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December 28, 2013

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Hello Noel, I'm doing some research on the natural gas industry in Mexico and am intrigued/confused by the discrepancies in the pricing data from 2011 onwards. As displayed on page 105 here (http://www.energia.gob.mx/res/PE_y_DT/pub/2012/PGN_2012_2026.pdf), retail prices dropped sharply by over $4/MMBtu in mid-2011. My understanding is that although prices at Henry Hub and Houston Ship Channel did decline during that period, it was not nearly as precipitous. What is the source you're using for the U.S. export price and do you have any insight on why Mexican retail prices reacted this way? Thanks for any help you could provide, this is a tremendously helpful blog!

The U.S. export prices come from the EIA. They can be found here: http://www.eia.gov/dnav/ng/ng_move_poe2_dcu_NUS-NMX_m.htm.

I get the retail price data from the CRE: http://www.cre.gob.mx/articulo.aspx?id=169. Interestingly, their retail data only goes back to the beginning of 2012. Their data on regulated wholesale prices is as follows:

Refer. Reynosa Cd. Pemex

Jan-11 3.8839 3.9489 3.7108
Feb-11 4.0750 4.1400 3.8955
Mar-11 3.5735 3.6385 3.3948
Apr-11 4.0002 4.0652 3.8199
May-11 4.1170 4.1820 3.9296
Jun-11 4.0710 4.1360 3.8838
Jul-11 4.0991 4.1641 3.9160
Aug-11 4.1203 4.1853 3.9327
Sep-11 3.6184 3.6834 3.4447
Oct-11 3.5382 3.6032 3.3825
Nov-11 3.3049 3.3699 3.1502
Dec-11 3.1618 3.2268 3.0141

The August to December drop is 23%.

In the report you linked to, the retail prices are in the chart on page 105. From July to December (I’m eyeballing, more or less, assuming a drop from $16.50 to $11.50) they fall 30%. That isn’t so far off from the wholesale price drop.

On page 104 there is a cryptic explanation for the remaining differential:

“Although in 2011 resolutions were approved allowing distributors to purchase natural gas futures, the companies stopped buying said instruments, so that retail prices reflected for the most part the fall in the North American reference prices.”

That isn’t fully satisfying, because the timing and magnitude are slightly off. But it’s a start. The basic story seems to be: U.S. prices declined, which cause the regulated wholesale price to decline, and because for some reason the distributors chose not to hedge, retail prices declined a little bit more.

Is this at all helpful?

Hi Noel, thanks for the response - it's very helpful. My understanding is that the prices at Ciudad are tied to U.S. prices through a netback formula (although subject to some manipulation) and so Mexican prices are relatively inelastic with respect to domestic demand. What is the reasoning behind the Mexican government's decision to import higher-cost LNG then? Is it something of an indirect subsidy to satisfy industrial and residential demand?

I don't think it's a subsidy, per se, inasmuch as an attempt to fill demand given controlled final prices.

I'm hair-splitting, though. In a sense, it's the same thing. If controlled prices lead demand to rise, then attempts to fill that demand despite the economic cost are a de facto subsidy.

In that sense, I think you've hit the nail on the head. "Indirect subsidy" is a good way to put it.

There's one wrinkle though: when Pemex decided to buy LNG it isn't clear that they realized the landed price would spike. It is possible that Pemex's decision caused the price to spike. (That is how I would bet, to be honest.) If that's true, then Pemex didn't intend to subsidize consumers ... it was an accident that the managers felt locked into once LNG prices went through the roof.

Is that helpful?

A better time-series on landed price could help resolve the question in my above comment.

Noel, thanks again for the response. It's interesting that PEMEX may have simultaneously underestimated the risk of continued bearish U.S. gas prices along with the impact of their own actions on LNG prices.

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