Advancements in Mexico's Shale Exploration

The shale oil and gas business has taken pride of place globally as new solutions are sought for future energy needs. The contribution of these unconventional reservoirs to global hydrocarbon production is beginning to claim a serious place at the table. The US Energy Information Administration (EIA) has been notorious for its changing estimations and appraisals of Mexico’s shale oil and gas potential. Its ranking of Mexico’s shale potential has been modified over time, as the country comes closer to a complete appraisal project to assess this very potential. Mexico has moved in the EIA’s global list from fourth to sixth place in estimated shale resources, but even that ranking has been met with a certain degree of scrutiny and skepticism. Edgar Rangel Germán, Commissioner of CNH, has gone on the record about this ranking. “I respectfully think that the EIA figures which put Mexico’s unconventional potential as sixth in the world are still somewhat overestimated. However, the resources are clearly there, there are enough molecules to develop the unconventional segment in the country.” This makes clear that, regardless of the potentially arguable nature of the EIA’s ranking, it is hard to deny that being part of the EIA’s global top ten in shale resources means that a viable industry can be developed. Attracting external investment, technology, and expertise necessary to develop these resources will likely prove essential.

The 2013 EIA Report indicates that Mexico has a potential of technically recoverable resources of 545tcf and 13.1 billion boe. According to CNH’s published figures on reserves, the country had 16.55tcf of proven natural gas reserves at the beginning of 2014. Geological, geophysical, and geochemical studies complemented in over 1,000 wells drilled by PEMEX over the past 75 years have enabled specialists to identify shale reservoirs, such as Late Cretaceous plays distributed across the Chihuahua, Sabinas, Burro-Picachos, and Burgos Basins in the northwest, which are a continuation of the productive Eagle Ford formation in the southern US. The Agua Nueva and Maltrata Late Cretaceous plays extend south into the Tampico-Misantla and Veracruz basins. Finally, the Late Jurassic La Casita and Pimienta plays in the Chihuahua, Sabina, Burgos, and Tampico-Misantla Basins are equivalent to the productive Haynesville formation in the US. Based on these studies, PEMEX has identified 60.2 billion boe of unconventional prospective resources so far. From that total, 35.4 billion boe belong to the Tampico-Misantla and Veracruz basins and 24.8 billion to the Sabina-Burro-Picacho-Burgos Basin, where 31.9 billion barrels correspond to oil, and gas amounts to 28.9tcf. According to EIA estimates, it is the country’s northern regions that present the largest potential of developing further proven reserves in the future, as its 545tcf of technically recoverable shale gas resources dwarf current proven reserves.

Official business plans from PEMEX and PEMEX E&P promote the intensification of activities aimed at assessing the potential for shale gas and non-associated wet gas in unconventional resources. Drilling activities as part of the exploration of unconventional shale oil and gas plays in Late Jurassic and Late Cretaceous reservoirs began in 2010 in the Eagle Ford portion of the Burro-Picachos province. Successful results determined that the Eagle Ford play extended into Mexican territory with dry gas reservoirs and were best represented with the initial production of PEMEX’s first shale gas well, Emergente-1, in 2011, and the discovery of Percutor-1, Habano-1, and Arbolero-1 in 2012. The Anhélido-1 well marked the discovery of the first shale oil reservoir in the Late Jurassic Pimienta. The wells drilled in the Sabinas basin were meant to evaluate the Late Cretaceous unconventional play of the Eagle Ford formation. Chucla-1, located in the state of Coahuila, was completed in March 2013 and it resulted in a gas and condensate producer with a measured depth of 3,705m. Also located in Coahuila, Gamma-1 was completed in December 2013 and was a non-commercial gas and condensate producer with a measured depth of 3,793m. In July 2013, Durian-1 was completed in the state of Nuevo Leon, a dry gas producer with a measured depth of 4,240m. All of these wells were horizontally drilled and completed with multiple hydraulic fracturing. Wells in Poza Rica-Altamira, including Horcones-8127, Corralillo-157, and Furbero-8127, are intended to assess unconventional hydrocarbon reservoirs in the TampicoMisantla basin. The drilling of these wells will result in firsthand data and a larger level of geological certainty in this area’s unconventional plays. The Presidente Alemán-802 development well in Poza Rica-Altamira halted operations due to a mechanical accident during the drilling process. Consequently, it was not possible to evaluate the oil and gas shale play in the Late Jurassic Pimienta formation. Drilling operations in the Burgos basin had the goal of evaluating the Late Jurassic Pimienta formation. In the state of Tamaulipas, Nuncio-1 was completed in November 2013. This 4,900m deep well is a producer of dry gas. Serbal-1, Mosquete-1, and Céfiro-1 are still going through the final stages of their development. These wells have been identified as wet gas producers. Other wells in the Burgos Basin are located in the state of Nuevo Leon. Tangram-1 and Kernel-1 were completed in December 2013 and are both dry gas producers. Nerita-1 and Batial-1 are in the final stages of completion and both wells are aimed at evaluating oil and wet gas potential.

The low margins provided by the current gas market has led PEMEX to favor the exploration of oil, which in turn resulted in a reduced number of shale gas exploration endeavors, despite the shale oil and gas project undertaken with IMP and COMESA to explore the northern unconventional potential of the country. CNH stepped in to reduce the scope of the project. It was originally meant to cover all the shale prospective area, from Chihuahua to Veracruz, but it is now limited to Galaxia in Burgos and Limonaria in Tampico-Misantla. The technical complexity and geographic discontinuity of Mexico’s onshore shale potential zones have also influenced last year’s results, while the availability of the necessary technology, as well as access to water resources have also been hurdles to the project’s advancement.

An important distinction must be made pertaining to the terminology used in the EIA’s reports. This distinction is relevant when talking about Mexico’s shale potential and the future of its development, as it points to a particular conundrum within the Mexican oil and gas industry that has defined PEMEX’s relationship with shale resources for the last few years. The distinction in question is one made by the EIA between ‘technically recoverable’ resources and ‘economically recoverable’ resources. Technically recoverable resources are those that can hypothetically be extracted and produced with any of the currently available technologies fit for such task. This does not take into account the economic viability of these projects, current or future expectations for oil and gas prices, the regional availability of technology, or the contractual models or terms available in any given country for private operators. On the other hand, economically recoverable resources are defined by their nature as profitable to produce under current market conditions. Although this profitability is influenced by different factors including those aforementioned, the EIA defines the economic viability of resources through three variables: the approximate prices received for oil and gas production, the costs of drilling and completing wells, and the amount of oil or natural gas produced from an average well over its lifespan. The EIA also considers factors such as preexisting pipeline infrastructure and the availability of independent operators, supporting contractors, and suppliers. In a broader sense, it is worth asking if Mexico’s position in the EIA’s ranking for technically recoverable shale resources truly entails a current and tangible economic advantage. As Mexico and PEMEX move forward with the shale development strategy, it remains to be seen how the new contracting models made available by the Energy Reform will bridge the gap between the 175 shale wells drilled in Mexico and the over 13,000 wells drilled in Texas. Mexico must also create an economically effective strategy to manage its future natural gas output that is not overtly dependent on imports. In any event, Mexico’s position in EIA’s ranking speaks volumes of the industry’s potential growth. “This information gives us certainty about the size of the opportunities that Mexico has ahead, in terms of becoming an exporter of gas once again, and, hopefully one day, an energy hub,” Rangel Germán says. “Mexico has the conditions to become an energy hub given the amount of resources it has, all we have to do is do it right,” he concludes.