacity to move gas both to the southwest and the southeast.

According to Platts Analytics, a fully operational Wahalajara system would boost West Texas exports to Mexico by as much as 400 MMcf/d, as the system starts delivering to the Tierra Mojada power plant near Guadalajara and begins displacing LNG imports at Pacific Coast Manzanillo LNG import terminal.

PERMIAN IMPACT

Beyond the impacts to downstream deliveries in Mexico, an extended delay to the Wahalajara system's startup would also limit production takeaway capacity from the Permian Basin, putting additional downward pressure on Waha cash prices this spring and summer.

Assuming Wahalajara remains offline through August, production takeaway capacity from the already constrained Permian Basin would remain at roughly 11.9 Bcf/d, or about 400 MMcf/d lower than previously anticipated.

In April, cash prices at Waha have averaged just 9 cents/MMBtu. Forwards markets are currently pricing June, July and August at an average $1.30/MMBtu. Last summer, though, similar midstream constraints in the Permian Basin saw Waha cash prices average just 50 cents/MMBtu, S&P Global Platts data showed.