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U.S. Shale Glut Means Gas Shortage for Mexican Industry: Energy

U.S. Shale Glut Means Gas Shortage for Mexican Industry
Monopoly supplier Petroleos Mexicanos, known as Pemex, contacted all clients last month for the 15th time this year to recommend they cut consumption or face incomplete deliveries, compared with 18 times in all of 2011. Photographer: Susana Gonzalez/Bloomberg

Mexico has begun cutting natural gas supplies to some of its largest customers by as much as 45 percent of their orders to cope with ballooning demand from households to steelmakers such as Ternium SA and ArcelorMittal.

Monopoly supplier Petroleos Mexicanos, known as Pemex, started reductions on a case-by-case basis as the government studies forcing the measure on all companies. Pemex has increased imports from the U.S. to records this year as its state-owned pipelines run at about 95 percent of capacity.

The bottleneck in Latin America’s second-largest economy is the latest energy whiplash stemming from the U.S. shale gas boom. Mexican gas prices are tied to rates in its northern neighbor, where soaring supplies from shale fields drove gas to a 10-year low and reduced Mexico’s wholesale price 32 percent in the past year. Manufacturers can’t get enough of the energy.

“The shortage of natural gas is affecting companies economically and technically,” Octavio Rangel, the Mexico Steel Chamber chief, said without naming any, in a written response to questions. “In some plants, gas supply has been reduced 40 percent to 45 percent of what was originally agreed.”

Pemex contacted all clients last month for the 15th time this year to recommend they cut consumption or face incomplete deliveries, compared with 18 times in all of 2011.

The pinch illustrates how the global supply balance was rocked by advanced extraction techniques that have buyers in the U.S. paying about one-eighth the price Asian nations are charged for gas. At the same time, nations like Mexico that link prices to the U.S. Henry Hub benchmark are seeing rapid demand growth compared with Europe, where most rates are tied to oil.

‘Pricing Problem’

“The problem is about pricing, not about reserves, not even about pipelines,” David Shields, a Mexico City-based independent energy analyst and publisher of Energia magazine, said in an Aug. 22 interview. “Companies want the same prices here than those in the U.S. when the supply reality is different in Mexico.”

On Aug. 29, Energy Minister Jordy Herrera met with executives from Concamin, an umbrella group representing Mexico’s multiple industrial chambers, to discuss boosting imports of liquefied natural gas, or LNG, from South America and Africa in exchange for higher rates to customers.

A deal wasn’t reached. The companies rejected any plan that will pass the increased costs to the industrial customers, two people familiar with the meeting said. They asked not to be identified because the information isn’t public. Officials at the press offices of the Ministry and Concamin declined to comment.

Largest Consumers

The steel industry is the largest private consumer of gas, with ArcelorMittal, Ternium and Altos Hornos de Mexico SA being the biggest producers. Officials at Ternium and ArcelorMittal, both based in Luxembourg, declined to comment from Mexico, as did those from Altos Hornos.

Of all the so-called critical alerts issued since 1998, when customers are asked to cut usage, about a third occurred in the past 18 months, Pemex said in an e-mailed statement.

The longer Mexico is short of supply, the more likely U.S. companies such as Apache Corp. and Cheniere Energy Inc., both based in Houston, will benefit. Cheniere, seeking to increase shipments to countries with U.S. free trade agreements, in April won federal approval to build the largest U.S. natural-gas export plant.

While Pemex has projects to add pipelines from other points in the U.S., they won’t come into service until at least 2014. The bulk of its supply, from domestic gas fields, has likewise lagged demand growth.

Idle Gas

Pemex’s monopoly for gas production is leaving fields with as much as 1 trillion cubic feet of gas reserves to sit idle as cheap North America prices deter investments. At the same time, Mexico’s constitution prevents private companies from developing such projects.

Output is restrained by decades-old equipment and a strategy of prioritizing investments in crude oil projects. Mexico’s domestic natural-gas sales have risen 70 percent in the past decade, outpacing a 46 percent increase in production, according to Energy Ministry data.

The nation, operator of the world’s ninth-longest pipeline grid and the second-biggest importer from the U.S., is increasing its 6,000-mile gas network 40 percent. The $10 billion of projects are largely getting financed by private developers.

U.S. exports by pipeline to Mexico reached an all-time high of 52.2 billion cubic feet in May as yields from shale formations drove U.S. output.

Rationing Effects

Despite the gas boom in the U.S., some Mexican plants have delayed projects “to switch their equipment to cleaner gas amid the shortage,” Rangel said, without identifying the companies. Any rationing of gas supplies will prompt “production losses for the companies and for the supply chain.” Rangel said.

Gas emits about 50 percent less carbon dioxide than coal.

“There’s no uncertainty,” Deputy Energy Minister Mario Gabriel said by telephone from Mexico City on Aug. 20. “It’s a short-term problem, and the industrial sector knows that by 2014, 2015 and 2016 the gas will be arriving where they want it for its new projects.”

Thirty percent of Mexico’s energy consumption is natural gas, the U.S. Energy Department said on its Mexico Country Analysis Brief. Mexico produced 2.1 trillion cubic feet of gas in 2010, while consuming 2.2 trillion, according to the department.

LNG Imports

Gabriel said that Mexico will boost imports of LNG to offset the shortages and will delay some projects to replace the use of fuel oil with natural gas at its power plants and refineries run by Pemex and Comision Federal de Electricidad, the state-owned power company known as CFE.

Mexican companies are moving away from fuel oil, which trades at $17.301 per million of British thermal unit, to use natural gas, which settled at $2.850 per million Btu on the New York Mercantile Exchange. Gas fell to a 10-year low of $1.902 per million Btu on April 19.

Mexico regulates natural-gas prices by linking them to the futures delivered to the Henry Hub in Louisiana and adding a transportation fee.

LNG is gas chilled to minus 260 degrees Fahrenheit (minus 162 Celsius) so it can be transported by ship.

CFE and Pemex, which uses gas to boost output from aging crude fields and to power some refineries, will need to trim their demand in the short-term to balance the natural-gas market, Gabriel said.

Replacing Fuel Oil

CFE, Latin America’s largest utility by revenue, planned to be “extremely aggressive when it comes to growth capacity from natural gas,” then Chief Executive Officer Antonio Vivanco said May 23. CFE is upgrading four plants and building 10 power generation terminals to replace the use of fuel oil with natural gas. Pemex plans similar upgrades in most of its refineries.

Mexico’s plans to relieve shortages in the short term with LNG imports may be hampered by Peru’s request to domestic producers to halve its gas exports to Mexico to allocate gas reserves to Peruvian industries.

Mexico’s fields aren’t the only underused gas facilities, Shields said. Mexico’s LNG terminals are working at a low capacity or not operating at all because South American prices can’t compete with U.S. costs.

“In practice, the only gas coming to Mexico will be by pipelines, and they’re at their limit,” Shields said.

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