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«IN THE NORTHWESTERN COAST OF MEXICO 7 in the Northwestern Coast of Mexico LNG Impact on Natural Gas on Both Sides of the U. S.-Mexico Border Sophie ...»

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in the Northwestern Coast of Mexico


Impact on Natural Gas on Both Sides

of the U. S.-Mexico Border

Sophie Meritet*

Juan Rosellón**

Alberto Elizalde***


This paper studies the possible impacts of liquefied natural gas (LNG) projects on natural

gas prices on both sides of the U. S.-Mexico border in California. In that state gas prices are high and demand is expected to grow. Several projects for LNG facilities have been proposed and have to cope with public opinions against them. In Baja California, four LNG projects are under development given the rising demand forecasted for the next years.

After a detailed study of the opportunity for LNG projects, we conclude with an analysis of the fundamentals of the current and future price formation in both sides of the U. S.Mexico border.

Keywords: 1. liquefied natural gas (LNG), 2. price formation, 3. LNG projects, 4. Mexico-U. S.

border, 5. natural gas market.


Este artículo estudia los posibles impactos de los proyectos de gas natural licuado (GNL) sobre los precios del gas natural en ambos lados de la frontera Estados Unidos-México en el área de California. En California, los precios son altos y la demanda se espera que crezca.

Varios proyectos de instalaciones de GNL han sido propuestos y tienen que lidiar con opiniones públicas en su contra. En Baja California, cuatro proyectos de GNL están en desarrollo, dada la alta demanda pronosticada para los años siguientes. Después de un estudio detallado de las oportunidades para proyectos de GNL, concluimos con un análisis de los fundamentos de la formación actual y futura de precios en ambos lados de la frontera.

Palabras clave: 1. gas natural licuado (GNL), 2. formación de precios, 3. proyectos GNL, 4.

frontera México-Estados Unidos, 5. mercado de gas natural.

Associated Professor, Centre of Geopolitics of Energy and Row Materials, Dauphine University. E-mail: Sophie.MERITET@dauphine.fr.

Professor-Researcher, Centro de Investigación y Docencia Económicas (CIDE).

** E-mail: juan.rosellon@cide.edu.

Interorganisms price analysis supervisor, Petróleos Mexicanos (Pemex). E-mail:

*** aelizalde@dco.pemex.com.

Date of receipt: February 14, 2006.

Date of acceptance: May 22, 2006.



Canada, Mexico and the United States recognize the fact that they have important interrelationships in the natural gas sector. Based on data from the three countries' energy ministries, natural gas demand in North America will continue to increase significantly. The maturity of conventional natural gas supply areas and sources in the United States and Canada, and the lack of capital to develop gas supplies in Mexico, will mean that increasing supply to meet this North American demand growth will be challenging. The United States are progressively feeling upward gas price pressure with an increasing number of projected natural gas-fired electricity generation capacity, relatively small amount of natural gas storage, increasing demand from users, demand-driven transportation capacity constraints, and higher marginal cost of obtaining reliable natural gas supply. This will also create a significant opportunity for unconventional gas supplies and sources, such as gas from shale, from Alaska and Arctic Canada, and via liquefied natural gas. Increasing demand for natural gas and slowly declining natural gas production are causing analysts, including Federal Reserve Bank chairman A. Greenspan, to look to LNG imports as the answer to North America's supply issues. Records levels have been noticed for 2004 in terms of us LNG imports with 22% increase (Energy Information Administration, 2004). Liquefied Natural Gas (LNG) is supposed to induce major changes in the North American gas market.

LNG would no longer be just a peaking fuel. It could become an increasingly important part of natural gas consumption. CERA notes “The incoming tide of LNG in the North American market”. There are at least two dozen proposals to build new LNG terminals in North America over the next few years. Many see the expansion of U. S. LNG imports as a means to lessen U. S. dependence on foreign oil and welcome expansion plans, while other groups oppose any new LNG import terminal developments, citing potential threats by terror groups and environmental disruption. One concern the industry has expressed is that companies active in the market are running the risk of overbuilding import terminal capacity–creating a potential oversupply in the market that will depress gas prices and impede operating profitability. While there is some social opposition, key issues in the development of this new natural gas supply in the U. S. include recent market changes that increase LNG flexibility, decreasing LNG costs along the value chain, and access to new markets with


the diversity of natural gas suppliers from all over the world. Thanks to LNG development, some analysts predict a new, more flexible natural gas market could appear with more links between regions. The role of LNG is usually misunderstood… This paper focuses on the possible impacts of development of LNG on natural gas prices on both sides of the U. S.-Mexico border. In California, gas prices are high and demand is expected to grow. Several projects for LNG facilities have been proposed and have to cope with public opinions against them.

In Mexico, some LNG projects are under development or revision in order to complete the domestic gas production, given the rising demand forecasted for the next years. The Mexican Energy Regulatory Commission (CRE) has approved the construction of five LNG terminal projects in Mexico, four of which would be built in Baja California. However, one of the projects, to be developed by Marathon Oil Corp., was rescinded in March 2004 after the State of Baja California seized the land.

The U. S.-Mexico border in California is a good example to study the impact of LNG supply on regional natural gas prices. This paper is divided in three


• Section 1 presents the opportunities for LNG development within the natural gas market in California.

• Section 2 shows the fundamentals of the natural gas market and LNG developments in Mexico, and Baja California.

• The concluding remarks section presents insights on price formation for both sides of the U. S.-Mexico border.


