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The Future of U.S. Shale Gas Hinges on Our Southern Border

The Future of U.S. Shale Gas Hinges on Our Southern Border

There’s no denying that the United States is currently experiencing a shale gas glut. Gas fields – such as the Marcellus – are the gifts that keep on giving. Last year, overall U.S. production levels hit 74 billion cubic feet per day.

On top of that, the warm U.S. winter created a dynamic that’s left 2.5 trillion cubic feet of natural gas sitting in storage facilities. That’s the largest amount ever left over at the end of the heating season. It’s even prompted talk about a serious lack of storage capacity by the start of the next heating season.

Between the shale surplus and limited storage, the scenario seems bleak. And the single glimmer of hope for the U.S. gas industry is quickly being snuffed out.
The demand for liquefied natural gas (LNG) in Asia has taken a dramatic swan-dive off a cliff. With its descent has come an equally shocking decline in value, as well.
Prices for LNG in Asia have fallen more than 35% since the start of 2016 – even as prices reached $4.40 per million British thermal units (BTUs), which is a record low for this time of year.

And, as I revealed in an earlier article, Russia’s natural gas giant Gazprom (OGZPY) is prepared to launch an all-out war on U.S. LNG in Europe to defend its territory. And, just like Saudi Arabia before them, the Russians are prepared to jack up supplies and lower prices to ensure continued sales in Europe.

Demand Soars South of the Border

There is, however, one remaining viable option to bail out the U.S. natural gas industry – the demand for our natural gas is soaring just south of our borders, in Mexico.

Mexico is transforming itself into a global manufacturing powerhouse. Many electronics, including aerospace parts and flat screen TVs, are produced there. However, Mexico’s auto manufacturing industry is leading the way. In 2013, Mexico surpassed China as No. 1 in foreign direct investment by global automakers.

An estimated five million cars will be built in Mexico within the next five years!

The one item that was holding back Mexican manufacturing was high energy costs. Electricity costs were 47% higher in Mexico than the U.S. in 2014. Last year, that gap closed to 29% thanks to the ongoing move away from fuel oil and other sources, to the use of U.S. natural gas. Goldman Sachs reports that natural gas now accounts for 60% of Mexico’s electric power generation.

In 2015, Mexico imported 2.9 billion cubic feet of natural gas per day. This number will only continue to climb in the years ahead. According to consultants at IHS Energy, that natural gas import figure will rise to 4.4 billion cubic feet per day by 2020. Other estimates are even more optimistic than the IHS forecast.

The Pipeline Boom

Of course, the gas doesn’t make its way to Mexico on its own – it must be transported via pipelines.

The increased need for the transportation of natural gas has led to a boom in the building of pipelines connecting Texas and Mexico. According to Bank of America Merrill Lynch, there are now 14 pipeline projects – costing $7.4 billion and running 2,360 miles – that are either already underway or in the planning stages.

But that’s just the start, says Cenagas, the agency that runs the Mexican gas transmission system. A five-year plan by the Mexican government calls for the addition of more than 3,000 miles of natural gas pipelines connecting the U.S. and Mexico.

A forecast from Platts says pipeline capacity between the two countries will more than double to 14.7 billion cubic feet by 2019. That will leave plenty of spare space for those steadily increasing exports of U.S. natural gas making its way to Mexico.

A number of companies are already seeing major benefits from this boom in pipeline building.

Some of the players involved in the Mexican gas pipeline build-out are Kinder Morgan Inc. (KMI), Energy Transfer Partners L.P. (ETP), Oneok Partners L.P. (OKS), and TransCanada Corp. (TRP). NuStar Energy L.P. (NS) also has vast storage facilities in Mexico.

Will Economics Trump Politics?

This natural gas boom in Mexico is a win-win situation for both Mexico and the U.S.

But politics is sure to enter the equation.

One major potential road block would be Donald Trump’s vow to build a wall on the Mexican border. If he becomes president, there is a chance he would stop this synergistic energy relationship dead in its tracks.

However, as Mexico is fast becoming an extremely important life preserver for the U.S. shale gas industry, it’s doubtful that Trump would be able to push forward with his efforts to sever ties with our southern neighbors. Ending our relationship with Mexico may well send the industry over the waterfall without a life preserver.

Hopefully, pragmatism would rule if this debate ever comes to the table. As Mark Florian of First Reserve – an investor in the Los Ramones II pipeline – told the Financial Times, “As long as the wall doesn’t go below ground, I think we’ll be OK.

Source: The Wall St Daily by Tim Maverick, Senior Correspondent.

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