Picing Naual Gas in Mexico Dagobe L. Bio* Juan Rosellon** June, 999 Absac We sudy mechanisms fo linking he Mexican make fo naual gas wih he Noh Ameican make and show ha he neback ule is he efficien way o pice naual gas. We sudy he effecs of invesmen in poducion faciliies, educions in impo aiffs and echnical expo esicions on domesic naual gas pice. Reducing he impo aiffs will no incease he impoaion of naual gas and will have lile impac on he pice. Fuhe, we show ha i is opimal o develop new gas souces closes o he abiage poin ahe han o he cene of consumpion. We also sudy he implicaions of he egulaoy famewok on Pemex s makeing aciviies in he fowad make fo gas. Key wods; naual gas, welfae, picing, Mexico, egulaion *Depamen of Economics [MS-22] Rice Univesiy 6 Main Houson, TX 775 email:bio@ice.edu ** Ceno de Invesigación y Docencia Económicas, A. C. Cae. México Toluca 3655 Lomas de Sana Fe, 2 Mexico D. F e-mail:josellon@dis.cide.mx The eseach epoed in his pape was suppoed by he Comisión Reguladoa de Enegía in a gan o he Ceno de Invesigacion y Docencia Economicas, A.C.
. Inoducion NAFTA has esuled in he opening of many of he Mexican makes; many of he insiuional and aiff baies o he fee movemen of capial and goods have been emoved. This pape discusses he linkage of he Mexican make fo naual gas o he U. S. and Canadian make. Difficulies aise fom hee souces. Fis, he naional oil company Peóleos Mexicanos (Pemex) is a monopoly and many of he makes involved ae egulaed. Pices ae no a good guide fo economic decisions as o poducion. Second, oil, gas and naual gas liquids ae ofen poduced joinly, and in such cases i is impossible o allocae coss of poducion o a specific poduc. Finally, he goods poduced ae subsiues in consumpion. Gas and oil ae subsiues in he geneaion of powe; naual gas liquids, gas and oil ae subsiues as feedsocks. This ceaes vey difficul poblems in egulaing pices. The Comisión Reguladoa de Enegía (CRE) has been given he esponsibiliy of egulaing he pice of naual gas. In Noh Ameica, gas is anspoed by pipeline. The cos of anspoing cubic fee of gas miles by onshoe pipeline is appoximaely $.4 o $.85. By conas, he cos of anspoing a bael of esidual fuel oil is appoximaely $. pe housand miles. Since a bael of esidual fuel oil has he enegy equivalen of 6 cubic fee of gas, gas is moe han weny imes moe expensive o anspo han fuel oil. The economics of anspoaion is a key elemen in he Noh Ameican make fo gas. This make is based on pipelines and hee ae pipelines connecing he Unied Saes and Mexico. We begin by consideing he essenials of he Mexican pipeline sysem, and show how he pice of naual gas in Mexico is ied o he gas pices in Souh Texas. We hen consuc a model of naual gas impo, expo and disibuion in Mexico, and deive he opimal picing ule of naual gas in he Mexican pipeline sysem. This picing ule is he fomula ha he CRE has implemened and is consisen wih he objecives of a egulao seeking o opimize social welfae. Finally, we analyze he impac on he pice of Mexican naual gas of educions in impo aiffs, echnical expo esicions, new poins of poducion, and fowad makes and esicions on pipeline capaciy.
