North American natural gas model: Impact of cross-border trade with Mexico

Natural gas gained significant attention due to its low carbon emissions and competitive prices in North America relative to other energy sources. The Annual Energy Outlook 2015 projects the U.S. as a net exporter by 2017. Recently, Mexico launched its energy reform, aiming to expand domestic production by opening the market to private investors. The success or failure of these policy changes will impact the development of the natural gas market in North America. To analyze possible pathways of the Mexican energy reform, we develop the North American Natural Gas Model (NANGAM). NANGAM is a long-term partial equilibrium model that allows for endogenous infrastructure expansion and non-linear cost functions. NANGAM is calibrated using the most recent data available from U.S., Canadian, and Mexican sources. We find that, in order to reduce pipeline imports, Mexico depends on economic incentives that lower barriers to infrastructure investment and keep production costs at competitive levels. If reforms to guarantee these incentives are not successfully implemented, growing gas demand in Mexico will be satisfied by further supply from Texas and neighboring states. This will cause a ripple-effect of increasing production in other regions in the U.S. and a shift in trade flows across the continent.