«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 ...»
Apparently, CFE arranged LNG contract prices for what it would pay for pipeline gas imports. However, in the specific case of Ensenada, Baja California, the LNG contract price is higher than the gas price associated with bringing gas all the way from Texas to the California-Arizona borderline. This means that CFE is granting (artificial) rents to LNG companies. From an analytical point of view, this CFE policy is inconsistent with an efficient result derived from nodal price theory applied to natural gas regulation (Brito and Rosellón 2002 and 2005). The new LNG supply sources should simply be considered as new supFRONTERA NORTE, VOL. 18, NÚM. 36, JULIO-DICIEMBRE DE 2006 ply nodes in a netback system. LNG pricing should be determined by following the natural gas opportunity cost (netback rule) and reflect as well congestion in gas distribution. However, the CFE contracts seem to be generating additional rents with adverse distributional effects.
LNG'S entry into the Mexican natural gas network (in both the Gulf of Mexico, and the Pacific Ocean) will then increase the number of arbitrage points as well as their location. This will of course imply a more complex price system.
However, this should not constitute a major problem for Mexican gas regulators since similar programs have been devised in other infrastructure areas fairly easily, even for much more complex industries such as the electricity industry.
The adequate design of a price program in accordance with nodal price theory would provide an efficient reference for gas trading and contracting, in both the natural gas and electricity sectors. Likewise, the regulator should develop programs that evaluate the impacts on welfare and pricing of the location, dimension, ownership and sequencing in the construction of LNG terminals.
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