2 2. The Mexican Naual Gas Make The Mexican pipeline sysem is shown in Figue. This newok is, 249 kilomee long. I eaches mos of he indusial cenes wih he excepion of he Noh Pacific pa of he couny. In 994 he pipeline sysem anspoed 2.4 billion cubic fee of naual gas. This volume includes 3 million cubic fee (mcf) of gas impos, 4 mfc of non associaed gas, and 2. billion cubic fee (bcf) of associaed gas fom pocessing plans. Mexico has appoximaely 63 illion cubic fee of gas eseves. In ecen yeas ove 38 illion cubic fee of non associaed gas have been discoveed nea Bugos. These gas fields ae close o he Texas bode. A pesen ae of consumpion, his is ove 35 yeas of eseves so hee is a poenial fo his gas o be expoed o he U. S. make. The pipeline linkage fom hese discoveies o he U.S. make is cuenly unde expansion. 2 Impo The Mexican Pipeline Sysem Impo Cananea Imuis Naco Cd. Juáez Impo Impo Hemosillo Guaymas Chihuahua Cd. Cuauhémoc Delicias Gómez Palacio Cd. Camago Jiménez Laguna del Rey Moneey Toeón Salillo Nuevo Laedo Monclova Linaes Piedas Negas Reynosa Los Ramones Impo Maamoos Agüelles Sn. Fenando Bugos Sn. Luis Poosí Cd. Madeo Guadalajaa L. Cádenas Salamanca Sa. Moelia Ana Uuapan Toluca Tlalchinol Tula Pachuca Poza Rica Veacuz Jalapa Maapionche Villahemosa Puebla Pajaios La Vena Aasa T. Blanca Cd. Pemex Minailán Nvo. Teapa Méida Campeche Souce: PEMEX Opeaional No opeaional Injecion poin Salina Cuz Cacus y Nuevo Pemex Figue. Pemex, 998, Indicadoes Peoleos y Anuaio Esadísico. 2. The cuen expo capaciy a Reynosa is 75 mcf pe day and he impo capaciy is 3 mcf pe day. These capaciies ae being expanded o 33 and 22 especively wih he Tennessee and Tejas pipelines.
3 The Mexican pipeline sysem can be viewed as a "Y" shaped newok. Ciudad Pemex is locaed a boom of his "Y". This ciy is locaed in he Souheas egion whee Pemex poduces associaed gas (8% of oal naual gas poducion). In he Noheas am of he Y is Reynosa-Bugos which poduces non associaed gas (2.3% of oal poducion) and is a link wih he Texas pipeline sysem. A he Nohwes am is Ciudad Juáez which is a poin whee gas is impoed. The physical juncion of he hee banches of he "Y" is locaed a Los Ramones. The CRE egulaes he pice of gas a Ciudad Pemex pice hough a neback fomula based on a benchmak pice in Souheas Texas, he abiage poin beween impoed gas and gas poduced in Mexico, and he ne anspo coss. The poin whee impo and domesic flows mee is defined as he abiage poin. Since he pice of impoed and domesic gas mus be he same a his poin, he pice of he Mexican naual gas a his poin is he sum of he Texas benchmak pice plus he anspo cos fom he bode. The pice of gas a Ciudad Pemex is he pice of gas a he abiage poin less he anspo cos fom his poin o Ciudad Pemex. The pice of gas in Mexico is he pice a he Houson Ship Channel adjused fo coss. The pice cap fo he Mexican naual gas is equal o he pice in Souheas Texas, plus anspo coss fom Texas o he abiage poin, less anspo coss fom he abiage poin o Ciudad Pemex. The abiage poin is cuenly locaed a Los Ramones. In a saic model his pice ule would be opimum. Howeve, picing naual gas is a poblem in he heoy of he second bes. Two equilibium condiions have o be saisfied fo efficiency: spaial and ineempoal condiions. In he spaial make, he pice of naual gas mus be linked o anspo coss while in he ineempoal make he pice of naual gas a any wo poins in ime should be linked by he inees ae and he cos of holding naual gas. The picing ule based on he Houson Ship Channel pice implies an equilibium in a spaial sense since he maginal cos of impoed gas and he maginal cos of domesic gas ae he same a he abiage poin. Howeve, in imes of peak demand, he binding
4 consains in he supply of gas o make maybe bolenecks in he pipelines fom gas soage esevois and non-associaed gas fields.he ule may cause ineempoal disoions due o he high cos of anspoing and soing naual gas. Thus, linking he US and Mexican naual gas pices inoduces ino he Mexican make he disoions geneaed by he US weahe. A vey cold wine in he Noheas of he USA duing 996-97 caused a damaic incease in he naual gas bills paid by Mexican consumes. 3 When he ineempoal equilibium condiion is violaed, is i sensible o impose he spaial condiion? The heoy of he second bes suggess ha he answe o his quesion is no clea. Having he pice of naual gas eflec he cos of impoed gas means ha he maginal gas will be used efficienly in he sho un, bu impuing his pice o domesic poducion esuls in ens o Pemex and may ceae ineempoal disoions. Naual gas should be piced in ems of is scaciy and no in ems of pipeline bolenecks. One possible disoion is he selecion of echnology ove ime. One of he mos impoan uses of naual gas is in he geneaion of eleciciy. In ha use, i is a close subsiue fo fuel oil. The pemiums fo naual gas ove oiled fied alenaives wee compued by Sauffe in his sudy of he economics of anspoing liquefied naual gas. He found ha gas had a small advanage ove fuel oil and ha a subsanial facion of ha pemium could be aibued o envionmenal concens. 4 Anohe faco in educing he disoions caused by seasonal vaiaions in he pice of gas is he emegence of a boad make in fuue conacs. This make enables gas consumes in Mexico o hedge agains some of he isk ceaed by he weahe in he Unied Saes. 5 3. Naual gas pice in Mexico inceased by 35% beween Ocobe 996 and Januay 997. 4. T. R. Sauffe, (996) The Diseconomics of long-haul LNG Tading, Occasional Pape No. 26 Inenaional Reseach Cene fo Enegy and Economic Developmen, p. 4. 5. The CRE has ecenly implemened such a mechanism fo disibuos of naual gas. (See Comisión Reguladoa de Enegía 998).
