May 23, 2017

Mexico to Get First Non-Pemex Exploratory Well in 80 Years

The burgeoning Mexican oil industry fostered by national Energy Reform is about to pass another milestone. A U.S.-British consortium led by Talos Energy LLC, Houston, has spudded the 1 Zama exploration well on Block 7 in the shallow-water Sureste basin at the bottom of Campeche Bay. Talos and its partners claim 1 Zama will be the first wildcat well drilled by private companies since Mexico nationalized the industry in 1938.

Talos says the well's principal target is the Zama structure with direct hydrocarbon indicators in the Tertiary clastic reservoirs. The Zama structure is estimated to have gross unrisked resources in a range of 100-500 million bbl.

Talos is the operator of Block 7 with 35% interest. One partner, with 40% interest, is Sierra Oil & Gas, an independent Mexican E&P company created to pursue upstream and midstream opportunities. Led by experienced Mexican and Latin American energy executives, Sierra's core business plan is to develop low- to-medium risk oil and gas opportunities as they become available in the course of implementing Energy Reform.

The third partner, with 25% interest, is Premier Oil Plc., London. The company goes back to 1934 when it was founded as the Caribbean Oil Co. Listed in London as PMO, the company closed yesterday at 63 pence, or 82cts U.S., giving it a market cap of $414 million.

All three partners appear to regard 1 Zama as a highly significant undertaking. The well was spudded two days ago, on May 21, and the schedule calls for up to 90 days to drill both the Zama prospect and the secondary target, Zama Deep. Premier says its share of well costs will be $16 million, which puts total cost of the well at $64 million.

Sierra Oil & Gas is a portfolio company of Riverstone Energy Ltd., which trades on the London exchange under the symbol RSE. RSE is a closed-ended energy investment company that invests chiefly in the E&P and midstream sectors. To date, RSE has made 16 investments spanning conventional and unconventional oil and gas activities in the Gulf of Mexico, Continental U.S., Western Canada, the North Sea and Mexico.

Sierra's guiding strategy is to partner with specialized international E&P companies under an "influential non-operator" model. The 1 Zama presents a representative case as Sierra is the largest owner, at 40%, but not the operator.

The 1 Zama is of particular interest on account of its proximity to the three Amoca wells drilled by Italian oil major Eni SpA 1 mile off the Tabasco shore and a short ways east of Coatzacoalcos, Mexico's main oil port. As reported in OPIS on March 24, Eni declared its 2 Amoca confirmation well "the first well drilled by an international major in Mexico" since 1938.

Block 7 and the 1 Zama are farther out in the water than the acreage being drilled by Eni, but the wildcat is still shallow water and probably working off the same general configuration of geological strata.

May 16, 2017

Mexico's Monterrey: Battleground for Independent LPG Suppliers

OPIS has learned, through conversations with U.S.-based LPG suppliers north of the border and Mexico LPG marketers south of the border, that the Monterrey metropolitan area is shaping up as ground zero in the battle to open up Mexico's LPG market according to terms of the Energy Reform.

As Mexico's primary industrial center, Monterrey is the northern hub of the national transportation system. All roads and rail lines lead to Monterrey as the first stop on the way down to the center of Mexico. It is only 140 miles by toll expressway from the two nearest border points: Laredo to the north and Reynosa east-northeast.

Monterrey is thus the pivotal northern market in the LPG trade. Naturally, Pemex has a high-volume LPG terminal in the city. As Mexico opens the door to market pricing of LPG, begun in January, Pemex has begun posting weekly LPG prices on its website (Google: "Pemex precios de GLP").

The Monterrey LPG posting was 8.7944 pesos per kilogram for May 1-7, 8.6568 pesos for May 8-14. OPIS is quoting here the "precio por punto de entrega (sin IVA)," better known in the trade as the "first-hand price" to dealers at the terminal before tax.

Obviously these numbers require a bit of translation to get them on a comparable basis to U.S. pricing in cents per gallon. First you multiply the Pemex price by 1.92 to get it to gallons. Then you divide by the exchange rate for that day (it's been hovering around 19 pesos to the dollar for the last eight weeks). Employing this methodology, OPIS converts the Pemex posting to 88.56ct/gal for May 1-7, 87.42 ct/gal for May 8-14.

