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Collaboration Key to Meet Gas Demand: Rystad Energy

Schreiner Parker - Rystad Energy
Senior Vice President and Head of Latin America

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Karin Dilge By Karin Dilge | Journalist and Industry Analyst - Thu, 11/03/2022 - 13:20

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Q: What are the main challenges faced by oil and gas companies today and how should they tackle them? 

A: The current challenges faced by oil and gas companies are not specific to the industry. Rather, they are challenges unique to Mexico. The idea that PEMEX is going to be the primary driver of growth in the country is not necessarily misguided but there is much more room for collaboration and cooperation in the upstream sector. 

Despite its more than 100 years of history, upstream oil and gas still has a great deal of untapped potential in Mexico, for both onshore and deepwater activities. An example of a Latin American country that has benefited from cooperation with the IOC’s is Brazil, where Petrobras had a monopoly in the oil and gas industry many years ago, and then opened up to the wider market. Now, the company leads E&P efforts in Brazil with international partners, benefiting from the knowledge transfer. 

Cooperation also opens up new routes to capital. The way to tackle the issues that private E&P companies are facing in Mexico will be through a mixture of patience and pragmatism. There are several pragmatic ways to work with and alongside PEMEX but patience is required to understand that the current administration is still learning and understanding what the oil business could and should be in Mexico going forward. Hopefully, the administrations that follow will accelerate their learning when compared to this administration. It is important to really build on the lessons learned now. Increasing the understanding and knowledge of how the international oil industry works and how a diversification of operators and players in the sector can serve the same purpose will allow PEMEX to be the driving force that it strives to be along with the help of its partners.  

Q: How can Mexico develop its unconventional resources? 

A: Mexico is in a very unique situation. It is dependent on a single supplier for the majority of its natural gas, the US, both for piped gas and LNG. Almost 85-90 percent of Mexico’s demand is met by the US. That creates an issue when it comes to security of supply, or energy security as it's called today. If the US, for some reason, is unable to fulfill those contracts and send gas to Mexico either via pipeline or LNG cargos, Mexico would find itself in a very precarious position. 

The crisis in Ukraine has taught us that energy security is paramount. The government should recognize that Mexico’s overdependence on the US needs to be mitigated somehow and one of the best ways to address that is through the development of shale resources in Mexico. The issue with shale development in Mexico is twofold, however. First, there has not been enough shale exploration activity to understand how viable production is. The second is the above-ground political debate, which is something that the US also has had to deal with. The problem is that in Mexico, all underground resources are owned by the state, while in the US most of these resources are owned by private citizens or companies. In Mexico, this means that the government must get the community involved. 

Gas demand in Mexico is set to grow, driven by power generation and industrial needs. Over 60 percent of the country’s electricity is generated by natural gas and the majority of it is imported. Even considering efficiency gains in gas power plants and ambitious growth in wind and solar capacity installation, gas demand is set to grow by 353Bcf/y, which cannot be met through conventional resources alone. Companies would have to drill shale in a really significant way to even offset the legacy production decline.

Even with a hundred shale gas wells drilled per year and productivity remaining competitive, Mexico would still need incremental pipeline imports to meet demand. Yet, shale development would take the country one step closer to ameliorating its dependence on the US. 

Q: What potential does the company see in Mexico as an LNG export hub? 

A: It is an exciting prospect with some projects already materializing. The idea of having a cross-border LNG project where gas comes from one country and liquefaction occurs in another is new. If these projects are able to close 20-year plus contracts in Asia and are able to secure supply volumes in the Permian basin supported by the right infrastructure, they will be extremely interesting. It makes more sense to export LNG to Asian markets from the Sonoran coast than it does from California due to regulatory risks and taxation, among other hurdles faced in the US so the principal is in fact sound.

 

Rystad Energy is an independent energy consulting service and business intelligence data firm offering global databases, strategy advisory and research products for E&P and oil service companies, investors, investment banks and governments.

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