5 3. Picing Naual Gas D J f ( n) dn D b g( n) dn D c h( n) dn Figue 2 A model of he linkage of he naual gas pipelines o he wold makes need only conside he linkages o he Texas pipeline newok. Figue 2 capues he essenial feaues of he complee Mexican gas pipeline sysem. Z J epesens impos a Juáez fom Wes Texas, Q b epesens poducion a Bugos, and R is Los Ramones, he poin whee he main sysem and he nohwes subsysem ae physically ineconneced. Demand is disibued on he lines JR which epesens demand beween Juáez and Los Ramones (Moneey is locaed on his line), BR beween Los Ramones and Bugos, and on he line RC which epesens demand in he cene and souh of Mexico. C is Ciudad Pemex. Assume ha he disibuion of gas on lines JR, BR, CR is given by he geneal densiy funcions f ( n),
6 g( n), and h( n). 6 Gas is supplied a J, B, and C by he amouns,, and. The pice a poin J is given by, a poin B is given by, a poin C, by and a poin R, by. The abiaion poin beween J and R is given by, beween B and R, by s and beween C and R, by. The poins and ae locaed a R. The poin is locaed a C. Highe values of, s and imply ha he abiaion poin has moved souh. Even in his fom, he geneal soluion of his poblem is complicaed. Howeve, he poblem can be simplified by exploiing some echnical and insiuional popeies of he Mexican pipeline newok. Fis, hee canno be equilibium wih hee abiaion poins. This would equie ha poin R be a poducion souce. Second, he capaciy of he pipeline a Juáez and he demand on ha segmen of he pipeline (e.g. Moneey) ae such ha gas fom Wes Texas will no each Los Ramones. This implies ha one of he abiage poins mus be in he Juáez-Los Ramones segmen of he pipeline. Since gas is poduced a Bugos and Ciudad Pemex, hee mus be an abiaion poin delineaing hese wo souces of poducion. Thus, hee ae wo abiaion poins and one of hem mus be in he Juáez-Los Ramones segmen of he pipeline. To avoid he use of Kuhn- Tucke condiions, assume ha gas is impoed a Juáez and expoed a Bugos. Thee ae hee cases o sudy. Fis, he case when he second abiage poin is in he Ciudad Pemex-Los Ramones segmen (C-R). Second, when he second abiage poin is noh of Los Ramones. Thid, he case when he second abiage poin is a Los Ramones. 6. If hese disibuions have mass poins as well as segmens whee demand is zeo. small changes in demand can esul in lage changes in he locaion of he abiage poin. This may ceae incenives fo Pemex o educe o dive poducion fom fields in he souh of Mexico. See Bio, Lilejohn and Rosellon (999).
