* U.S. gas imports can't meet Mexican demand anymore
* Gas link with cheap U.S. is shattered as Mexico imports LNG
* Latin America's LNG prices rise above Asia
* Demand from region may prove key to future LNG prices
By Oleg Vukmanovic and David Alire Garcia
LONDON/MEXICO CITY, May 9 Mexico is stepping up imports of liquefied natural gas (LNG) as rising demand, falling domestic output and pipeline bottlenecks for cheap U.S. imports force it to pay at least four times more for added supplies.
A slump in LNG demand from top global buyer Japan has shifted the spotlight from Asia to major Latin American economies Brazil, Argentina and now Mexico, seeking to avert looming energy shortages with an ambitious program of cargo purchases.
An energy crunch in March underscored Latin America's second largest economy's growing dependence on imports to keep power flowing, as state-run oil and gas monopoly Pemex scrambled to buy LNG at any price in order to avert potential grid failures.
"They say we bought expensive gas but today we're worried about the integrity of the system," Alejandro Martinez, director of Pemex Gas and Basic Petrochemicals said in an interview, referring to domestic criticism of the costly purchases.
Previously, gas piped in from a drilling boom in the United States had kept import costs down but Pemex paid $19.45 per million British thermal units (mmBtu) for a spot LNG cargo in March, as imports from the U.S. costing about $4.40/mmBtu hit the limit of pipeline capacity.
To help keep the lights on, state-run power monopoly CFE is expected to award the country's biggest ever tender this week for supply of 30 LNG cargoes to be delivered in 2013 and 2014.
Argentina, another rising LNG importer, is also snapping up cargoes to meet its record annual demand while robust buying from Brazil adds to the supply squeeze and lifts prices across the board.
Put together, the rise in demand across what is now one of the world's few booming economic zones, is one of the main factors propping up global LNG prices. Any sign that Mexico or the others may be able to relieve the pressure for supplies would have the opposite effect.
Martinez said Mexico will only likely reduce those costly imports towards the end of 2014 as major pipeline expansion works allow more U.S. gas into the country.
That said, CFE is also re-negotiating its long-term LNG supply deal to win discounts from producer Nigeria, Pemex's Martinez said.
As well as receiving cheap U.S. gas by pipe, Mexico benefits from having some of its long-term LNG supplies tied to the same price point, considered unusually cheap by international standards.
Under a deal signed in the early 2000s with Shell and Total, Mexico's CFE pays just 18-20 cent/mmBtu above the benchmark US Henry Hub gas price for deliveries of LNG into the Altamira terminal on its eastern coast, Waterborne president Steve Johnson said.
US gas at $4/mmBtu is among the cheapest in the world, compared with $15/mmBtu in Asia, $15.50/mmBtu in Brazil and $16.80/mmBtu in Argentina, according to the most recent deals.
Mexico's latest spot shipment in late April cost substantially less than its rushed March delivery at $15.85/mmBtu.
Although rich in oil and gas, the slow pace of energy market reform in Latin America has seen indigenous production tumble while at the same time gas demand for power generation grows, creating an energy gap filled by foreign imports.
The fields discovered off Brazil's coast, set to drive its economy for years to come, are still deep in development and will likely generate more oil initially than gas. Pemex has been slow to make any moves to exploit shale gas reserves estimated to be the world's third biggest.
The resulting appetite for LNG supply has attracted the attention of producers and traders turned off by slumping demand in Asia, previously the world's biggest LNG buyer.
"Supply for the two countries is widely expected to originate from the Atlantic Basin, meaning offers into Mexico could emerge higher because of longer shipping distances," Waterborne's Johnson said.
Brazilian demand for LNG took the market by surprise after the worst drought in decades depleted hydroelectric reserves, prompting heavier gas imports.
Although rainfall has topped up reservoirs in recent months, LNG imports surged by 24 percent year on year to 19.84 billion cubic feet in April, a trend that is expected to continue into May at least, Waterborne data shows. (Additional reporting by Henning Gloystein; editing by Patrick Graham)