The prospect for substantial U.S. liquefied natural gas (LNG) exports and additional pipeline supplies being exported to Mexico raises questions about pricing mechanisms and the role of the Henry Hub, but it is still too early to determine what role, if any, Henry will have south of the border, an energy consultant with ICF International said Tuesday in Los Angeles.
Mexico recently enacted legislation opening its energy sector to private investments (see Daily GPI, Oct. 3).
"The [U.S.] law calls for the pipeline transportation of supplies to Mexico to be unbundled, so a trading market we presume will emerge at some point; that's certainly the intention," said ICF International Vice President Greg Hopper, who is closely monitoring U.S. gas export prospects.
Speaking at a session of the LDC Gas Forum Rockies & the West, Hopper said there is no reason why a Mexican gas pricing mechanism "couldn't be based on some gas price index, including Henry Hub, and what we've seen so far regarding LNG exports is that Henry and the transparency of the U.S. gas markets are attractive to foreign buyers.
"They like the fact that it is indexed and other possibilities that come with that. The clear direction is toward market-based pricing for gas supplies for the [Mexican] power market."
Hopper said a question surrounding the issue of LNG exports from the United States is what the basis for pricing will be, and whether Henry Hub will be the pricing point.
He raised the question of whether Henry Hub is as relevant given the flood of new supplies set to come to the Gulf Coast from Marcellus and Utica plays that don't flow through the hub.
"For our U.S. LNG export terminals in Louisiana, a lot of the gas being purchased is passed from Marcellus directly to inlets to the plants, bypassing Henry Hub, and so that might affect the overall price signal from Henry," Hopper said.
"The other part of Henry Hub is you see gas there trading at increasing spreads to other points in the United States in the Northeast and even in the Southeast, where it is trading $1.50 more than other U.S. market points, which used to be almost unheard of."
For would-be Mexican gas buyers, other pricing points that are lower and have less volatility might eventually prove more attractive. "I do think indexed prices are the way it will go, but exactly which index at this point, we don't know."
More details on how the Mexican market will be formulated may be issued later this month when details on the reform laws are clearer, said Hopper. He said there still needs to be more clarity on what the eventual roles of Petroleos Mexicanos, or Pemex, and Comisión Federal de Electricidad will be.