Mexico’s Energy Future Must Include Holistic Evaluation

Mexico has the potential to be an important player in the oil and gas space due to its abundant reserves and prospective resources. Data from the International Energy Agency shows Mexico has the 17th largest oil reserves in the world, and it is the fourth largest oil producer in the Western Hemisphere behind the United States, Canada and Venezuela. The energy matrix of Mexico will eventually transition to cleaner sources of energy, but both oil and gas will still be there at least for the next two to three decades.

According to the National Hydrocarbons Commission (CNH), Mexico has more prospective resources of oil and gas in non-conventional fields than in conventional ones. Therefore, it is critical that our country invests to be able to exploit and access these resources to significantly increase production of oil and gas. One CNH commissioner has explained that oil prospective resources account for 68.1 billion barrels, of which 47% are conventional and 53% non-conventional. In the case of natural gas, we have a similar situation. Prospective resources of this critical hydrocarbon account for 224.7 billion cubic feet, of which 37% are conventional and 63% non-conventional.

Mexico is in the Top 10 of countries with more non-conventional resources that are technically viable to be exploited both in oil and gas. Reviewing specific data regarding non-conventional fields by each type of hydrocarbon, Mexico is in eighth place in oil, while in natural gas we are sixth on the list.

There are non-conventional fields that can be exploited and could start production within two to three years, while the existing conventional fields could easily take up to four to five years. Therefore, development of non-conventional fields could result in increased production sooner. These non-conventional fields have a significant presence of natural gas, and we must remember that Mexico as a country is dependent on more than 70% of imports to satisfy consumption.

Nonetheless, it is important to highlight that in general, non-conventional fields exploitation has a negative image due primarily to two main issues related to environmental concerns. Both have been addressed and there is factual evidence based on objective and scientific information to counter these two concerns.

The first concern is that non-conventional fields exploitation requires vast amounts of water. There is an argument that states that conventional wells require less water than non-conventional wells. Evidence demonstrates that a non-conventional well requires less net water, since water recirculation can take place, therefore, countering this argument.

The second concern is pollution of underground water sources or aquifers. Available existing technology addresses this issue. There are coating elements that are used to preserve well integrity before water is injected to carry out the hydraulic fracturing or “fracking” activity. It is highly unlikely that these aquifers would be affected, and in addition to this, these underground aquifers are normally located within 60 to 1,000 meters below ground level. Non-conventional fields are generally located between 1,000 and 6,000 meters below ground level.

An open, factual, and rational conversation needs to happen to move forward, addressing all concerns, so our country can tap into these non-conventional resources. It is important to highlight all risks associated with fracking and they all must be discussed, but this should not stop Mexico moving forward since these risks can be controlled, addressed or avoided.

Mexico must evaluate and assess non-conventional fields with a holistic point of view to move toward energy security. Oil, as compared to natural gas, is more profitable. Non- conventional fields contain in most cases natural gas combined with oil. The profitability and potential of the fields must be viewed strategically.

Increasing natural gas extraction out of these fields would benefit Mexico in many ways providing energy security. Natural gas has a more robust value chain and enormous business potential, especially for the petrochemical industry. Natural gas is the main source for electricity generation, accounting for more than 50% of electricity generated in the country.

Natural gas can be processed into other byproducts such as ethane, methane, and propane. These are themselves feedstock for other products, such as ethylene, propylene, butylene, among other natural gas derivatives, and they are all feedstock for basically all industries that make up industrial production in our country. The petrochemical industry in Mexico depends on natural gas in 80% of its feedstock.

According to the National Association of the Chemical Industry (ANIQ), this industry creates 20 times more value creation in petrochemical and chemical products than selling oil and gas does. This is the multiplier effect that Mexico needs to assess and grasp, to really tackle the concept of energy security and self-sufficiency. Ninety-five percent of all industrial sectors in the country use petrochemical and chemical products generated by the chemical industry. Today, it only accounts for 2.2% of Mexico’s GDP. It touches many industries, including construction, pharmaceuticals, beauty and cleaning products, plastics, rubber, textiles, automotive, aerospace, pulp and paper, medical, among many others. If there was enough natural gas for this industry, the potential impact on GDP would double to 4.5% in the next 10 to 15 years, according to ANIQ.

Another critical element to consider is that Mexico must be able to capture natural gas to minimize flaring that is currently taking place. There is technology available to maximize capturing natural gas being flared when extracting oil (in both conventional and non-conventional fields). We have a great opportunity to capture natural gas and support national production for internal consumption. At the same time, capturing this natural gas helps Mexico comply with reducing carbon emissions associated with flaring, and supports our international commitments related to this matter. We must consider that reduction of carbon emissions is mandatory for many international companies planning to invest in Mexico, and they demand cleaner sources of energy. Natural gas contributes as the hydrocarbon with the lowest carbon emissions of all.

As mentioned previously, we import around 70% of our consumption of natural gas and vast amounts of petrochemical products, since there is not enough natural gas available to maximize petrochemicals production in Mexico. I also mentioned that most of the electricity is generated with natural gas, not oil. Therefore, from an energy security and self-sufficiency point of view, what we need in Mexico is availability of natural gas.

Our trade balance is negative considering that our exports of crude oil are not enough to compensate for the imports of natural gas and other essential petrochemical products. The energy security and self-sufficiency concept has to be addressed in such a way that we view oil alongside natural gas, that we as a country develop a joint public policy where oil is considered at the same level of importance as natural gas, and always with a long-term view that goes beyond our traditional six-year planning scenarios that follow political periods, and not the 10- to 20-year industry-specific planning periods.

The next question for our country to address is the much discussed and highly needed storage capacity for natural gas. Today, our country has less than two days of inventory, according to CENAGAS and SENER, and it is concentrated in two LNG import terminals in Manzanillo and Altamira. In other developed economies, their inventory levels are at least 30 days of national consumption and can go as high as 90 days in some instances, like in Japan, according to the International Energy Agency.

The primary mechanism to accomplish this goal is underground storage, which includes depleted reservoirs (two currently being evaluated by CENAGAS: Jaf in Veracruz, and Brasil in Tamaulipas) and salt caverns (readily available in Veracruz) as the main technologies for large-scale operational and strategic storage of natural gas. These technologies have been operational in many other countries for the past 50 years. Storage should be an integral part of the natural gas infrastructure expansion that is being implemented and at the center of public policy discussions to guarantee energy security.

Mexico has a historic opportunity to capitalize on nearshoring, taking advantage of the USMCA agreement, and the robust economic integration we have with North America, and this all must happen now. This is a once in a lifetime opportunity, and it has an expiration date on it. Mexico must prioritize increasing local production, expansion of natural gas infrastructure (transport pipelines and much needed large-scale storage) to mobilize natural gas to where it is needed. The only way for this to happen is to work in a close and coordinated effort between the federal government with the complementary input from the private sector with financing, technology, and know-how. The Mexico moment is here and within reach for us to materialize it, for the benefit of economic prosperity for our beloved country.