More than a year later, how has Mexican natural gas pricing evolved?

In June 2017, Mexico’s Energy Regulatory Commission (CRE) announced the elimination of the maximum price of natural gas, known as the first-hand price, or the VPM. Instead of using this price cap formula, the state-owned oil and natural gas company, Petroleos Mexicanos (Pemex), alongside independent market participants, would determine prices based on market conditions.

More than a year later, how does the Mexican market look from a pricing perspective?

In place of the VPM, CRE took steps towards engineering pricing transparency in the gas market through the publication of the National Reference Index of Wholesale Natural Gas Prices (IPGN), starting in July 2017, making price reporting mandatory for the first time in the Mexican market.

Moving to a more granular level, in February, CRE broadened its pricing coverage to six different regional indexes, which represent a volume-weighted average price of all trades reported by marketers during the prior month with respect to volume, average price billed and service costs.

However, regional pricing formation has not occurred solely from a federal standpoint.

Pemex prices are now no longer based on just two markets, Reynosa in the North and Ciudad Pemex in the South, but are determined by market activity in nine different regions of the country, while continuing to utilize S&P Global Platts’ published Henry Hub and Houston Ship Channel indexes as their reference prices.

While pricing transparency has accelerated in the Mexican gas market, obstacles remain.

According to a majority of market participants, CRE’s regional prices, while providing an additional pricing point, have limited use due to the opaqueness of the data included, lax reporting rules as to the types of transactions to report, as well as a several month lag.

Pemex, on the other hand, appears to be conducting business as usual, utilizing an updated version of the pre-reform VPM as well as publishing daily natural gas prices. However, the formula and methodology are now regularly being reviewed and amended by CRE— Pemex’s own system of checks and balances.

In addition, adders for LNG cargoes distort prices in parts of the country that do not maintain direct access to either Manzanillo or Altamira, two of Mexico’s most utilized regasification facilities.

More broadly, when comparing Pemex pricing and CRE pricing in a particular region, such as northeastern Mexico, the two values diverge starkly due to fully loaded costs and various adders being included in the CRE prices, whereas Pemex’s pricing shows strictly the value of the gas.

Fundamentally, the prices are apples and oranges.

Looking ahead, as proposed by CRE, the regulator’s monthly, and eventual daily, indexes, are not a permanent feature of its role in the gas market, with price reporting agencies, such as Platts, expected to take the reins and develop pricing for the burgeoning market.

Since May 2017, Platts has published 15 locations on a net forward model, utilizing final daily settlement prices in the South Texas and Southwest markets as the index, and tacking on transport costs to various points within the country.

As the Mexican market develops, so must modeled pricing, to reflect changes in infrastructure developments, like flows from West Texas to Topolobampo on the western coast of Mexico, as well as shifts in the supply-demand balance, resulting in a dramatic revamping of daily Platts Mexican pricing.

The new prices have sought to pivot away from a heavy reliance on border crossing points, and move deeper into Mexico to capture isolated markets like Merida in the Peninsular region, as well as future interconnection points at Tuxpan, where the 2.6 Bcf/d Sur de Texas-Tuxpan pipeline will end. The project is expected to be in service before the end of 2018.

Currently, these prices are featured weekly on S&P Global Platts Analytics’ Spotlight, but will soon reside in a dedicated Mexican gas product titled “Gas Daily Mexico”, which is scheduled to launch in the fall.

So far, the progress in price transparency to the Mexican energy sector is substantial, but Mexico still has a long way to go in establishing both full transparency and garnering market confidence, as it is an integral part of achieving the full aims of the 2013 Energy Reform and to attracting international investors.