7 4. Case I Figue 3 Suppose one of he abiage poin is in he Juáez-Los Ramones segmen of he pipeline and he second abiage poin is in he Ciudad Pemex-Los Ramones segmen. (See Figue 3). The choice vaiables ae expos,, impos and he abiage poins, and. The vaiables of inees ae he abiage poins and he pice of gas a Bugos and Ciudad Pemex. On he Juáez-Los Ramones segmen, he cos of moving naual gas fom poin J o a poin locaed a n is c J n and he cos of moving naual gas fom poin R o a poin locaed a n is c J (-n). The cos of moving naual gas fom Bugos o Los Ramones is c b. The cos of moving naual gas fom Bugos o a poin in he Ciudad Juáez-Los Ramones segmen locaed a n is c b + c J ( n). On he Ciudad Pemex-Los Ramones segmen, he
8 cos of moving naual gas fom poin R o a poin locaed a n is c c n and he cos of moving naual gas fom poin C o a poin locaed a n is c c (-n). The cos of moving naual gas fom Bugos o a poin in he Ciudad Pemex-Los Ramones segmen locaed a n is c b + c c n. The objecive funcion of ou model is min f ( n)c J ndn + f ( n) [ c b + c J ( n) ] dn + + h( n) [ c ( c n )] dn + p j Z j p b Y b h( n) ( c b + c c n) dn () he consains ae: f ( n) dn + h( n) dn + g ( n ) dn + Y b Q b, (2) f ( n) dn, (3) Z j h( n) dn Q c (4) whee equaion (2) is he esouce consain a Bugos, equaion (3) is he esouce consain a Juáez and equaion (4) is he esouce consain a Ciudad Pemex. The Lagangian is
9 L f ( n)c J ndn + f ( n) [ c b + c J ( n) ] dn + + h( n) [ c ( c n )] dn + p J Z J p b Y b h( n) ( c b + c c n) dn + α f ( n) dn + h( n) dn + g ( n ) dn + Y b Q b + β f ( n) dn + γ h( n) dn Q c Z J (5) whee α is he dual associaed wih he value of naual gas a Bugos, β is he dual associaed wih he impos of naual gas a Juáez and γ is he dual associaed wih he value of naual gas a Ciudad Pemex. Fo ineio soluions, he fis ode condiions wih espec o and ae p b α (6) p J β. (7) The fis ode condiions wih espec o and unde he assumpion ha < < and < < can be wien as c J [ c b + c J ( ) ] α + β. (8) ( + c c ) c c ( ) + α γ c b (9) Equaions (6) and (7) deemine he pice of gas a Bugos and Juáez. Subsiuing equaion (6) ino equaion (9) gives he pice of gas a Ciudad Pemex γ p b + c b + 2c c c c () The value of is obained by solving equaion (4).
Subsiuing equaions (6) and (7) ino equaion (8) gives he abiage poin on he Juáez- Los Ramones segmen of he pipeline ( c b + c J + p b p J ) -------------------------------------------- 2c J () Noe ha if one of he abiage poins is beween Ciudad Pemex and Los Ramones, hen he abiage poin locaed on he Juáez- Los Ramones-Bugos segmens depends only on he pice of gas a he endpoins and on he cos of moving gas on hese wo segmens of he pipeline. I is independen of he poducion a Bugos. The pipeline connecing Bugos, Los Ramones and Juáez is essenially pa of he Texas pipeline newok. 5. Case II Figue 4
Suppose one of he abiage poin is in he Juáez-Los Ramones segmen of he pipeline and he second abiage poin is in he Bugos-Los Ramones segmen. (See Figue 4). The choice vaiables ae impos, expos, and he abiage poins, and s. The vaiables of inees ae he abiage poins and he pice of gas a Bugos and Ciudad Pemex. The objecive funcion of ou model is min f ( n)c J ndn + f ( n) [ c c + c J ( n) ] dn + + g( n) [ c c + c b ( n) ] dn + p j Z j p b Y b s s g( n)c b ndn (2) he consains ae: Q b s g( n) dn Y b, (3) f ( n) dn, (4) Z j f ( n) dn + g( n) dn + h( n) dn s Q c (5) whee equaion(3) is he esouce consain a Bugos, equaion (4) is he esouce consain a Juáez and equaion (5) is he esouce consain a Ciudad Pemex. The Lagangian is
