If and when we build another wall along the heavily fortified and guarded U.S.-Mexico border, one thing is certain. In addition to all the northbound smuggling tunnels it will intersect with a growing number of pipelines humming with cheap southbound natural gas.

Although Mexico is one of the world’s top 20 natural gas producers, demand there has soared even as domestic supply has declined in recent years.

Source: International Energy Agency

As a result, the country has become the most important export market for U.S. natural gas. In 2010, Mexico imported 0.9 Bcf/d of natural gas from the U.S. By the end of 2016 that had grown to more than 4 Bcf/d, amounting to more than 5% of U.S. natural gas production:

That’s a huge deal, and the cross-border gas trade is still far from its full potential. According to the EIA, natural gas has become Mexico’s favorite fuel by far for electricity generation, increasing its market share from 34% in 2005 to 54% a decade later.

Additions of natural gas-fired generating capacity will accelerate through 2020, with Mexico’s energy ministry projecting that 14.7 GW of new gas-fired capacity will come online. Most of those plants will be located in the northern and central parts of the country — with easy access to natural gas imported from the U.S.

There are two key drivers behind this surge of demand from Mexico’s power generation sector. The first is the relatively high cost of the fuel oil Mexico has historically used to power some of its power plants as a major crude producer. Historically, the cost to produce electricity from fuel oil and natural gas was about the same, but that relationship broke down as oil prices began to climb in 2005. Though the chart below is for the U.S. it’s representative for Mexico as well.

Crude is currently roughly three times as costly as U.S. natural gas on an energy-equivalent basis. That creates a strong economic incentive to replace inefficient old Mexican power plants still running on bunker fuel oil with new gas-powered ones.

But that high cost of fueling legacy assets would have been irrelevant without new laws that have opened Mexico’s oil, natural gas and power sectors to private and foreign investment. Reforms in the power sector introduced competition among generators while leaving a state-owned agency to manage the power grid. The Mexican government has also committed to reducing the carbon footprint of the country’s power plants. Natural gas fits the bill as a lower-carbon and lower-cost option for power production, and demand has surged accordingly.    

Electricity demand in Mexico is also growing at a much faster rate than it is to the north. In the U.S. and Canada it increased 1% and 5%, respectively, over the last decade, while Mexico increased its electricity consumption 24% over the same span.

Natural gas demand in Mexico is projected to increase by nearly another 2 Bcf/d as a result of the new capacity additions. That demand will be primarily satisfied by increased imports from the U.S. This will necessarily involve a buildout of pipeline capacity from the U.S. into Mexico, some of which is already  underway.

U.S. pipeline capacity to Mexico currently stands at 7.3 Bcf/d, and is projected to nearly double in the next three years. This year four U.S. pipeline projects will be completed and should start to supply a total of 3.5 Bcf/d of natural gas to new natural gas-fired power plants in Mexico. These are:

• Phase II of the Roadrunner Pipeline being built by ONEOK Partners (NYSE: OKS)

• The Comanche Trail Pipeline, being built by Energy Transfer Partners (NYSE: ETP)

• The Trans-Pecos Pipeline (also called Presidio Crossing), being built by Energy Transfer Partners

• The Nueva Era Pipeline, a joint venture between Howard Energy Partners and Grupo Clisa

By the end of 2018, two more pipelines should begin exporting 3.3 Bcf/d of natural gas from the Eagle Ford to Mexico’s Northeast and Central regions. The Kinder Morgan (NYSE: KMI) Mier-Monterrey Pipeline will transport natural gas from the border between the U.S. and Mexico in Starr County, Texas, to Monterrey, Mexico.

The Nueces-Brownsville Pipeline is being built by Valley Crossing Pipeline, a subsidiary of Spectra Energy (NYSE: SE). This project will include construction and operation of a header system of more than 5 Bcf/d(!) near the Agua Dulce Hub in Nueces County, Texas. In addition a 2.6 Bcf/d pipeline will be built, originating at that header and extending to Brownsville, Texas.

Mexico is also making major expansions to its internal pipeline network, and TransCanada (NYSE: TRP) is a key player. TransCanada was the first private company to build and operate natural gas pipelines in Mexico when the country first opened its midstream sector to private investment in the mid-1990s. By 2018, TransCanada will be operating seven major natural gas pipeline systems in Mexico representing approximately $5 billion of investment.

So the future of natural gas exports by pipeline to Mexico looks pretty bright. President Donald Trump’s demands for new trade barriers along with a border wall to be paid for by Mexico present a threat to this fast-growing trade, which is ironic given his strong support for the U.S. energy industry and pipeline projects.

This shouldn’t affect the medium-term demand for natural gas nor the midstream projects discussed here, but could have a chilling effect on longer-term projects. Still, too many powerful interests on both sides of the border benefit from this trade to let politics derail it.