Mexico's Unconventional Resources: Unlocking Shale Potential

One of the most interesting areas in Mexico's E&P sector is the potential to exploit existing unconventional resources, such as shale oil. The presence of large unconventional resource accumulations and the proximity to the United States have generated great expectations regarding the future of unconventional resources in Mexico. On the one hand, there is optimism due to the quantity and quality of resources, but there is also uncertainty regarding the economic viability of their exploitation. This will largely depend on the productivity of the formations, development costs, the fiscal regime designed by the Mexican state, and the ability to expeditiously apply the lessons learned in the United States to Mexican territory.

The Ojinaga, Eagle Ford, and Agua Nueva plays are distributed across the Chihuahua, Sabinas-Burro-Picacho, and Burgos basins. These are considered extensions of the Eagle Ford formation in its dry gas and wet gas segments. On the other hand, the Agua Nueva and Maltrata plays are present in the Tampico-Misantla and Veracruz basins. Finally, the La Casita and Pimienta formations correspond to the Chihuahua, Sabinas, Burgos, and Tampico-Misantla basins, mostly producing oil and gas, which are equivalent to the Haynesville formation.

The Ministry of Energy has estimated prospective unconventional resources at 60 billion barrels of oil equivalent, distributed across the aforementioned basins. This estimation could be a lower bound of the existing resources, as more detailed studies are still required to provide more information about the basins present in Mexico. In short, it is important to highlight that there is a significant amount of unconventional resources in Mexico and that there are major similarities with the resources of existing basins in the United States.

Unlike the United States, where the surface area is fragmented among a large number of companies, Mexico offers the opportunity to operate larger fields. This could lead to lower discovery costs, as well as better operational economies of scale, among other aspects. This would allow fields to be exploited using long horizontal wells, optimizing investment needs for surface infrastructure, and minimizing potential disruptions from field unitization.

Another relevant aspect in Mexico is the existence of a significant number of untapped sweet spots, which implies that the companies finding them first will gain a clean advantage within the industry. For this to materialize, regulators need to generate a critical mass of shale activities — that is, auctioning a significant number of fields for private exploitation. This is critical to achieve a sufficient scale of activity that allows the establishment of competitive well-service supply chains with low costs, similar to those in the United States, and to develop surface transport infrastructure for the different hydrocarbons (especially gas, where low prices create pressure to use shared infrastructure).

When observing the unconventional resource basins, it is interesting to note that the Jurassic shale formations present in the Tampico-Misantla and Veracruz regions coexist with Tertiary tight oil formations. Given that these fields are currently being exploited, there is an opportunity to generate operational synergies in terms of production facilities and access to transport infrastructure. Considering that the hydrocarbons present in this zone are mostly oil, this points toward a much more feasible and short-term development compared to the resources in Sabinas-Burgos and Burro-Picacho, where dry gas and wet gas are predominantly found.

The successful development of shale in Mexico will largely depend on adopting the best practices and cutting-edge technologies used in the United States. As an example, the following lessons learned stand out for the profitable exploitation of unconventional reservoirs: increasing the lateral length of wells, increasing fracture counts, reducing the total number and cost of wells, and better identifying sweet spots.

Some hydrocarbon specialists have pointed out that the breakeven price for profitable shale exploitation in Tampico-Misantla ranges between US$55 and US$65 per barrel (for other formations, an additional US$8 to US$10 per barrel would need to be added), which is comparable to analogous basins in the United States. However, these statements have omitted the effect of production cost reductions derived from using commingled production methods (using wells that produce from more than one formation simultaneously) alongside other formations, such as the Tertiary. This could lower the breakeven price to levels around US$40 per barrel.

Another critical aspect to consider for Mexico's unconventional resource potential to materialize is the regulatory framework. First, it is important for Mexican regulators to define fiscal and environmental regimes that provide certainty to investors, thereby reducing the non-geological risk associated with these projects. As fiscal conditions become more attractive, they will help compensate for country risks such as social conflicts and insecurity. The fiscal regime must also address how to handle the asymptotic production decline curve of the wells. This issue could become central to a mature shale market with high M&A activity.

Furthermore, there is the need to accelerate the availability of these resources by auctioning new blocks to generate the critical mass required for developing this type of project. This will attract new capital to the sector, as Mexico competes internationally for investments from oil sector players. The longer Mexico takes to deploy substantial rounds of unconventional resources, the more resources will continue to be allocated to US basins. Therefore, Mexican regulators play a highly important role in developing this sector.

In summary, Mexico has the possibility to become a major player in the exploitation of unconventional resources, if we can emulate the success observed in the United States regarding operating costs, profitability, and regulation. This will depend on the Mexican state creating the conditions to attract new players willing to risk their capital in these types of projects. Mexico has the right geology, but the state must do its homework to turn this opportunity into reality.