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Mexico in theNorth American Context

A Critical Contributor to the Energy Balance

by Wood Mackenzie

Paper presented at theForging North American Energy Security

Conference, Monterrey, Mexico April 1-2, 2004



The author

Wood Mackenzie has been providing its unique range of Consultancy Services and Research Products to the Energy andLife Sciences industries for over a quarter of a century.

Suite 1000 T (713) 470 16005847 San Felipe F (713) 470 1701Houston E [email protected] 77057 www.woodmac.comUSA

FORGING NORTH AMERICAN ENERGY SECURITY

is a conference organized by the North American Forum onIntegration, the Escuela de Graduados en Administración Pública yPolítica Pública (EGAP) of the Instituto Tecnológico y de EstudiosSuperiores de Monterrey (ITESM) and the Consejo Mexicano de

Asuntos Internacionales (COMEXI).

North American Forum on Integration

4519 Saint - DenisMontreal (Quebec)Canada H2J 2L4Phone : 1 (514) 844-8030Fax. : 1 (514) [email protected]

Escuela de Graduados en Administración Pública y Política

Pública

Eugenio Garza Sada 2501

CP 64849, Monterrey NL. MéxicoPhone: 01 (81) 8158-2218 | Fax: 01 (81) [email protected]/egap

Consejo Mexicano de Asuntos Internacionales, A.C.

Campos Eliseos No. 345, Piso 6, Polanco,México, D.F., 11560Tel (52-55) 5279-60-87/88 | Fax (52-55) [email protected]

© Wood Mackenzie’s Copyrights. All reproduction, in whole or in part,is prohibited unless authorized by FINA, owner of an exclusive license.



Suite 1000 T (713) 470 16005847 San Felipe F (713) 470 1701Houston E [email protected] 77057 www.woodmac.comUSA

Mexico in the North American Context – aCritical Contributor to the Energy Balance

Buoyed by a more optimistic outlook for the economy going forward, Mexico’s burgeoning gas demand willcontinue to rise as its relatively immature gas market continues to develop. Despite this increase in

demand, Mexico’s natural gas supply potential remains strong, and, in combination with imports, will turnMexico from a net importer within North America to a net contributor to the North American gas market, ashift set to occur before 2010.

Despite the sharp decline in 2001, Mexico’s gas demand increased by an average annual growth rate of 6.6% per annum between 2000 and 2002. Furthermore demand is expected to increase by an estimated8% in 2003. Much of the strong growth has been fuelled by a raft of new gas-fired CCGTs (CombinedCycle Gas Turbines) as power development proved strong in Mexico, as in the rest of North America. Theseplants will continue to provide the main engine for gas demand growth through 2010 in both Mexico andNorth America as a whole. Over the outlook period, Mexico’s gas demand is expected to rise from a level of 3.3 bcfd in 2002 to 4.5 bcfd in 2010, equivalent to an average annual growth rate of 4%.

The main trends and inflection points for Mexico’s gas market between now and 2010 are as follows:

Demand growth, particularly in the industrial sector, will be lower than it has been at the start of thisdecade, but will still increase from 3.6 to 4.5 Bcf per day from 2003 to 2010.

Domestic supply is increasing, and over the study period it will begin to keep pace with demand. Thisimpact will level off toward the end of the decade, but marketed production will increase from 2.7 to 3.8Bcf per day from 2003 to 2010.

LNG regasification facilities are likely to be constructed in Mexico offering a new source of supply. Thevolumes of LNG injected into Mexico are expected to exceed imported gas requirements. As such,there will be an overflow of supply into the US towards the end of the decade, of more than .5 Bcf per day.

Mexico’s Gas Demand by Sector

The key assumptions underlying this outlook for demand in Mexico include:

Power Sector. Wood Mackenzie assumes that investment in generation is sufficient to sustainelectricity demand growth at around the 4% level. This is significantly lower than the outlooks put forthby the Mexican government which anticipate an average annual electricity demand growth of 6% duringthe 2003-2010 timeframe. There are several key factors that underpin our view of new gas-fired power capacity in Mexico.



