Will Mexico Profit or Lose with Rising Natural Gas Prices?

US natural gas prices have been on the rise in recent months: experts are seeing prices rise to US$6/MMBtu. Mexico, as a net importer, will likely feel the effects too. But it could also profit of the much higher prices elsewhere in the world, part of the country’s push to become an export hub.

On Tuesday September 28, natural gas in the US climbed up to a high not seen in seven years. Traders described recent prices as “volatile” even though demand has not been exceedingly high and the forecasted weather appears to be mild. Because the market tends to use the spreads of March-April ad October-November to bet on demand during the winter season, speculators are watching these developments closely.

When gas prices increase, this poses a problem for Mexico. “This sharp rise in prices will undoubtedly have strong repercussions on the industry in Mexico, not only for those who directly consume natural gas, but also for electricity consumers,” wrote Federico Muciño, Founder and Consulting Partner of Epscon in a column for El Financiero.

Driven by the economics behind the matter, the country has slowly moved from a major producer of natural gas to a net importer, relying on a cheap supply from Texas. Natural production, reached a somewhat meagre 3.81 Bcf/d in August, partly because of a fatal platform fire. Regardless, the fact that PEMEX uses the natural gas it produces itself means that CFE sources its gas from the US. Higher prices would not shock the state utility as much as the days of the brutal February winter storm, which drove up prices and caused a disagreement on contract terms between the utility and Goldman Sachs, but they would still be a major crutch for the country as it tries to keep down the prices of the energy it generates.

Crucially, natural gas prices are hitting record highs in Europe and Asia, reaching highs of US$6/MMBtu. Traders explained to Reuters that within this environment buyers would take any liquefied natural gas (LNG), which is useful for its transportability over long distances, that the US could spare. But there is one problem: the US lacks the liquefaction capacity to truly benefit because it can only convert around 10.5 bcf/d into LNG. “The US LNG export capacity ceiling is likely the only thing reining in Henry Hub prices from following European and Asian gas and LNG prices to the moon," said Sheetal Nasta, Managing Editor at RBN Energy to Reuters.

The idea of exporting LNG to markets such as Asia has rapidly become an attractive business proposition for Mexican companies, including CFE. Various players are therefore pushing to turn the country into an export hub, including at IEnova’s Energía Costa Azul facility. Crowded or difficult shipping routes toward Asia such as via the Panama Canal could be avoided because of Mexico’s strategic location, giving it a strategic advantage. Though the benefits could be massive, Mexico is not the only country exploring exports and could face Mozambique and Qatar as stiff competition in the future. What is more, natural gas prices would have to remain relatively low if Mexico is to turn a profit from this complicated operation. In any case, the country has plenty of reserves on its own borders, although the practice of fracking remains illegal for the time being.