2 L f ( n)c J ndn + f ( n) [ c c + c J ( n) ] dn + s s g( n)c b ndn + g( n) [ c c + c b ( n) ] dn + p j Z j p b Y b + α g( n) d n + Y b Q b s + β f ( n) dn + γ f ( n) dn + g( n) dn + Z j s h( n) dn Q c (6) Fo ineio soluions, he fis ode condiions wih espec o and ae p b α (7) p J β. (8) The fis ode condiions wih espec o and s unde he assumpion ha < < and < s < can be wien as c J [ c c + c J ( ) ] γ + β. (9) c b s [ c c + c b ( s) ] + α γ (2) Subsiuing equaions (7) and (8) ino equaion (9) ogehe wih he esouce consain associae wih gas fom Ciudad Pemex, gives he abiage poins and he pice of gas a Ciudad Pemex. If we subsiue equaion (7) ino equaion (2) we see ha he pice of gas a Ciudad Pemex is he neback ule, γ p b + c b s [ c c + c b ( s) ] (2)
3 6. Case III Figue 5 In Case III gas fom Bugos and Ciudad Pemex go o he Juáez-Los Ramones segmen of he pipeline (See Figue 5). This may be he mos impoan case as i eflecs cuen condiions and will emain so in he fo seeable fuue. Thus, alhough his case can be eaed as he limi of he fis wo cases, a caeful eamen is jusified. Inuiively, i is obvious ha he pice a Los Ramones is he pice a Bugos plus he cos of anspoaion. The pice a Ciudad Pemex is he pice a Los Ramones less he cos of anspoion. Thus, he pice a Ciudad Pemex is he pice a Bugos plus he cos of anspoaion fom Bugos o Los Ramones less he cos of anspoaion fom Los Ramones o Ciudad Pemex. If we examine equaion () fo, we ge,. (22)
4 I is necessay o solve he poblem compleely in ode o use he model o analyze policy opions. To do so, i is useful o use he mahemaical ficion ha gas fom Bugos and Ciudad Pemex ae segegaed. We will assume ha he gas fom Ciudad Pemex is deliveed o he segmen -R of he Juáez-Los Ramones segmen of he pipeline a a cos c c + ( n)c J. The gas fom Bugos is deliveed o he - segmen of he Juáez-Los Ramones segmen of he pipeline a a cos c b + ( n)c J. (See Figue 5). The objecive funcion of ou model is min f ( n)c J ndn f ( n) [ c b + c J ( n) ] dn + f ( n) [ c c + c J ( n) ] dn + p j Z j p b Y b + (23) he consains ae: f ( n ) dn + D b + Y b Q b, (24) f ( n) dn, (25) Z j f ( n) dn + h( n) dn Q c (26) whee equaion(24) is he esouce consain a Bugos, equaion (25) is he esouce consain a Juáez and equaion (26) is he esouce consain a Ciudad Pemex. The Lagangian is
5 L f ( n)c J ndn f ( n) [ c b + c J ( n) ] dn + f ( n) [ c c + c J ( n) ] dn + p j Z j p b Y b + α f ( n) dn + g ( n ) dn + Y b Q b + β f ( n) dn + γ f ( n) dn + Z j + h( n) dn Q c (27) Fo ineio soluions, he fis ode condiions wih espec o and ae p b α (28) p J β. (29) The fis ode condiions wih espec o and unde he assumpion ha < < and < < can be wien as c J [ c b + c J ( ) ] α + β. (3) c b + α γ c c (3) (9) fo. Noe ha equaion (3) is he same as equaion (8) and equaion (3) is equaion
6 7. Taiff on Naual Gas p + c J ( n) p J Figue 6 The quesion of he impac of educing he impo aiff, T, on gas on he pice and consumpion of gas was pa of he policy discussions elaed o he linking of he Mexican make o he Noh Ameican make. This model pemis us o addess his quesion If Case I holds, he abiage poin on Juáez -Los Ramones segmen of he pipeline depends only on he poducion a Ciudad Pemex. The abiage poin on Juáez -Los Ramones segmen of he pipeline is deemined by equaion (). Diffeeniaing equaion () wih espec o T and noing ha, hen d ------- < d p J 2c J (32) A decease in he pice a Juáez will incease he value of and hus move he abiage poin souh. The pice a Ciudad Pemex is linked o he pice a Bugos and emains unchanged. (See equaion ()) Since he demand on he Los Ramones-Ciudad Pemex segmen has no changed, he gas balance is mainained by inceasing expos a Bugos. Impos a Juáez ae offse by expos a Bugos. The pice of gas fo poins noh of he Juáez -Los Ramones abiage poin will dop; he pice of gas fo poins souh of he Juáez -Los Ramones abiage poin will no change. (See Figue 6.) The analysis fo Case III is simila.