Wood MackenzieKintore House74-77 Queen StreetEdinburghEH2 4NS, UKTelephone +44(0) 131 243 4400 Facsimile +44(0) 131 243 4535

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− No Significant Change in Investment Laws. This analysis assumes that there is no significantchange in the electricity law that would encourage a drastic upward shift in investment in Mexico.The current electricity reform that is up for debate in Congress will effectively only release about15% of current industrial sector demand to private sector investment. We do not view thisproposed reform as a major incentive for private sector investment.

− Majority of New Power Build is Combined Cycle. The analysis assumes that the majority of newpower build continues to be CCGT despite higher gas prices during the 2005 to 2008 timeframe.There is some additional investment in Hydro, Steam, Coal and Renewables but the bulk of thenew build is weighted towards CCGTs.

Industrial Sector. Gas demand in Mexico’s industrial sector is expected to stagnate over time due toseveral factors including but not limited to:

− Exposure to higher energy prices. We assume that gas prices remain linked to the US and thatPemex is not subsidizing the industrial sector.

− Non-competitive labor costs. Mexico’s export driven industrial sector has suffered over the lastseveral years in part due to rising labor costs relative to key competitors like China and Southeast Asia. We assume that Mexico’s labor costs remain high relative to other competing countries.

− Export Barriers. Despite NAFTA, Mexico still faces some export barriers as it attempts to expandits market share in the United States. We assume for this exercise that the anti-dumpingmeasures in the US that prohibit the expansion of exports to the US in certain industries (likecement) continue.

Commercial/Residential. The companies currently operating in Mexico’s gas distribution businesshave faced a series of challenges in their attempt to hook up clients and expand market share. Thereis no significant change expected in the business environment for the gas distribution companies. Thechallenges they face include but are not limited to:

− High cost of installation and conversion. Natural gas tariffs at the residential/commercial levelcompete with LPG. If however, customers are forced to assume the cost of installation or conversion, then natural gas is a more expensive option. Many distributors have begun to assumethese up-front costs and plan to distribute them over time to the client.

Strong LPG Competition. Competition from LPG will remain strong, and the ongoing anti gas campaignlaunched by the LPG distributors is likely to continue.




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The resulting demand for natural gas by sector in Mexico through 2010 is as follows:

Mexico Gas Demand by Sector, 2000 – 2010

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G a s D e m a n d ( m m c f d )

LDC* Industrial Power Other

Mexico Gas Demand by Sector, 2000 – 2010 (mmcfd)

Year LDC* Industrial Power Other Total Demand

2000 212 1,447 1,027 263 2,9492001 232 1,231 1,149 261 2,8722002 263 1,294 1,515 256 3,3282003 277 1,290 1,771 257 3,5942004 301 1,242 1,935 259 3,7382005 331 1,220 1,995 261 3,8082006 360 1,224 2,068 264 3,9162007 392 1,233 2,158 268 4,0512008 423 1,245 2,253 271 4,1922009 459 1,260 2,364 274 4,3562010 504 1,277 2,449 277 4,507




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The structural shape of Mexico’s gas market has undergone significant change over recent years. Industrialdemand has traditionally accounted for the largest area of demand but the recent high price environmenthas resulted in a severe weakening of demand in the industrial sector. This, along with the strong growth inthe power sector, has resulted in the power generation sector overtaking the industrial sector to become theprimary area of demand in Mexico’s gas market. The power and industrial sectors together overwhelminglydominate gas demand, accounting for over 80% of the market. The LDC sector (Local DistributionCompanies serving commercial, residential and small industrial consumers) is at a very early stage of development and accounts for only for 8% of the total gas market. Market penetration is low but given itslow base, the LDC sector is expected to be the fastest growing sector over the forecast period. The other grouping largely comprises Pemex Gas’ own consumption and accounts for a further 8% of demand.

Mexico’s Gas Supply by Basin

Mexico has a long history of supplying oil to the United States and has also supplied some relatively minor volumes of gas in the past. In recent years Mexico’s domestic gas market has been growing rapidly, andgas is now being imported from the US via a number of cross-border pipelines. Pemex currently contributessome 2.7 bcfd of market adjusted supply, which equates to 75% of total domestic Mexican demand.

However, Mexico has significant future gas supply potential and, ultimately, the country could be asignificant exporter of gas to the US. The key factor will be less the geology and the levels of investmentthat can be devoted to upstream gas. Severe limitations are placed on this by the fact that the upstreamsector is still operated 100% by the state-owned oil company, Pemex, and chronic under-investment

plagues all aspects of Pemex’s operations.

