News Article

Cloudy Future for Mexico’s Unconventional Resources

Wed, 01/21/2015 - 12:20

The American shale gas boom was one of the feel-good stories of the global energy market in recent years. The plentiful and cheaply extracted resources to be found in various shale oil and gas plays would secure the US’ long- term energy independence, while allowing it to reduce oil imports from unsavory regimes. It allowed it to stare down Saudi Arabia in November 2014 when OPEC refused to cut production, which many saw as a move intended to sink the profitability of American oil production. This was until the bottom fell out of oil prices, taking them from US$110 a barrel in July 2013 to US$45 in January 2015.

Shale is already claiming the lion’s share of gas production in the US, with about 20% coming from associated gas production with the versatile natural gas liquids also helping to detonate the shale boom, since they can be used as petrochemical feedstock and are not subject to export restrictions. However, this left the US market dangerously overexposed. In 2014, the average shale development in the US had a break-even point of US$57 a barrel. However, even if US shale interests temporarily became unprofitable, the country had a major advantage. The infrastructure, equipment, and technology at Eagle Ford and other important shale plays are state-of-the-art. This means that operators can choose to hunker down and reduce spending, while ensuring that production can come racing back once profitability returns. Mexico does not have that option.


While the country is estimated to have profound shale oil and gas reserves, very little drilling has been done to prove them. Excitement about Mexico’s shale reserves can be traced back to the US Energy Information Administration. Its assessment stated that Mexico had technically recoverable shale gas reserves of 545tcf, or the sixth-largest in the world. However, a CNH report based on PEMEX information was released in December 2014, stating that Mexico’s prospective reserves only stood at 141.5tcf. If accurate, this latter estimate would see Mexico tumble out of the top ten countries with the largest shale reserves. Either way, both assessments contain high degrees of uncertainty, with only drilling able to prove Mexico’s real reserves once and for all.

Starting in 2010, PEMEX has drilled about 20 exploratory wells in the Burgos Basin, which is part of the Eagle Ford play stretching across the Texas-Coahuila border and into Tamaulipas and Nuevo Leon. The first well, Emergente-1, reached down 2,500m but returned only an initial production rate of 2.8mcf/d. The second well, Habano-1, which focused on Eagle Ford’s liquids window, did not do any better, returning rates of 2.77mcf/d and 27b/d of crude oil. PEMEX has made ongoing promises, such as pledging in 2008 to drill 300 exploration wells dedicated to shale before downsizing that to just 75 wells to be done in 2015. The Energy Reform then came to derail these plans but this shows how economic circumstances and internal doubts may well have caused PEMEX to shy away from developing unconventionals. One PEMEX estimate stated that 40,000 wells would be needed to fully tap up Mexico’s shale reserves, at a cost of US$10-20 million per well.

With the arrival of Round One, real questions about the future development of Mexico’s unconventionals are being raised. In December 2014, Mexico announced the details about the first phase of Round One, covering 14 fields in the shallow waters in the Gulf of Mexico. This was a savvy move as, with PEMEX averaging production costs of US$22 per barrel in these fields, foreign operators would be attracted to these fields’ profitability even at low oil prices. The same does not apply to unconventionals and the PEMEX CEO, Emilio Lozoya Austin, has said that the unconventionals bidding phase of Round One might be pushed back or dropped altogether. “The exploitation of unconventional fields requires the drilling of thousands of wells annually as well as having an agile deployment of human and material resources. Most probably, with low oil prices, the bidding phases for shale oil and gas fields will have to be delayed until further rounds,” he said.


While markets and oil and gas companies alike may be excited about the opportunities to invest in Mexico following  the Energy Reform, this does not mean the country can get away with anything. Any list of private sector concerns before investments are triggered will include regulatory transparency, set environmental protection rules, and clearly defined contracts. However, for the exploitation of shale, these lists will lengthen. The country’s shale reserves are mainly in the states of Coahuila, Tamaulipas, and Veracruz, all of which are plagued by security problems. Coupling uncertain reserves, large upfront investments, and the risk of insecurity may put certain companies off. Additionally, Mexico’s Burgos and Sabinas basins stretch across largely undeveloped areas, meaning that the government will have to invest in building infrastructure such as pipelines and roads, while also ensuring companies have access to a steady supply of water, which is essential to fracking. Finally, the lack of development in shale areas means that local communities have not had much experience negotiating with operators and developing a social license protocol. However, Mexico has received a measure of help from the US, which has been advising it on its own experience with resource assessments, environmental protection, and regulatory policies. Furthermore, the government has been taking steps to mitigate certain areas of concern. According to CNH, no unconventional blocks which lie in zones affected by violence will be allocated in Round

Given these hurdles, SENER and CNH are considering tweaking the fields that were originally chosen to make them more appealing. In the first and second phases of Round One, various fields have either been bunched together or further divided as the case may be. According to Lourdes Melgar, Undersecretary of Hydrocarbons at SENER, this ongoing analysis will be carried out at every stage, including unconventionals. “Future oil prices will have a greater influence on shale projects because these have a different timeframe from the conventional fields included in Round One,” says Melgar. Furthermore, Lozoya Austin has stated that the business model needed to develop Mexico’s shale fields would be suitable for smaller, agile companies. While this would enchant a Mexican government that wants to see Mexican operators arise, large players are not turning their noses up. This is evidenced by Guillaume Ropars, Director General of Total Mexico, who says that “we are aware that PEMEX has not prioritized the exploration and production of unconventional resources. However, we strongly believe that it should be a priority that could be materialized with a strong partner like Total.”