Mexican gas production accelerated in 2004 and almost doubled to reach 6.4 bcf/d in 2010. But since then, production has begun to stagnate. While production was falling, demand for natural gas was rising, led by the power and industrial sectors. Growing demand-side pressure has led to recent supply events, when deliveries to industry and the power sector were curtailed. Such restrictions are in contrast to the US, where the surge in shale gas production has pushed natural gas prices to record low levels. Mexico's supply gap has been increasingly met by higher imports, doubling from 2010 levels by 2013. But even then, imports have been limited by insufficient pipeline connections with the US. In 2013, this resulted in Mexico receiving 5 Mt of LNG at global LNG prices, double or triple US natural gas price levels.
Despite the above, Mexico has a good reserve base, estimated at 17 tcf. But, historically it cannot boost production without investment from state oil and gas monopoly Pemex. Under this arrangement Pemex has not increased its gas supply, due in part to lack of international capital and expertise, and competing demands on its capital from oil. To redress this, the government has begun an ambitious programme of reform aimed at attracting international partners for Pemex as well as allowing international firms to develop reserves. The reforms were passed in August 2014 but the impact is unlikely to be immediate. Implementation will take time, as much of the proved reserves will stay with Pemex, and Pemex's prioritised gas projects are deep offshore projects with extensive lead times. Although production should increase well before 2018, expectations about the time taken for the reform to pay dividends needs to be realistic.
Supply should eventually expand, but demand will continue to grow, led by the power sector. The power sector needs to meet increasing demand from Mexico's manufacturing base; and a government desire to replace remaining oil-fired generation with gas. Healthy growth in industrial production is being driven by an average wage rate in Mexico now at a discount to the average Chinese wage. As most of the investment is in more labour intensive manufacturing, the impacts on gas demand will be felt more strongly through increasing power demand.
Mexico's recent gas balance has been achieved by a growing reliance on imports, which we expect will continue to be the case for the remainder of the decade. We estimate the supply and demand gap will grow by 1 to 1.5 bcf/d from its current levels by 2020, given some healthy increases in production. In addition, with US natural gas prices at a discount to global LNG prices, Mexico will want to substitute LNG for US gas pipeline imports, adding another 0.5 bcf/d of demand for US imports. While an increase of 1.5 to 2.0 bcf/d in Mexican pipeline imports by 2020 may be less than what growing pipeline capacity could allow, there are plenty of risks that could raise that level, including slower domestic production growth and more investment in energy intensive industry-which we expect will prefer to invest north of the border. So even with the current energy reforms targeting the supply side, we project Mexican imports of natural gas from the US will continue to grow over the remainder of the decade.