Any analysis of Mexico’s future gas supply outlook must first start with an examination of Pemex’s futureplans and aspirations for the sector. The company’s Strategic Gas Plan (launched in 2002) aims to seegross Mexican gas production rise from 4.4 bcfd in 2002 to 8 bcfd in 2008, and remain roughly at plateauthereafter.

The majority of this growth is scheduled to come from a rise in non-associated gas production, increasingfrom 1.3 bcfd in 2002 (29% of Mexico’s total) to around 4 bcfd (50%) in 2010. The main sources of this newsupply will be the Burgos Basin, Lankahuasa/Lamprea (Continental Shelf Extensional Fault Trend), theVeracuz Basin and the Macuspana Basin (Southeastern Province). In addition, associated gas from theChicontepec oil field (Misantla Basin) could be important if that difficult development does eventuallyproceed.




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Mexico Supply Region Map

T e x as

Burgos Basin

Lou i s i ana

M i ssi ssippi

Houston

Monterrey

MEXICO

New Orleans

Mexico-Deepwater Basin

Tampico Basin

Misantla Basin

Southeastern Basin

Sierra de Chiapas Basin

UNITED STATES OF AMERICA

San Antonio

Reynosa

MEXICO CITY

Guadalajara

Minatitlan

Mérida

GUATEMALA

GUA TEMALA

Gulf of Mexico

Pacific Ocean

4 0 0 m

e t r e s

Sabinas Basin

Veracruz Basin

C h i h u a h u a

D u r a n g o

C oahu i l a

T amau l i p as

S an Lu i s P ot os i

M i c hoac á n

Z ac at e c as

G u e r r e r o

J al i s c o

C ol i ma

OaxacaChiapas

Y ucat án

Q u i n t a n a R o o

T abascoCampechePuebla

H i d al g o

G u ana j u at o

N a y a r i t

S i n a l o a

N u e v oLe ón

V e r a c r u z

105°W

105°W

100°W

100°W 95°W

95°W

90°W

90°W

1 5 ° N

1 5 ° N

2 0 ° N

2 0 ° N

2 5 ° N

2 5 ° N

3 0 ° N

3 0 ° N

0 200 400100

Km

T abasco




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Wood Mackenzie is more conservative in its estimates of future Mexican supply. This is primarily based onthe assumptions that Pemex’s technical limitations and future budget constraints will limit its plans. We alsoassume that the company’s expectations (in its Strategic Gas Plan) of new supplies emanating from theMultiple Service Contracts (MSCs) are too optimistic. Indeed, with the first MSC round now complete, itseems that only about half the 1 bcfd of gas that Pemex was hoping for from the program will be produced.

Wood Mackenzie estimates that in 2003, imports averaged 900 mmcfd and satisfied 25% of demand.During 2004 supply will only increase slightly and imports will rise to around 940 mmcfd. Beyond 2004 theeffects of the MSCs will begin to be felt and imports should start to decline. Our outlook is one of areasonable increase in gross gas production capacity (to around 5.8 bcfd) by 2010. Tying in our demandforecast, we expect gas imports to fall off from 2005, perhaps dropping to 750 mmcfd by the end of thedecade. However, much more sizeable investment will be required to actually eliminate the country’s importrequirement and we do not anticipate this taking place during the study period.

Gross Gas Production vs. Marketed Gas

The following two charts detail our forecast for both gross and market adjusted gas supply in Mexico. Oneof the major characteristics within the Mexican supply picture is the large difference between ‘gross gasproduction’ and the available ‘marketed gas’ (‘net gas to market’). For instance, in 2002 some 4.4 bcfd of gas was produced at the wellhead but only 2.6 bcfd actually reached the market. Hence 1.8 bcfd of grosswellhead gas production was ‘lost’ (41% of the total). This difference is due to a variety of factors but it isprimarily attributable to shrinkage during processing, in-field consumption/re-injection, flaring/venting andgathering line losses.

Pemex is working to improve efficiency and reduce the unnecessary losses (notably flaring and gatheringline losses), and we expect the percentage losses to slowly decrease through 2010.