7 If Case II holds and gas is being impoed a Juáez and expoed a Bugos we can diffeeniae equaions (5), (9) and (2) wih espec o (See Appendix) and solve he esuling linea sysem o ge d dt g( s) ---------------------------------------------- < 2[ g( s)c J + f ( )c b ] (33) ds dt f ( ) ---------------------------------------------- > 2[ g( s)c J + f ( )c b ] (34) dp ------- dt ------------------------------------------- c b f ( ) > [ g( s)c J + f ( )c b ] (35) This implies ha a decease in he pice a Ciudad Juáez would move he abiage poin souh on he Juáez- Los Ramones segmen of he pipeline and noh on he Bugos- Los Ramones segmen of he pipeline. The pice a Los Ramones would go down. The incease in impos fom Juáez is offse by an incease in expos a Bugos. By moving he abiage poin noh on he Bugos-Los Ramones segmen of he pipeline, a decease in he pice a Ciudad Juáez would decease he pice of gas in Mexico. The amoun of gas impos does no change as he eal ne effec is o move gas fom Wes Texas o he Houson make. In all he hee cases if gas is being impoed boh a Bugos and Juáez, a educion of he aiff would no change he abiage poins since he abiage poins ae a funcion of he diffeence in pices and his diffeence does no change. Thee would be no change in impos, bu he pice a Ciudad Pemex would dop by he amoun of he aiff hough he neback ule. (See Appendix.) 8. Expo Consains This analysis was done unde he assumpion ha he expo of gas a Bugos was no consained by pipe capaciy. If hese flows ae consained, hen i is necessay o add
8 a consain,, fo expos a Bugos and a consain,, fo impos a Juáez o he minimizaion poblem. These can be wien as Y b Y b (36) Z J Z J (37) Fis, le us conside he case when he consain on expos a Bugos is binding. The fis ode condiion is α p b δ b, (38) whee δ b is he Lagange muliplie fo he expo consain. Mexico s linkage wih he Unied Saes gas make would be he pice a Ciudad Juáez hough β p J (39) Applying he neback ule, he pice a Los Ramones is p p J + 2c J -- 2 (4) The pice a Bugos would in un be deemined by he pice a Los Ramones and he cos of moving gas fom Bugos o Los Ramones, p b p J + 2c J -- 2 c b (4) The diffeenial beween he pice a Bugos and he Houson Ship Channel pice (adjused) would be efleced in he Lagange muliplie associaed wih he capaciy consain on expos,.
9 δ b α Figue 7 The abiage poins, and, would be deemined by he elaions Q c h( n) dn, (42) Q b Y b h( n) dn + f ( n) dn + g( n) dn. (43) The analysis fo he ohe cases is simila. As long as he link beween he abiage poin is no consained, he pice a Ciudad Juáez will be a easonable guide as he Noh Ameican gas make is likely o be in equilibium. I may be he case, howeve, ha demand condiions ae such ha he pipeline sysem in he Unied Saes is no able o move sufficien gas o each a make equilibium. Wes Texas gas may be undepiced and his will be efleced in he pice of gas in Mexico. The pipeline fom Ciudad Juáez o he Wes Texas fields has limied capaciy and i is possible ha boh consains may bind. If he consain fo he supply of gas a Bugos given by (2) is no binding, hen ha dual, α is equal o zeo. The abiage poin on he Juáez-Los Ramones segmen is deemined by he impo consain,
2 Z J f ( n) dn (44) δ J β δ b α Figue 8 9. Locaion of Poducion Anohe issue ha has come up in policy discussion is he impac of he disibuion of gas poducion on he pice of gas in Mexico. Some people wee supised ha he lage discoveies a Bugos did no lowe he pice of gas in Mexico. Howeve, if we examine he equaions ha deemine he pice of gas in Mexico in he hee impoan cases we have sudied he poducion of gas a Bugos does no play a ole. I is only if expos a Bugos ae consained by capaciy ha he level of poducion a Bugos has any impac on he pice of gas in Mexico. In he absence of expo consains, he maginal gas poduced is expoed. A elaed quesion is whehe hee ae any welfae implicaions associaed wih he locaion of poducion o new discoveies. This quesion is easily answeed by examining he duals fo poducion a Bugos and Ciudad Pemex. Recall ha he economic inepeaion of he dual is he value of elaxing ha consain. The value of he dual a Bugos is α p b (45) and he value of he dual a Ciudad Pemex is
