HEP, EFM eye gas export markets with South Texas midstream capacity expansion

Howard Energy Partners and Eagle Ford Midstream plan to nearly double natural gas capacity to the Agua Dulce hub by 2024, targeting premium export markets.

Dos Caminos—a joint venture between the two midstream operators—will concentrate efforts in the Austin Chalk and Eagle Ford shale plays in and near Webb County, Texas.

Currently, HEP and EFM collectively have about 1 Bcf/d of gathering, treating, and transportation capacity in South Texas, which will be expanded to 2 Bcf/d through both brownfield projects and greenfield pipelines. HEP will be Dos Caminos' operator.

"Given our unique pipeline footprint and history in South Texas, we are best situated to respond to the significant natural gas production growth in the Webb County area," HEP CEO Mike Howard said in a July 27 statement.

In addition to a gas processing facility near Laredo, Texas, HEP is a joint owner of the 200-mile Nueva Era pipeline, which brings South Texas gas production across the border into the heavily industrial Monterrey area in Northeast Mexico. Eagle Ford Midstream's system, located in the Eagle Ford Shale, delivers gas to the Agua Dulce Hub in Nueces County, Texas. The Agua Dulce Hub is particularly well connected to the Mexico market, with interconnects with NET Mexico, Valley Crossing, and Kinder Morgan Tejas, all of which flow gas to the US-Mexico border.

The first phase of the project will be completed in the third quarter of 2023, with the rest slated for completion in 2024.

Agua Dulce dynamics

The additional midstream capacity could help loosen constraints in South Texas from rising gas production that has widened basis spreads to cash Henry Hub. Agua Dulce spot gas has averaged a 67-cent discount to cash Henry Hub so far this July, more than seven times wider than the 9-cent discount averaged in the corresponding period last year.

Gas production in the Eagle Ford basin in South Texas has averaged 5.37 Bcf/d so far this July, up 13% from the 4.76 Bcf/d averaged during the same time last year, Platts Analytics data showed. The Eagle Ford has seen the second sharpest increase in rigs year on year, after the Permian. Further production increases in the basin are likely on the horizon, with rig count soaring nearly 20% from the start of May.

Export demand

South Texas gas production has the geographic advantage of being near Mexico and to international markets through Gulf Coast LNG exports.

US-to-Mexico gas exports have averaged nearly 6 Bcf/d so far in 2022, largely in line with 2021 levels despite a dramatically higher price environment. Platts Analytics expects Mexican demand for US molecules to increase over the next several years, as three new gas-fired combined-cycle power plants come online by 2024. The additional gas demand in Mexico is set to coincide with Dos Caminos' target date for completing its expansion.

Gulf Coast LNG feedgas demand also promises to increase over the next several years, providing another potential home for South Texas gas supply. A third wave of new liquefaction and export facilities has been rapidly securing long-term commitments over the last year, spurred by record-high global gas prices. Platts Analytics has projected that three to five final investment decisions on new export facilities in 2022.