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Gross Gas Supply Outlook to 2010 by Basin – Mexico

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G a s P r o d u c t i o n ( m m c f d )

Continental Shelf

Misantla

Tampico

Veracruz

Burgos

Southeastern




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Marketed Gas Supply Outlook to 2010 by Basin – Mexico

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G a s P r o d u c t

i o n ( m m c f d )

Continental Shelf

Misantla

Tampico

Veracruz

Burgos

Southeastern

LNGIn parallel with rising imports over recent years, there has been a surge of interest in LNG. Companies areracing to build new LNG regasification facilities to fill Mexico’s widening supply gap and to potentially supplythe lucrative US market. Competition between the companies is intense but three prime sites have beenearmarked for development – Baja California, Altamira and Lázaro Cárdenas.

The Altamira facility on the east coast of Mexico is at the most advanced stage of development. Shell wonthe CFE’s tender for a 15-year 500 mmcfd LNG contract and construction on the regasification terminal isabout to start. The first deliveries into the site are scheduled to arrive by Q3 2006. No permits for theplanned Lázaro Cárdenas facility have yet been awarded and we do not expect the first deliveries to arriveuntil 2008.




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LNG Imports by Terminal – Mexico (mmcfd)

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1500

2000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m

m c f d

Altamira Lazaro Cardenas Baja California

LNG Imports by Terminal – Mexico (mmcfd)

Facility Grid 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Altamira Main 121 500 500 500 500

Lazaro Cardenas Main 180 300 400

Baja California NW 398 690 764 777

Total 0 0 0 0 0 0 121 898 1370 1564 1677

Mexico’s changing import dynamic

The makeup of Mexico’s net import picture is set to change drastically over the forecast period. CurrentlyMexico is solely dependent on piped supplies from the US for its import requirements and will continue toremain so until 2005 at the earliest. However, the start up of Mexico’s proposed LNG regasificationterminals is set to alter Mexico’s import supply base dramatically. LNG volumes are expected to enter theMexican market in 2006 with the commissioning of Altamira and increase significantly thereafter with thestart up of new regasification facilities at Baja California and Lázaro Cárdenas.




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The influx of LNG into the market will reduce the pull on the US market in 2006 and nullify the requirementby 2007. Moreover, from 2008 onwards LNG imports will be greater than Mexico’s own domestic importneeds. This will have a major impact on the inter-regional flow dynamics. Not only will LNG displace theimport requirement from the US but it will also reverse the net flow direction between Mexico and the US.

Mexico Net Imports by Source (Piped v LNG)

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-500

0

500

1000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m m c f d

Piped (US) LNG

Mexico Net Imports by Source (Piped v LNG) (mmcfd)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Piped (US) 264 346 715 935 966 932 799 -18 -552 -783 -946

LNG 0 0 0 0 0 0 121 898 1370 1564 1677

Total 264 346 715 935 966 932 920 880 819 781 731




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The chart shows the potential LNG overspill that could feed the US market via Mexico beyond 2007. By2010, LNG imports are expected to reach 1.6 bcfd – a surplus of 0.9 bcfd beyond Mexico’s own domesticrequirements. This will give Mexico significant scope to act as a LNG receiving and transit country to servethe US market. The overspill into the US market is unlikely to be met purely by LNG however. (Surplusvolumes brought into the Baja California grid will flow into the US but deliveries into the main grid via Altamira and Lázaro Cárdenas are unlikely to reach the US border).

In part this is due to the location of the regasification terminals but it is also due to the location of Mexico’smajor gas producing regions. Traditionally most of Mexico’s indigenous gas supply has been from thesouthern region but more recently the northeast region, and in particular the Burgos basin, has risen inprominence. The Burgos Basin is a key part of Pemex’s strategic gas program and non-associated gasproduction from the region is set to increase significantly over the decade. LNG imports into Altamira andLázaro Cárdenas will result in Mexico’s arbitrage point moving north, which in turn will allow Mexico toexport a proportion of its northeast gas production to the US.

Main Grid Net Imports by Source (Piped v LNG)

-1000

-500

0

500

1000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m m c f d

Piped (US) LNG

Main Grid Net Imports by Source (Piped v LNG) (mmcfd)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Piped (US) 204 262 590 744 693 636 482 30 -230 -422 -612

LNG 0 0 0 0 0 0 121 500 680 800 900

Total 204 262 590 744 693 636 603 530 450 378 288




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The US Gas Market Dynamic

The US gas market remains on edge, with available supplies fundamentally inadequate to meet the demandthat has historically existed in the North American gas marketplace. The implication for the Henry Hub priceis that natural gas must price at a level that discourages an amount of demand sufficient to bring the marketback into balance. This condition will remain in place through 2010 and beyond, as Wood Mackenzie doesnot expect import growth to keep pace with native supply decline and demand pressure.