During the 1980s and 1990s, North American natural gas supply exceeded demand and, as a result, prices were stable and low. Today, the situation is different. Natural gas imported to California from the Western states and Canada is more expensive. California's large and increasing demand for natural gas and its dependence on interstate pipelines for imported sources of natural gas supply has been the subject of broad public policy debate. The California Energy Commission is concerned about the impact of recent increases in natural gas prices, which in 2004 were double what they were in 2002 and FRONTERA NORTE, VOL. 18, NÚM. 36, JULIO-DICIEMBRE DE 2006 earlier, on consumers and the state's economy. This section will focus on the state of California1 with the natural gas market fundamentals, LNG projects and a price analysis.

Natural Gas Market Fundamentals California's energy system is characterised by two fuels: petroleum and natural gas. In 2004, the state produced about 16% of the natural gas it used, 42% of the petroleum and 81% of the electricity (Table 1). California is the second state in its use of energy after Texas.

–  –  –

In 2004, the gas demand in California was around 2.0 Tcf (MMMMcf ) with an in state production of 0.25 Tcf: 85% of natural gas consumed in California is imported. Over the next two decades, natural gas is expected to play a key role in California's energy system (Figure 1). Around 42% of the electricity produced in the state is from gas, a figure that is expected to rise. Natural gasfired power plants are preferred, because they emit less air pollution and are more cost effective compared to other fossil-fuelled generation technology (with lower capital and operating costs). The state has environmental objectives were achieved thanks to natural gas. Public debates are numerous in California where public concern about environment protection is taken seriously.

We do not present the situation of the U. S. market; we focus on the Californian situation.


Even if the population is growing,2 total residential natural gas consumption, however, has remained relatively flat at about 500 bcf per year. The average household's natural gas consumption (most new homes and buildings have air conditioning and natural gas heating) is less than half what it was thirty-five years ago even with the state's larger homes and more natural gas appliances. California's residential consumers use approximately one-third less natural gas per customer annually than residential customers, nationwide. The natural gas demand is increasing thanks to the two biggest consumers of natural gas, namely electricity generators (33%) and industrial use (32%).

Source. NAEW, 2005.

FIGURE 1. Natural gas demand and in state production from 1998 to 2025 The authorities are worried about the dependence of California on natural gas and are focusing on improving the situation.

California is not the only state with a increasing demand: the demand of its neighbors affects the delivery capacity to California. At the same time, this state appeared to be at the end of pipelines networks. In the last decade, three new interstate gas pipelines were built to serve California (expanding the over one million miles of existing pipelines connecting the state with gas-producing areas) (Figure 2).

Since 1967 the number of households in California has nearly doubled from 5 million to more than 9

–  –  –

The growing gap between U. S. gas production and demand suggests that the natural gas industry could be on the threshold of entering the rank of major long term natural gas importers. The tight natural gas supply situation impacts prices. With 85% of its consumption imported, the state is looking at prices that are higher than before. North American market interrelation has not helped to reduce the price volatility that has emerged since the mid-nineties. This volatility, caused by a tightening between supply and demand, has seen prices surge to as high as $10 per MMBtu and fall back to below $2 per MMBtu.

Wholesale natural gas prices in California have doubled since 2002 and have, periodically, been as much as four times the national average (Figures 3 and 4).

Cost per Thousand Cubic Feet (2004)

–  –  –

In 2003, to satisfactorily meet existing and future energy demands, the

Energy Report established five options:

1. Energy efficiency strategies.

2. Replace natural gas-fired power plants with renewable energy.

3. Deploy small-scale, “distributed” generation.


–  –  –

Source. Energy Information Administration, 2005.


S. natural gas wellhead price (Dollars per thousand cubic feet) 2000-2005

4. Increase domestic supplies of natural gas from unconventional and remote sources.

5. Import natural gas supplies from overseas.

One of the options is to develop natural gas supplies. With a tight market, volatility and high prices, news sources of natural gas could be a solution. With the decrease of LNG costs along the value chain, LNG imports could help meet demand. In the Integrated Energy Policy Report, LNG is recognized as a potential supply source for California and a means of serving its energy needs.

in CaliforniaLNG

Historically, LNG imports represented a small amount of natural gas imports in the U. S. - about 1%. LNG imports more than doubled in 2003 from the previous year and now represent 3% of the total gas imports (NAEW, 2005). The possibility that LNG might play an important role in meeting U. S. energy needs


has arisen only recently. Three year ago, in its Annual Energy Outlook 2002, the EIA indicated that LNG imports were “not expected to become a major source of U. S. energy supply”.

In California, residential demand for natural gas is relatively flat, due to the success of energy conservation programs. Demand is expected to rise especially because of electricity generation. The state is heavily dependant on natural gas with 85% of its consumption being imported. Authorities are looking at different ways to diversify their supplies. The real driver, however, is price. An LNG terminal would allow the state to import foreign gas to compete with high-priced domestic gas. The most economical way to transport natural gas over long distances that cannot be served by a pipeline, is in liquid form.

California has an interest in South America and Mexico, which are two of its closest sources. If these countries could provide LNG, they would be costcompetitive suppliers. A ship will take 25 days to come to California from Oman, 18 days from Australia, 16-17 days from Malaysia and Indonesia, 11 days from Russia and 5 days from Alaska (one way at 18.5 knots). The costs of LNG depend on projects, and differ from country to country.

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