Ukraine Crisis Can Jeopardize Mexico’s Natural Gas Supply

Commodity markets have spiraled as a result of Russia´s Ukraine invasion. War in Ukraine and economic sanctions to Russia will most likely impact oil and natural gas prices, an issue that has Mexico holding on to its seat.

Martha Bárcena, former Mexican Ambassador to the US, said that Russia is Europe´s  main gas supplier. Conflict in Ukraine may interfere with gas supply, jeopardizing Europe’s energy security and pushing gas prices upwards. As a preventive measure, Europe may shift towards other gas suppliers to prevent an energy shortage.

To substitute  40 percent of Russian gas imports, Europe may turn to the US, Qatar and Saudi Arabia to purchase LNG. If the US chooses to increase exports to Europe, Mexico could either face potential gas shortages or pay higher prices.  

Today, Mexico is more dependent on natural gas than ever before, since natural gas generation consists up to 60 percent of electricity produced. Analysts are unclear about the extent of the impact the Ukrainian crisis may have on gas prices and Mexico´s electricity costs.

President Andrés Manuel López Obrador said in case there is an increase in natural gas prices caused by the Ukraine-Russia conflict, Mexico has alternatives to prevent energy shortages. "In case the price of gas and imports increase significantly; we can start all power generation plants that do not require gas to avoid the increase in the cost of electricity.” The president also emphasized the potential use of hydroelectric plants and fuel oil to replace generation through natural gas.

However, natural gas substitution may not prevent an increase in electricity prices. Natural gas is Mexico’s most efficient input for electricity generation. Hydroelectric plants may not be able to produce enough electricity, as shortages in natural gas could require. Paul Sánchez, an energy sector analyst, explained that the problem for hydroelectric plants is that during the first months of the year, it hardly rains in Mexico. "It is not possible to use all of the hydroelectric plants to sustain the electricity system, especially if the water has other uses. Let us not forget that in previous years dam levels reached less than 50 percent of their total capacity," Sánchez said.