The prices of residual and distillate fuel oils have heavily influenced the upper and lower bounds of the pricerange for natural gas in recent years, but these relationships are changing. For 2004 and 2005 WoodMackenzie expects periods in which supplies are adequate to allow demand to return to the market, and inthose periods price may weaken below resid for a time. Beyond 2005, the periods in which gas must priceat levels that discourage a significant amount of demand each day will increase in frequency, and in thoseperiods gas is likely to price above distillate fuel oil. Where gas price falls in relationship to resid anddistillate on an annual average basis will be determined by how much demand must be driven out of themarket, and for how long, in order to balance the gas market.

Wood Mackenzie’s average annual Henry Hub price expectations in nominal dollars, and major factorsinfluencing price, are illustrated in the chart on the following page:




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Price is expected initially to decline significantly, from an average of $5.45 in 2003 to $4.77 in 2004, andincrease steadily thereafter. But, the fundamental factors influencing price will shift over the remainder of the decade. The annual US supply/demand balances provided in the table below highlight the pattern of declining US supply post 2005, as well as building demand pressure in the power generation market.However, the resulting price pressure is not uniform, as moderating oil prices, building imports, and the USproduction peak result in three distinct phases for the Henry Hub price.

US Balance – Bcf per day

DryProduction(1)

Supplemental Total Canada Mexico(2)

LNG (3) TotalImports

NetWithdrawals

Total

2001 51.91 0.21 52.12 9.76 -0.26 0.47 9.97 -3.19 58.902002 51.42 0.22 51.65 9.83 -0.59 0.45 9.69 1.52 62.852003 51.20 0.22 51.42 8.67 -0.74 1.13 9.06 -0.16 60.322004 51.70 0.22 51.93 9.21 -0.69 1.51 10.03 -0.05 61.91

2005 51.95 0.23 52.18 9.05 -0.64 2.25 10.66 -0.32 62.522006 51.72 0.23 51.95 8.93 -0.48 2.74 11.19 0.59 63.722007 51.44 0.23 51.66 9.08 -0.03 3.63 12.68 -0.34 64.012008 51.19 0.22 51.41 8.96 0.20 4.43 13.59 -0.44 64.562009 50.80 0.23 51.03 9.05 0.42 5.20 14.67 0.13 65.832010 50.00 0.23 50.23 9.29 0.61 6.03 15.93 0.70 66.86

(1) This column includes only import/export balances to the Mexican main grid.(2) This column excludes LNG Deliveries into Baja California, Northwest Mexico.(3) NW Mexico Demand included within the US balance because it is integrated with the US grid rather than the Mexican maid grid.

Canadian Production

Canadian gas production is also key to the North American energy balance, and will heavily influence

overall gas prices, wholesale power prices, and net gas flows across the US-Mexican border. Canadian gassupply is dominated by output from Western Canada and will remain so for the foreseeable future. Outputfrom the Western Canadian Sedimentary Basin (WCSB) is forecast to recover slightly following productiondecline in 2002/03 due to high drilling activity. But despite strong predictions for the number of future wellsto be drilled going forward, production is expected to remain relatively flat for the remainder of the decade.




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Our supply forecasts for Canadian gas represent ‘marketable’ or ‘marketed’ gas supply that comprisesmethane and other components including an element of natural gas liquids. Wood Mackenzie forecastsCanadian marketed gas production to grow modestly to 2005, increasing by around 0.4 bcfd over 2003 to17.5 bcfd. By 2010, developments offshore Atlantic Canada and in the Mackenzie Delta, expectedonstream in 2007 and 2009 respectively, should more than offset an anticipated decline from WesternCanada resulting in total production of around 18.4 bcfd.