Supplier sources tell OPIS that all their business negotiations are conducted in terms of the differential between the OPIS Mont Belvieu non-TET price on a given day and the delivered price at a Mexican supply point. On May 1, the day Pemex posted prices for May 1-7, OPIS non-TET at the end of the day was 60.5cts. On May 8, OPIS non-TET ended the day at 63ct/gal. Thus, the Pemex differential at Monterrey was 88.56-60.5, or about 28ct/gal. On May 8, the differential was 87.42-63, or about 24.4cts/gal.

Those differentials set the terms of how you sell LPG in Monterrey. One supplier laughed at the Pemex 28ct differential in the first week of May.
Without even trying, his price of 17cts was beating Pemex by 11cts. But the paradox was that he wasn't selling any May propane in Mexico. Other intruders in the market, as he calls them, have been selling tank cars of propane at 12- 14cts over Belvieu.

This raises the question of what the actual costs are to bring propane to the Monterrey market. One potential yardstick is the rack price of propane in Corpus Christi, Texas, as reported in OPIS Propane Daily. This week, on May 8, the Corpus Christi rack average was 74cts, 11cts over the non-TET base price. That's about as low as the Corpus Christi differential gets. In February, it was running around 20cts, dropping to the 13-14ct range in April.

Thus, if a supplier is putting propane into Monterrey at 12-14ct over Belvieu, he is near to par with the Corpus Christi rack. That is to say, he is erasing transportation costs of the greater distance to Monterrey as well as the costs of crossing an international border. Admittedly, because of NAFTA, crossing the Mexican border tends to be pretty cheap.

One supplier who insists on looking for term deals with Mexico says the 12-14ct differential to Belvieu is not a viable price over any length of time. Another source with knowledge of the 12-14ct deal laughs and says that is no term deal. "That is summer-only propane. The people doing that deal are only looking at 30-day to 60-day deals."

This source describes the rationale for short-term summer-only propane deals. The thinking goes: "We'll dump cheap propane below Pemex on the Mexican market in the summer. The moment the market turns, we're outta there. It's kind of like what cockroaches do when you turn the lights on."

Looking at the macro North American supply picture for propane, a market strategist sees storm clouds on the horizon for Mexican distributors living hand-to-mouth and just buying propane month-to-month. He sees three sources of overland supply, which have made product available for rail exports to Mexico, that in all likelihood will not be there this winter.

First is those 150 tank cars a month of supercheap propane being railed in now to Monterrey and other key northern markets. That supply will be gone the moment there is a seasonal upturn in the Mont Belvieu propane price.

Second are the barrels currently coming to Brownsville, Texas, on the Dow Pipeline from the Energy Transfer Partners King Ranch plant. LPG volumes on this pipeline reportedly dropped from 10,000 b/d (10 kbd) to 5-6 kbd when a large nearby gas plant was shut down. Some sources have heard Dow express the thought that it might shut down the King Ranch-Brownsville pipeline and reroute those barrels to Corpus Christi.

Third is the main event looming over the North American NGL market in 2017, the opening of Sunoco Logistics' Mariner East II (ME2) Pipeline, with initial capacity of 275,000 b/d flowing east from four fractionation hubs in the heart of the Marcellus-Utica production trend.

The strategist remarks on the paradox that Marcellus barrels are the farthest possible barrels from the Mexican border, yet it is these barrels that have made available an abundant supply of cheap Midcontinent barrels available for railcar exports to Mexico.

In summer 2016, Marcellus barrels at the Houston, Pa., fractionation hub were selling at Belvieu minus 15cts in order to get them railed to Conway. It was those distressed barrels from Marcellus, plus equally distressed Canadian barrels from Edmonton, that were backstopping term-supply deals structured by the pioneers of rail exports into Mexico.

When ME2 comes on line in 4thQtr 2017, about 50-60 kbd of propane going west on railcars will switch to eastbound for export from the Marcus Hook, Pa., dock of Sunoco Logistics.

