To ease escalating natural gas prices that have resulted inplant shutdowns and job losses, Mexico’s Energy Ministry said lastweek that the government will offer long-term financing through2006 to help industries cope.

The ministry said last week that the government would beginfinancing this month the difference between the reference price fornatural gas used by state-owned gas and oil monopoly PetroleosMexicanos, or PEMEX, and a base price of $4 MMBtu. The change wouldprotect the country’s industrial sector, whose profits have beendevastated in recent months, forcing layoffs and shutdowns.

Mexican companies currently pay natural gas prices that arekeyed by U.S. market prices in South Texas, even though thecountry’s energy sector is controlled by PEMEX. Adjustments aremade for transmission distances.

The Energy Ministry’s proposal, a compromise reached bygovernment officials, industry representatives and PEMEX, willoffer financing on gas bought between now (January) and March 2001.Under the proposal, PEMEX customers would repay the financed partof the purchases in monthly installments beginning in 2002.Payments would have to be completed by March 2006. The rate was notspecified, but would be competitive.

A longer-term solution is expected to be unveiled before Marchby an analysis group made up of government and industryrepresentatives, and the Energy Ministry said that might includesetting up a price-hedging scheme. No mention was made of droppingthe Texas-based price scheme.

“Unlike the world oil market, natural gas markets are regionaland are determined by physical links between supply and demand,”said the ministry in a written statement.

The new proposal followed a similar measure passed by theMexican Senate the day after Christmas. The Senate urged PresidentVicente Fox to set a cap of $3.92/MM Btu on the price of naturalgas. The Senate’s agreement, backed by the opposition majority,said the price cap would give the country’s industrial sectorshort-term “breathing room.” The Senate’s proposal was the secondsince Fox took office Dec. 1 urging the new administration tostabilize Mexico’s natural gas prices.

The Ministry’s plan would complement earlier efforts by formerPresident Ernesto Zedillo last year to provide relief withoutresorting to direct subsidies to industry. Over the summer, Mexicoenacted a program that allowed natural gas bills to be paid outover time, and also to provide a 25% discount on August 2000 pricesto companies that used natural gas futures contracts to hedge theircosts. The hedging discount is estimated to have cost thegovernment $28 million.

Currently, Mexico imports nearly 6% of its natural gas, and theimports are expected to grow to as much as 30% by 2009, accordingto the government’s 10-year outlook for the energy sector. PEMEX’snatural gas production in 2000 averaged 4.7 Bcf/d, and itsproduction is expected to grow to 8 Bcf/d by 2009.

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