2 The egulaions he CRE has issued equies ha Pemex sell gas on he spo make a he Houson Ship Channel pice, adjused by he neback ule. The quesion hen occus whehe Pemex can use is monopoly powe ove he pipeline o ge monopoly en in his fowad make. To addess his quesion le us conside a simple model. Assume a wo peγ p b + c b + 2c c c c (46) If he em Ciudad Pemex, if he em is posiive i is moe efficien o develop gas esouces a is negaive i is moe efficien o develop gas esouces a Bugos. The inuiion behind his esul is simple. Le be he disance fom Ciudad Pemex o he abiage poin. The cos of moving a uni of gas fom Ciudad Pemex o he abiage poin is ( )c c. The cos of moving a uni of gas fom Bugos o he abiage poin is. If a uni of gas is poduced a Bugos i is sold a a pice. If a uni of gas is poduced a Ciudad Pemex i displaces a uni a he abiage poin which eleases a uni a Bugos which is sold a a pice. The ne benefi of a maginal uni of poducion is α γ p b [ p b ( )c c + ( c b + c c )] c c c b + 2c c (47) The poducion a he poin neaes he abiage poin yields he highes ne social benefi. I should be noed ha if hee is some flexibiliy in meeing domesic demands fom Bugos o Ciudad Pemex, evenue maximizing behavio on he pa of Pemex would shif poducion o Ciudad Pemex.. Fowad Makes and Pipeline Capaciy
22 iod model. Gas is poduced a Bugos and shipped o Houson and Moneey. Le p τi be he spo pice a ime τ in make i and be he fowad pice a ime in make i; is he spo pice a Houson a ime, is he spo pice a Moneey a ime. Pices a ime and fowad pice ae defined in a simila fashion. Le be he cos of moving gas fom Bugos o Houson, be he cos of moving gas fom Bugos o Moneey, and c c m c h. Le be he capaciy consain on he pipeline fom Bugos o Moneey. If he capaciy consain does no bind, he pice a Moneey is p τm p τh + c. (See Figue 9 lef) If he capaciy consain binds, he pice a Moneey is p τm p τh + c + p, whee p ae he ens associaed wih he capaciy consain. (See Figue 9 igh) p τm p p τm pτ h + c D( p) D( p) Figue 9 If he capaciy consain on he pipeline is no binding, he spo make pice in Moneey will be p τm p τh + c. Anyone who desies o engage in fowad ansacions can do so in he Houson make. Pemex does no have an effecive monopoly of he fowad make and will capue no ens. Suppose he capaciy consain on he pipeline is always binding and he pice diffeenial is consan, p. In ha case he spo make pice in Moneey will be
23 p τm p τh + c + p. Anyone who desies o engage in fowad ansacions can do so in he Houson make. Howeve, Pemex can capue he ens associaed wih he pipeline consain by selling oupu fowad. Noe ha ens will exis and he only quesion is who will appopiae hem. Given ha he capaciy consain on he pipeline is binding, hee ae no eal effecs. Now suppose he capaciy consain on he pipeline is binding wih a pobabiliy q and he pice diffeenial is consan, p. In ha case he spo make pice in Moneey will be p τm p τh + c + p wih a pobabiliy q and p τm p τh + c wih a pobabiliy (- q). The equilibium fowad pice of gas will be pˆ m q( p τh + c + p) + ( q) ( p τh + c) (48) Anyone who desies o engage in fowad ansacions can do so in he Houson make. Howeve, Pemex can capue he ens associaed wih he pipeline consain by selling oupu fowad. If he pipeline capaciy consain is binding, ens will exis and he only quesion is who will appopiae hem. The key egulaoy issue in his conex appeas o be insuing ha Pemex invess sufficienly in pipeline capaciy so ha capaciy consains ae no a seious issue. Howeve, a complee sudy of his issue is beyond he scope of his pape.. Conclusions This pape sudies he implicaions of linking he Mexican make fo naual gas o he Noh Ameican make. We consuc a mahemaical model of he Mexican naual gas pipeline newok and use i o analyze vaious policy quesions. We show ha he neback ule is he only efficien way o pice naual gas in a saic conex. In a saic model his pice ule would be opimum. Howeve, wo equilibium condiions have o be saisfied fo efficiency: spaial and ineempoal condiions. In he spaial make, he pice of naual gas mus be linked o anspo coss while in he ineempoal make he pice of naual gas a any wo poins in ime should be linked by he inees ae and he cos of
