Bejamín Torres
Baker & McKenzie
View from the Top

Fitting Shale Gas into Mexico's Natural Gas Paradigm

Wed, 01/22/2014 - 10:53

Q: Should shale gas production be a priority, and should PEMEX become the main producer?

A: We are witnessing a very interesting and challenging time in the natural gas industry. The US is seeing record-breaking production numbers, particularly derived from shale gas, which translates into lower prices. Mexico is sitting on the world’s sixth largest reserve of shale gas according to the Energy Information Administration (EIA), but PEMEX does not have the technology, the know-how, and the financial capabilities to undertake the large scale production of shale gas. The question therefore is whether it makes sense to invest a significant amount of money and time in producing shale gas if it is available from the US at the lowest price in the world, leaving aside all the risks and financial burdens associated with production, environmental impact, technological requirements, and other factors. In Mexico’s case, the money is better spent on producing more oil, because the rate of return and the profits are higher. PEMEX knows how to do that well, at least in shallow waters. PEMEX officials say that they want to explore and produce shale gas, and that they have a specific mandate to do so. However, I do not think this is a priority as the true urgency is to develop natural gas pipelines and to make sure that this infrastructure is completed as soon as possible. The lack of pipelines is creating difficulties in the supply of natural gas to all industries, precluding Mexico from becoming more competitive. Looking at the future of natural gas, we can expect a steady price increase of about 3% a year. I do not see significant increases exceeding this, at least in the medium-term. Sooner or later, environmental concerns are going to have an impact, at least in the US, and once that happens, the price of gas will naturally increase.

Q: What changes do you expect that the Energy Reform will bring to the shale gas industry?

A: The Energy Reform contemplates allowing private investment in shale because private investors have the right know-how to be willing to take the risks. The Reform is really explicit in its intentions: private investors are to be allowed into deepwater and shale gas, which are the thresholds that PEMEX has not yet been able to reach. However, the implementation of the Energy Reform does not mean that the country will immediately enjoy the benefits of shale gas production. It would take some time to process and prepare the corresponding contracts, and to define whether such contracts would be awarded by public tenders or by direct award, among other variables. Mexico does not even have adequate transportation infrastructure, so that remains to be developed as well. In addition, PEMEX itself has a great need for natural gas. This leads to a conflict of interest as the activities of production, transportation, and the authority to sell gas should be segregated. PEMEX is really having a conflict of interest: it demands gas, yet it also produces and sells it.

Q: How would you advise your different clients to enter infrastructure projects such as pipeline construction?

A: Potential contractors should do their homework. If they wait for public tenders to be launched, they will be late. Most of the real players are doing their homework and anticipate the call for tenders, sometimes up to a year before the tenders are launched. They use this time to obtain relevant information, to assemble the team that they need, and to place the company in the best position possible. New players in the energy field should work with those that are well-acquainted with the industry, that speak the native language, and that can make strategic alliances with local players to allow the development of more business.

Q: How does Baker & McKenzie help its clients through legal hurdles?

A: Baker & McKenzie understands the current business climate so we know that clients are looking for the best legal advice at a competitive cost, available 24/7. Moreover, we provide market intelligence and sensitive information on key business areas, as well as integrated legal assessments. In addition, we offer an internal industry focus group composed of attorneys focused on the energy practice, who are familiar with matters related with PEMEX or CFE. For instance, we have accountants who are leaders in transfer pricing for the integral contracts with PEMEX. We have dedicated experts who understand the varied needs of the oil and gas industry and how to fulfill them successfully through our one-stop shop offer.