Manzanillo: A Controversial Pricing Star Is Born?

Comisión Federal de Electricidad's (CFE) decision to bid out the Manzanillo liquefied natural gas (LNG) project with the Southern California (SoCal) index as its relevant benchmark could establish a new pricing point in Mexico's western natural gas market. A new pricing point will bring benefits-and costs-to a wide range of players, including the power sector and other consumers, Pemex and other natural gas suppliers, and LNG developers themselves.

* Potential arbitrage differences with Mexico's regulated price. The new US gas proxy could challenge Mexico's regulated gas pricing methodology as it is not designed to accommodate the flexible basis differential between the SoCal and South Texas markets.
* An external method to reduce prices in Mexico. Gas consumers could see a lower benchmark price, although the potential benefits will arrive gradually as the regulated gas is increasingly threatened by a more competitive third-party gas source in the western region.
* No final decision yet. This new pricing point is still waiting on two key milestones: confirmation that the Manzanillo LNG project will go forward, and sufficient interest from international players to meet CFE's expectations for firm long-term LNG contracts.

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