The strategist also says that turning on ME2 will end the availability of Canadian barrels for Mexican exports. This past winter, propane going to Northeast distributors was selling for Belvieu plus 20cts. Canadian rail exports will almost certainly turn eastward to capture this premium.

May 4, 2017

Energy Transfer Starts Up Permian Gas Pipelines to Mexico

In conjunction with release of its 1stQtr earnings report, Energy Transfer Partners (NYSE: ETP) reported startup of three major gas delivery systems to Mexico during the quarter. The facilities consist of two 42-inch pipelines, the Comanche Trail Pipeline running due west to El Paso and the Trans-Pecos Pipeline running south to Presidio, Texas, and the Waha Header as the origin point of both pipelines near Coyanosa in Pecos County, Texas.

Energy Transfer's partners in all three of these projects are Carso Energy Corp. and MasTec Inc. Carso Energy is the energy and pipeline unit of Grupo Carso, the industrial conglomerate that encompasses several of Carlos Slim's leading business interests. MasTec is a construction firm out of Coral Gables, Fla.

The bidding on all three of these systems was carried out under the auspices of Comision Federal de Electricidad (CFE), Mexico's national electric utility. Bidders on these projects weren't just bidding on construction. After completing the systems, the winning contractors are committed to operating them for 25 years.

The critical part of the bid process came after the winning bidder was selected. Then that bidder entered into negotiations with CFE on the transportation service agreement (TSA) that would govern operations and rates on the facilities for 25 years. The Waha header and both 42-inch takeaway pipelines are structured as Texas intrastate pipelines so that they will not be under FERC jurisdiction.

The third facility is the Waha Header, a short 10-mile piece of very large diameter pipe to tie together nearly all the gas pipelines that converge at Waha and create a seamless supply depot for those 42-inch lines to Mexico. ETP now says Waha Header has capacity for 6 Bcfd, up from 4 Bcfd when OPIS first reported the bidding on these systems way back on Nov. 19, 2014.

The principal intrastate pipelines passing through the Waha hub are Oasis and ET Fuels (owned by Energy Transfer), Enterprise (formerly Valero), and Atmos (formerly Lone Star). Among the interstates are El Paso and NGPL (Kinder Morgan), Transwestern (Energy Transfer), and Northern Natural Gas (Berkshire Hathaway). The purpose of the new header is to aggregate supply from all these potential sources and direct it to the Mexico outlet pipes.

ETP reports that Comanche Trail and the Waha Header went into service as scheduled on Jan. 30, 2017. The 42-inch intrastate pipeline traverses 195 miles pretty much straight west from Coyanosa to the Texas-Mexico border at San Elizario, Texas, just south of El Paso. Comanche Trail is designed to transport 1.1 Bcfd and presently includes seven delivery taps along its route for local economic development opportunities.

Trans-Pecos Pipeline went into service as scheduled on March 31, 2017. The 148- mile, 42-inch intrastate pipeline bears directly southwest, roughly parallel to U.S. Hwy 67, which connects Fort Stockton, Alpine, and Marfa to Presidio, Texas at the Rio Grande border crossing. ETP says Trans-Pecos has nominal capacity of 1.4 Bcfd and presently includes six local delivery taps along its route.

During the construction period, there was substantial local agitation against the project. To win over many of these objectors, ETP says Trans-Pecos entered into a cooperative effort to help West Texas Gas and the City of Presidio offset construction costs of a new pipeline that will connect to Trans-Pecos and deliver natural gas to the newly established Presidio Industrial Park. The new lateral pipeline is expected to be in service next month in June.

Trans-Pecos and the Waha Header are the origination point for a giant gas pipeline system reaching 533 miles south of Waha all the way to Torreon, Coahuila. CFE contracted out the system in three segments: Waha to Presidio, Presidio to CFE's El Encino power plant at Delicias, Chihuahua, and Delicias to Torreon. There have been construction delays on the two segments to the south of Presidio, so the whole system may not be ready for gas service to Torreon until late 2017.

April 26, 2017

Mexico Continues to Face Low Average Refinery Op Rate: SENER

HOUSTON -- The average refinery utilization rate in Mexico remains challenged so far in 2017, with that relatively low operating rate seen mostly unchanged from last year, according to Rosanety Barrios, chief of industrial transformation policy at the Secretaria de Energia (SENER) on Wednesday.

