Economic Basis for a Far-Reaching Legal Reform?

Tue, 01/22/2013 - 11:25

By David Enríquez. Mexico is going through a transition that means business opportunities throughout the entire value chain of natural gas. Opportunities arise not only from the increasing proportion of unconventional hydrocarbons in the energy basket, but also – especially in the short term – from the lack of infrastructure development required to provide natural gas e·ciently and at competitive rates.

Mexico has had, and will continue having, a commercial balance shortfall in the natural gas arena. According to the 2012-2015 Natural Gas Market Perspective, published by the Energy Ministry, even twelve years from now there will be a negative trade balance of 2,041tcf, in spite of exports of over 1,000tcf. As noted before, the deficit of natural gas in Mexico could only be changed by a shift in the production of unconventional natural gas. That way, with a 2012-2025 based macroeconomic scenario that poses an average annual economic growth of 3.5%, it is estimated that domestic demand of natural gas will experience an average growth of 2.2% per annum, reaching a volume of 10,779tcf in 2025. In the planning horizon, the two sectors that will have more weight in the demand are electricity and oil. As of 2025, both will consume 85.6% of the national aggregate. Industrial sector consumption will grow at a pace of 2.1% per year with a volume of 1,379.1tcf in 2025.

By 2025, most of the gas is expected to be associated, with a share of 63.6%. In this context, the shale gas production scenario is not yet su·ciently clear given the technological challenges and environmental impact its extraction would pose. Overcoming these obstacles will bring forth an obvious increase in the Mexican supply of natural gas. Moreover, shale gas production could become robust enough to shift the Mexican shortage perspectives in the natural gas arena. Actually, through the 2013-2027 National Energy Strategy, the Energy Ministry validates the potential of this resource in Mexico, indicated in the most recent DOE reports. According to said agency, Mexico ranks fourth at a worldwide level in technically recoverable shale gas resources and, thus, hoards almost 6% of the world’s potential of this energy source, with an estimated 681 tcf. In fact, Pemex’s Business Plan considers the basic programs to handle a potential of 150 to 459tcf in five geological provinces: Chihuahua, Sabinas-Burro-Picachos, Burgos, Tampico-Misantla and Veracruz. Whichever the correct assessment, the fact is that potential is significant, as is the technological challenge to ensure a sustainable exploitation.

If obstacles are overcome and an attractive exploration and production framework is generated – one that su·ciently engages private parties - Mexican shale gas market will be, without a doubt, a new and potent trigger of major investments in the country. The Energy Ministry has committed to undertake the interdisciplinary studies and projections in connection with this matter. The longexpected structural reform to Mexico’s oil and gas legal regime will need to e†ectively implement sustainable standards for the potential boom of the shale gas industry.

Although shale gas projects seem to be booming worldwide, not all cases will prove to be as interesting as most people think. Upon our reading of benchmarking studies and the experience of some of our global key clients, we think that, in addition to the environmental protection and midstream infrastructure development, the following legal areas are instrumental for the success of the yet-to-be-born Mexican shale gas industry: 


Full protection of property rights: Either a concession or a production-sharing model will have to be enacted – by amending the Constitution and secondary legislation – in order to provide legal certainty to new investors.

Ad-hoc fiscal regime that fosters innovation: Considering the innovative and entrepreneurial nature of the shale gas industry in successful countries (the US, for example), structuring a tax regime that creates incentives toward innovation and value creation will be essential.

Goal-based regulation: The environmental, waterconsumption and community challenges ahead will require flexible and benchmarking standards of regulation, in which well-coordinated governmental agencies take into account the asymmetric characteristics of the industry.