24 holding naual gas. A ule ha achieves he fis bes is no feasible. Fuhe, hee ae wo facos ha miigae he ineempoal disoions. Fis, gas is he dominan echnology in he geneaion of eleciciy. This is one of he mos impoan use of gas and he flucuaions in he pice ae no likely o diso he choice of echnology. Second, a boad make in fuue conacs is emeging. This make enables gas consumes in Mexico o hedge agains some of he isk ceaed by he weahe in he Unied Saes. The impo ax on gas o he Mexican gas make was ecenly eliminaed. We show ha if gas is being impoed a Juáez and expoed a Bugos, he educion in he ax will esul in no ne changes in gas impos o expos. Thee will be no change in he pice of domesically poduced gas. If gas is being impoed boh a Juáez and Bugos, he educion in he ax will esul in no changes in gas impos o expos and he pice of gas in Mexico is educed by he amoun of he ax. We sudy he welfae implicaions of he locaion of invesmen in new gas poducion and show ha i is opimal o inves in he souce closes o he abiage poin ahe ha o he cene of consumpion. This suggess ha he decision o inves in developmen of gas fields nea Bugos is coec. Refeences Adelman, M. A.,963, The Supply and Pice of Naual Gas, (B. Blackwell, Oxfod). Bio, D. L., W. L. Lilejohn and J.Rosellon, 999, Picing Liquid Peoleum Gas in Mexico, Comisión Reguladoa de Enegía.(WEB SITE:hp://www.ce.gob.mx) Comisión Reguladoa de Enegía. 997. "Resolución de la Comisión Reguladoa de Enegía sobe la Soliciud de Pemex Gas y Peoquímica Básica Relaiva a un Mecanismo Tansioio paa la Deeminacion de Pecios de Gas LP, en ano se Expide la Meodologia paa la Deeminación de Pecios de Vena de Pimea Mano", RES/85/97, MEXICO. (WEB SITE:hp://www.ce.gob.mx/egiso/esoluciones/997/ es8597.hml) Comisión Reguladoa de Enegía. 998 Resolucion Sobe el Pogama Tempoal de Cobeua de Pecios del Gas Naual paa el Invieno 998/99, RES/4/98, MEXI- CO. (WEB SITE:www.ce.gob.mx/egiso/esoluciones/998/es498.hml) Mas-Colell, A, M. D. Whinson and J. Geen, 996, Micoeconomic Theoy, (Oxfod Univesiy Pess, Oxfod). Pemex, 998, Indicadoes Peoleos y Anuaio Esadísico.
25 Sauffe, T. R., 996, The Diseconomics of long-haul LNG Tading, Occasional Pape No. 26 Inenaional Reseach Cene fo Enegy and Economic Developmen. Tusiani, M. D., 997, The Peoleum Shipping Indusy, (PennWell Publishing Co., Tulsa)
26 Appendix This appendix deives he impac of a educion in he impo aiff fo naual gas fo he case whee boh abiage poins ae noh of Los Ramones. The fis ode condiions fom he maximizaion poblem ae 2c J [ c c + c J ] p c p J (A-) 2c b s [ c c + c b ] p c p b (A-2) f ( n) dn + g( n) dn Q c h( n) dn s (A-3) Case A: Gas is only impoed a Ciudad Juáez Le T be he aiff. If gas is only impoed a Ciudad Juáez, we can diffeeniae wih espec o T and hen 2c J 2c b f ( ) g( s) d ds dp c (A-4) whee,, and. If we use Came s ule, de 2c J 2c b 2c J g( s) 2 f ( )c b 2[ g( s)c J + f ( )c b ] (A-5) f ( ) g( s)
27 de 2c b g( s) (A-6) g( s) de 2c J f ( ) f ( ) (A-7) de 2c J 2c b 2c b f ( ) (A-8) f ( ) g( s) d dt g( s) ------------------------------------------------- 2[ g( s)c J + f ( )c b ] g( s) ---------------------------------------------- 2[ g( s)c J + f ( )c b ] (A-9) ds dt f ( ) ------------------------------------------------- 2[ g( s)c J + f ( )c b ] f ( ) ---------------------------------------------- 2[ g( s)c J + f ( )c b ] (A-) dp c 2c b f ( ) ------------------------------------------------- dt 2[ g( s)c J + f ( )c b ] c b f ( ) ------------------------------------------- [ g( s)c J + f ( )c b ] (A-) Case B: Gas is impoed a Bugos and Ciudad Juáez If gas is only impoed a Bugos and Ciudad Juáez, we can diffeeniae wih espec o T, and. Then 2c J 2c b f ( ) g( s) d ds dp c (A-2)
28 de 2c J 2c b 2c J g( s) 2 f ( )c b 2[ g( s)c J + f ( )c b ] (A-3) f ( ) g( s) de 2c b g( s) g( s) (A-4) g( s) de 2c J f ( ) (A-5) de 2c J 2c b 2[ g( s)c J + f ( )c b ] (A-6) f ( ) g( s) so (A-7) (A-8) (A-9)