Barrios was speaking at the OPIS Mexico-U.S. Summit being held in Houston on Wednesday.

By pointing out the relatively low refinery rates, she highlighted the close trading relationship between the U.S. and Mexico as well as the opportunities to invest in energy infrastructure and import capabilities in Mexico.

Barrios pegs the current average refinery runs in Mexico at 57% of its maximum capacity due to a high number of refinery shutdowns.

Pemex has six refineries in Mexico, with a total capacity of 1.6 million b/d. The 57% refinery utilization rate is close to 960,000 b/d.

The efficiency and reliability of Mexican refineries vary from site to site. The highest average operating rate of 78% for an individual refinery is at Salamanca, followed by Salina Cruz 76%, Tula 63%, Cadereyta 43%, Minatitlan 39% and Madero 38%.

Barrios highlighted the important oil trading relationship between U.S. and Mexico, and this relationship has become more important than ever due to a strong U.S. fuel import demand from Mexico.

She said that in 2016, Mexico imported 87% of its gasoline and almost 100% of diesel from the U.S. on average.

The exports of gasoline and diesel from the U.S. to Mexico represented 60% and 16% of U.S. total exports, respectively, she said.

Exports of propane and jet fuel from the U.S. to Mexico represented 12% and 19% of U.S. exports, respectively, in 2016, Barrios said.

Mexico imports 97% of its propane and LPG and almost 100% of jet fuel from the U.S. on average, she added.

OPIS notes that the strong fuel export trend in the U.S., backed by an insatiable Mexico demand, was one of the key contributors to propping up U.S. refining margins last year.

April 19, 2017

U.S. Propane Wholesalers Struggle with Tighter Margins amid Growing Exports

Growing natural gas liquids exports on the U.S. Gulf Coast and East Coast have dominated the headlines in the past year, but the less-talked-about story so far has been a huge squeeze on U.S. Midcontinent propane sales, and profit margins at the racks and retail levels.

For at least three years in a row, Midcontinent propane distribution companies have endured a squeeze from the tightening supply on strengthening export flow and plunging retail sales amid relatively mild winter weather. This scenario of burning a candle on both ends has put some propane companies in financial turmoil, and it may lead to a stronger push for industry consolidation in the next few years.

"Three years of (relatively) warm winters in the Midwest have taken its toll on the propane industry," a wholesaler told OPIS.

"Unless you are in the Pacific Northwest or Western Canada, there was no real winter weather," he said in reference to the trend of mild winter weather.

In February, Minnesota had 18 consecutive months of record-high seasonal temperatures, the source said, adding that seasonal temperatures in Minneapolis on some days were 68 degrees when it should have been about 32 degrees.

Some sources said that the second half of January and February of 2017 were especially tough on propane wholesalers in terms of tight margins. The first source said that there was no room for error in that precarious operational environment.

OPIS reported Fauser Energy, a Midwest distributor, is divesting its wholesale products and NGLs business assets due to a financial liquidity crunch.

Besides facing less-than-stellar sales, wholesalers' margins were crushed by high prices stemming from a tight propane inventory at Conway and "less-than- full" stocks at Mont Belvieu and Canada.

"The huge price spread between Conway and Mont Belvieu has every barrel heading down to the Gulf Coast for exports," he said.

The first source said that some NGL plants in North Dakota were down earlier this year, contributing to a tighter supply in the Midcontinent.

Also, a consolidation move at the refiner and producer level led to fewer supply sources, and lower competition could lead to higher prices, he added. This contributed to less wriggle room for wholesalers amid a squeeze from lower retail sales.

Some larger propane distributors have been and will continue to buy out smaller and struggling companies, sources said.

A second source said that the U.S. propane demand is down, but strong exports are driving prices higher. The Ferndale terminal in Pacific Northwest is also exporting propane to Asia, in addition to strong outflow from the Gulf Coast and East Coast. Mexico's appetite for U.S. NGLs is also growing as the market south of the border is now liberated.

According to the latest data issued by the Energy Information Administration, U.S. monthly NGLs export has risen consistently for at least the past 10 years to a record high at 43.449 million bbl in January 2017. This is compared with 1.09 million bbl in January 2005.

