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Mexico opens up shale patch for first time in 76 years

Reforms to the investment regime should lure developers. Obstacles remain, from land rights to water and the north’s drug cartels

Mexico's congress passed landmark energy reforms this month, opening the country’s oil and gas industry to outside players for the first time in 76 years. With the reforms, potentially vast shale gasfields, including part of the prolific Eagle Ford shale that spans the Mexico-US border, will be opened to outside investors. The question now for the Mexican government, which hopes the reforms bring billions of dollars of foreign investment into its oil and gas industry, is whether investors will show up. 

The reforms have gone even farther than seemed possible when president Enrique Peña Nieto proposed a long-awaited overhaul of the country’s oil business in 2012. Moreover, analysts and industry sources say the closely watched secondary legislation, which has filled in much of the detail on contracts and other key elements, has set the reforms on a positive course. 

That bodes well for Mexico’s shale hopes. “If the economic incentives are there and the regulatory environment is appropriate, companies will come,” Carlos Garcia, a business development manager at Texas-based Lewis Energy, said during a recent Institute of the Americas webinar. 

It is an important endorsement for Mexico’s reforms. Lewis Energy worked as a contractor for the first wells state-run Pemex drilled in Mexico’s section of the Eagle Ford, so it has as much experience as any other foreign company in Mexico’s shale patch. Lewis Energy, which has grown in recent years into a major player in Texas’s shale plays, is also exactly the kind of US shale specialist Mexico will need to win over. 

While Pemex and international majors are expected to focus on Mexico’s rich deep-water fields, it is smaller independents that have cut their teeth in the US’ shale plays that will likely take the lead developing Mexico’s shale resources.

The first test of international interest will come in 2015. “Unconventional will be part of the first bid round, the first bid round will certainly take place next year,” says Oscar Roldán, director of planning at the National Hydrocarbons Commission, an industry regulator. The government is in the process of delineating acreage that will be put up for auction in a series of bid rounds to take place over the next five years. 

The potential is huge. The US Energy Information Administration has estimated Mexico holds 545 trillion cubic feet (cf) of recoverable shale gas resources, sixth in the world. Pemex estimates the country has 60.2 billion barrels of oil equivalent of possible unconventional resources. Some of Mexico’s most promising shale areas lie near the US-Mexico border, but there are shale plays that stretch down the Gulf Coast.

Foreign investment

Pemex appears keen to see a high degree of foreign involvement in shale development. In Round Zero, a stage in the energy reform process that gave Pemex the first opportunity to choose the areas it wants to develop, the company only requested areas covering around 15% of Mexico’s unconventional resources. By contrast, it has sought the right to develop about half of the country’s prospective conventional resources.

If foreign companies do move into Mexico’s shale patch, they will face an array of difficulties. Many of the most promising shale plays are in the parched northern part of the country where sufficient water supplies for fracking could be hard to come by. Technology developed in Texas that has allowed companies to recycle produced water and treat water from non-potable aquifers could help.

Companies will also have to forge relationships with local landowners. Unlike in the US, landowners do not own the resources under their homes, removing a key financial incentive that has helped encourage shale development in the US. As part of the energy reforms, the government will encourage contractors to negotiate deals with landowners that would see them receive a cut of the profits, if there are any, from the activity on their land.

Security will also be a major problem, especially for companies working in the border region. Mexico’s drug cartels have expanded rapidly into the oil theft business in recent years. Pipelines are routinely tapped into and oil workers harassed, threatened and occasionally abducted. It has been an issue for Lewis Energy, Garcia said. The company doesn’t allow personnel or equipment to be moved at night, so storage facilities are needed at each site to ensure it has enough material to be able to keep drilling through the night. That adds to the cost of drilling shale wells in Mexico, which are about 30% higher than in the US for Lewis Energy, Garcia says. Still, investors are likely to brave the risks, Garcia says. “This is the largest oil and gas play out there in the world. There isn’t another market that offers the opportunities that Mexico does right now.” 

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