If a tax war breaks out with Mexico, the price of U.S. natural gas shipped by pipeline would increase for Mexican buyers, but the fuel could still be the competitive energy choice south of the border.

The Trump administration floated the idea of a 20% border tax on goods imported from Mexico on Jan. 25 as part of its initiative to have Mexico pay for the construction of a border wall. If that happens and Mexico reciprocates with an identical tax on U.S. imports, a 20% surcharge could be tacked on to gas produced in the U.S. and shipped and sold in Mexico.

That surcharge would be paid by Mexican gas consumers, but it would not price pipeline gas out of the market, analysts said.

The average landed price of LNG at the Altamira Terminal on Mexico's Gulf Coast was $7.94/MMBtu as of Dec. 16, according to data from FERC, while the cost of gas off a pipeline from the U.S. averaged $2.60/Mcf in November."We wouldn't expect Mexico or any other country to not hit back," Maria Sanchez, energy analysis manager at Drillinginfo, said in an email. "I imagine Mexico [could be] looking at LNG imports again (they recently said all their imports will come from US pipelines). A 20% tax at $3.50 gas is 70 cents, so the U.S. gas might not be as cheap anymore, however this could still be cheaper than importing LNG."

"If Mexico did institute an import tax, much of that burden would be borne by Mexican gas shippers, which import U.S. gas into Mexico," S&P Global Platts Analytics analyst Ross Wyeno said. "Furthermore, a 20% increase in US natural gas prices is not expected to have a drastic impact on total demand for imports, since the next available substitution fuels are LNG and fuel oil, which both tend to trade at an above 20% premium to U.S. pipeline natural gas."

Exports of U.S. gas to Mexico have boomed in parallel with the shale revolution, and Wyeno does not see a theoretical 20% price hike as tax stopping export growth. "In 2017, Platts Analytics expects that U.S. exports to Mexico will reach 4.9 Bcf/d, a whopping 36% increase over last year."

But the fireworks of a tariff battle could be far worse than the blast effects, other analysts said.

"Everyone's been so excited about the potential for growing the Mexican natural gas market, and the very large infrastructure projects which are already underway and the ones that are planned for the future to get more U.S. natural gas into the Mexican market," said Duncan Wood, director of the Mexico Institute at the Wilson Center, a nonpartisan research organization. "It's kind of been taken for granted that that would be a market that would continue to grow."

Upstream producers and midstream pipeline operators should worry about the possibility of a financial border war, Wood said.

"If all of a sudden you begin to raise doubts about Mexico's potential as a natural gas importer, then surely that's going to hit U.S. firms," he said. "It's not just in terms of production and exports today, it's more about their ability to raise capital for the future. If the market is not going to grow in Mexico, then all of those companies will suffer because of it."

The biggest gas buyer in Mexico is the federal power authority, the Comisión Federal de Electricidad, which uses the gas mainly to fuel its growing fleet of electric power plants across the country.

The U.S. energy company with the most skin in the game is, arguably, the pipeline giant Kinder Morgan Inc., which says it already delivers 76% of the U.S. gas exported to Mexico through 17 pipelines and interconnects, and has plans to expand.

"The Mexico export projects that we have announced publicly are supported by firm commitments that are not impacted by the current discussion of import tariffs," Kinder Morgan spokesman Richard Wheatley said. "Given our pipeline network proximity and connectivity, we will be a major source of natural gas to Mexico either directly or indirectly for the foreseeable future.

Wyeno said any tariff war might skip U.S. export gas altogether. "The cost of the tax would largely be passed along to the Mexican consumer in the form of higher power prices, which is not likely to be a very politically attractive option," Wyeno said. "I think it's more likely that they would place a tax on another class of U.S. imports, such as manufactured goods and parts coming across the border, which would increase costs for U.S. companies operating manufacturing sites in Mexico."

Energy policy analyst Kevin Book of ClearView Energy Partners LLC is not quite as sanguine. A tariff war would mean the North American Free Trade Agreement, which Trump has called the "worst trade deal ever," has collapsed, injecting a whole new level of uncertainty into energy trading, Book said.

"In our view, if NAFTA were to give way to North American trade constrained by tariff and non-tariff barriers, this interdependence [of Canada, Mexico and the U.S.] all but guarantees net losses all around," he said.

S&P Global Platts Analytics and S&P Global Market Intelligence are owned by S&P Global Inc.