The disparity between export and domestic supply also caused sharp price volatility, with some players getting burnt by a sharp domestic price drop in a short time span of a few days while expecting a price hike, sources said. "There are fewer trading opportunities for an uplift in the market," the second source said.

Meanwhile, some sources said that relatively cheaper Canadian barrels offer a lifeline for some Midwest wholesalers, who are able to source these northern barrels via rail. However, this may not be a long-term solution.

They also said that this arbitrage flow across the border may not remain open for long as Canadian suppliers may raise prices in response to higher demand and stronger prices in the U.S.

It is bad business for propane wholesalers in the U.S. as the industry continues to consolidate, but the stronger competition is expected to make this sector more efficient, sources said.

April 11, 2017

DCP Midstream to Join Kinder Morgan in Gulf Coast Express Development

DCP Midstream will be joining Kinder Morgan Texas Pipeline (KMTP) in developing the Gulf Coast Express Pipeline Project, a natural gas pipeline offering an outlet for the massive production growth in the Permian Basin, KMTP parent Kinder Morgan Inc. (KMI) announced today.

The pipeline would transport up to 1,700,000 dekatherms per day of natural gas through 430 miles of 42-inch-diameter pipe from Waha, Texas, to Agua Dulce, Texas. Depending on shipper commitments, the pipeline could be in service by the second half of 2019, KMTP estimated. KMI would build and operate the pipeline, and DCP is expected to be a partner and shipper.

The Gulf Coast Express project would connect natural gas production in the Permian Basin to growing markets along the Texas Gulf Coast, including export markets via liquefied natural gas and deliveries into Mexico.

A binding open season for pipeline capacity kicked off March 22 and will continue through April 20. Kinder Morgan Natural Gas Midstream President Duane Kokinda said thus far the pipeline has seen a "tremendous level of interest ... during this open season."

KMTP hopes to leverage DCP's expertise in production and midstream transportation, citing its 1.3 billion cubic feet per day (Bcf/d) of processing capacity already centered in the Permian Basin. DCP also operates the Sand Hills NGL pipeline, which extends from the Permian Basin to Mont Belvieu and is currently being expanded to 365,000 b/d from 280,000 b/d.

"This opportunity presents a welcome competitive alternative that adds diversity to the market and is complementary to our recently announced Sand Hills expansion," said DCP's Chairman, President and CEO Wouter van Kempen.

Like other parts of the country, the Permian Basin has seen considerable production growth of late. The Energy Information Administration (EIA) recently estimated April crude oil production at 2.3 million b/d and natural gas production at 7.9 Bcf/d, both up 15% from the same period a year ago.

March 22, 2017

Kinder Morgan Plans Gulf Coast Gas Pipeline; Targets LNG, Mexico

Kinder Morgan Texas Pipeline (KMTP), a subsidiary of Kinder Morgan (KMI), has launched a nonbinding open season for firm natural gas transportation service on its proposed Gulf Coast Express Pipeline Project.

This project would connect the increased natural gas production in the Permian Basin to growing markets along the Texas Gulf Coast, including export markets via liquefied natural gas and deliveries into Mexico, KMI said.

The project is designed to transport up to 1,700,000 dekatherms per day of natural gas through approximately 430 miles of 42-inch pipeline from the area near Waha, Texas, to Agua Dulce, Texas. The pipeline will be in service in the second half of 2019, subject to shipper commitments.

Natural gas supply will be sourced into the project from multiple locations, including existing receipt points along KMI's KMTP and El Paso Natural Gas pipeline systems in the Permian Basin, a proposed interconnection with the Trans-Pecos Pipeline, and additional interconnections to both intrastate and interstate pipeline systems in the Waha area, KMI said.

Deliveries of natural gas into the Agua Dulce area will include points into KMTP's existing Gulf Coast network, KMI-owned intrastate affiliates (KM Tejas and KM Border pipelines), the Spectra Valley Crossing pipeline, the NET Mexico header, and multiple other intrastate and interstate natural gas pipelines.

The open season bid period begins on Wednesday, and ends at 5 p.m. Central Time on April 20.