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Watch: Anemic drilling rates in Mexico point toward further gas output declines

Platts Analytics expects total Mexican dry gas production will fall another 0.4 Bcf/d by the end of 2017, further increasing Mexico's need for US pipeline imports. However, this year has seen a number of delays on new export pipelines. Ross Wyeno explains how much LNG could be imported to help fill demand, as well as how the power sector is turning to fuel oil.

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Video Transcript

Anemic drilling rates in Mexico point toward further gas output declines

By Ross Wyeno, senior energy analyst

Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.

The Mexican gas markets are looking increasingly tight this summer as dual factors — falling domestic production and pipeline delays — threaten to create supply shortages and increase reliance on fuel oil for power generation.

According to SENER data, Mexican dry gas production fell to 3.2 Bcf/d in March, a 0.5 Bcf/d drop from a year prior. The data also noted that active rigs in Mexico fell to six during the month, down 23 rigs from last year. Of those rigs, only one rig was operating in the onshore areas.

This is in stark contrast to drilling in the US, where activity nearly doubled over the same timeframe. Anemic drilling rates in Mexico likely point towards further natural gas production declines through the remainder of 2017.

Total Mexican dry gas production expected to fall another 0.4 Bcf/d by end of 2017: Platts Analytics

Platts Analytics expects that total Mexican dry gas production will fall another 0.4 Bcf/d by the end of the year, further increasing Mexican need for US pipeline imports.

However, 2017 has seen a number of delays on new export pipelines, which have limited export growth this year-to-date. The most important of these delays have faced the Trans-Pecos and Nueva Era pipelines.

Furthermore, downstream of these pipelines, persistent constraints are expected to limit export growth to below 0.5 Bcf/d before mid-August, when the Nueva Era pipeline is scheduled to come online.

Mexico’s gas shortages met through more LNG imports, increased fuel oil burn in power markets

These delays have already created supply shortages in Mexico, which have been met through additional LNG imports and increased fuel oil consumption in the power markets.

With LNG import capacity likely to top out at around 0.7 Bcf/d, Mexico will likely become increasingly dependent on fuel oil generation to balance the power markets. However, the fuel oil generation stack has seen substantial retirements in the past year as the CFE has retooled their fleet and replaced it with gas-fired capacity.

According data collected by Platts Analytics, Mexico has retired nearly 3.4 GW of fuel oil generating capacity since the end of 2015, or around 25% of the fleet. These retirements, along with higher expected fuel oil consumption overall, are likely to drive higher utilizations at fuel oil generating stations this summer and will likely to result in higher power prices for Mexican consumers — particularly in areas with limited access to US pipeline gas.

Until next time on the Snapshot — we’ll be keeping an eye on the markets.