Marketed Gas Supply Outlook to 2010 by Region – Canada

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C a n a d a G a s P r o d u c t i o n ( b c f d )

Arctic

East Coast

Western Canada

Marketed Gas Supply Outlook to 2010 by Region – Canada

Supply Region 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Western Canada 16.7 17.2 16.8 16.5 16.9 17.0 17.0 17.0 16.9 16.8 16.6

Atlantic Canada 0.4 0.6 0.6 0.5 0.5 0.5 0.5 0.8 0.9 0.9 1.0

Arctic Canada - - - - - - - - - 0.3 0.8

Total (bcfd) 17.1 17.8 17.3 17.1 17.5 17.5 17.5 17.8 17.8 18.0 18.4




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The Henry/Reynosa Price Relationship

Historically Mexico‘s gas infrastructure has been closely interlinked with that of the US and the choice of theHouston Ship Channel (HSC) as a benchmark enables the opportunity cost of Mexican gas in the North American market to be considered. On the other hand, the HSC is a liquid market, pricing in closerelationship to the hub at Katy, Texas, and it also exposes Mexico’s gas market to increased price volatilitycaused by externalities in the North American gas market - i.e. sensitivity to weather variations and supplyand demand. The effects of this linkage were already apparent in early 1997 when price hikes in the USimmediately filtered through to Mexico causing considerable unrest at the end-user level. More significantly,this price linkage became a serious concern throughout the 2000s as US prices soared to all-time highs.

Prices of First Hand Sales Gas at Cd PEMEX, Reynosa & South of Texas HSC

0,0

2,0

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10,0

j a n v -

0 2

a v r -

0 2

j u i l - 0 2

o c t - 0 2

j a n v -

0 3

a v r -

0 3

j u i l - 0 3

$ / m m B t u

C.d PEMEX Reynosa (Tetco PG&E) Houston Ship Channel

Source:CRE

The price hikes experienced in January 2001 and March 2003 had a damaging and drastic impact onMexico’s industrial sector (see previous section). Many of the industrial consumers had failed to take actionnecessary to protect themselves against price risk and the high prices forced many companies into financialdifficulties. Where possible, companies switched fuels but the overwhelming majority were forced to reduce

output or shutdown completely. Many companies were pushed to the verge of bankruptcy. This had anegative impact on economic and industrial activity.

As indicated in the previous section, Mexico’s prices are wholly linked to HSC thus the forward view onbasis presented in this study varies directly with HSC. We have assumed for the purposes of this analysisthat the existing formula does not change over the study period. With this assumption as the basis,Reynosa basis is expected to be in the range of $.20-$.40 below Henry Hub.




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Mexico and Henry Hub Prices

$0.00

$1.00

$2.00

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$9.00

J a n - 0 3

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$ 2 0 0 2 p e r m m b t u

Henry Hub

Reynosa*

Mexico Basis to Henry Hub ($ 2002 per mmbtu)

Year Henry Hub Reynosa* Reynosa*Price Price Basis

2000 $4.48 $3.89 -$0.152001 $4.05 $4.10 -$0.232002 $3.34 $3.03 -$0.192003 $5.32 $5.01 -$0.242004 $4.54 $4.36 -$0.202005 $4.05 $3.87 -$0.182006 $4.20 $4.02 -$0.192007 $4.29 $4.10 -$0.192008 $4.34 $3.97 -$0.372009 $4.42 $4.14 -$0.282010 $4.50 $4.08 -$0.42

* Reynosa basis and therefore price calculated based on existing CRE formula which links Reynosa price to HSC. We have notcontemplated a change in arbitrage point. For monthly data see Appendix or study website.

As the gas balance shifts at the border, and exports begin into the US market, Reynosa can be expected toprice at a greater discount to the Ship Channel, and to the Henry Hub as well.




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Conclusions

Mexico, a long-standing and critical contributor to the North American energy balance, is well-positioned tobecome a net contributor to the North American gas supply mix within this decade, and in fact it is WoodMackenzie’s expectation that it will. For this shift to occur, however, several challenges must be met.

Reductions in gas losses in the system,

Continued gas-directed investments by PEMEX,

Effective and private investment in gas-directed upstream activity ,

Permitting and construction of at least 3 LNG regasification terminals, and

Overall supply growth that overtakes Mexico’s potentially strong native demand growth potential.

As daunting as these challenges appear in combination, at least some action is occurring on all of thesefronts. The likely result, in Wood Mackenzie’s view, will be net exports to the US - helping to relieve theNorth American gas supply crisis. In addition, Mexico’s gas consumers will pay a somewhat lower price for gas in comparison to the prices paid by customers in the central and eastern part of the US.

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