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Mexico looks for closer gas ties with US

Despite reluctance to open its oil sector to foreign investors, Mexico is seeking to expand unconventional natural gas cooperation with the US, including investment in exploration, production and pipelines

Speaking in Houston, Mexico’s director general of hydrocarbons, Guillermo Garcia Alcocer, said the country is looking to the US to help delineate unconventional shale-gas resources and integrate its pipeline grid. “We think we can work with the US, there is a good chance we can have an integrated market.”

Though he conceded its unlikely the country would give up complete control of its oil sector by allowing direct equity investment, it’s looking to the US to help explore an estimated 600 trillion cubic feet (cf) of unconventional shale-gas resources.

Mexico has some 54.7 billion barrels of oil equivalent (boe) of conventional resources. Yet preliminary estimates suggest Mexico’s shales could hold an additional 60.2 billion boe of unconventionals, which would more than double its resource base. About 25% of those additional reserves are liquids and wet gas.

To develop that bounty, Pemex would have to drill some 27,000 new wells. It has only drilled 28,000 wells in its entire history. “It’s like doubling what Pemex has done in the past 100 years”, Alcocer said.

But the size of the prize is too great to ignore; developments in Eagle Ford have not gone unnoticed. Pemex is keen to duplicate those successes on its side of the Rio Grande.

But Mexico simply does not have the expertise, technology and access to capital to do it alone.

“Geology does not see the border”, he continued. “We have the Texas experience very close. But the financial capacity and the work capacity of Pemex is the main challenge. Participation of partners will be crucial.”

Mexico has ambitious plans to increase the uptake and consumption of natural gas to generate electricity and improve living standards.

But it will take an almost complete rebuilding of the country’s transportation and distribution networks, entailing enormous investments in infrastructure. At the same time, the government relies on Pemex’s cash flow to fund social programmes.

It simply does not have enough cash to sustain government revenues and re-invest in production.

The shortfall is already being felt on the conventional side. According to the Energy Information Agency (EIA), Mexico’s conventional production peaked at 3.2 million b/d but has since fallen below 3 million b/d in 2012.

If present trends continue, the country could be a net oil importer by 2020. It’s not for lack of resources.

And though its new-found unconventional wealth represents a huge opportunity, it will come at an equally large cost.

Though it has taken steps to open its service sector and allow participation of outside producers in mature fields, direct equity investments in exploration and production are still off limits.

Alcocer says it would require constitutional change to fully open the energy sector, a task that has proven to be politically difficult.

However, natural gas is not as cut and dry. And he envisions imports of cheap US gas via cross-border pipelines to supplement Mexico’s own growing production in an integrated market.

It is conceivable that Pemex would continue to focus as the country’s sole oil producer while opening the natural gas sector to outside investment, especially from the US. That much is almost inevitable.

“It is necessary to review the current legal framework and adjust it to the structural changes in the energy sector”, he said.

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