Alfredo García
Executive Managing Director
Sie7e Energy
/
Expert Contributor

Opportunity Losses Over Shale Gas

By Alfredo Garcia Mondragón | Wed, 02/09/2022 - 12:49

In 2015, just after the promulgation of President Peña Nieto's 2013 Energy Reform, oil prices had remained stable above US$80 a barrel for a period of three years, proving a great boost to the small producers of gas from shale (shale gas), badly called fracking.

The Arabian countries wanted to sabotage the industry by increasing production and driving oil prices down to the range of $35 a barrel. Indeed, many small independent companies had to sell, others closed, but the critical issue was in the debt generated by the financing obtained to develop these projects.

After the enactment of the Energy Reform, the world industry had great expectations for Mexico because it was the last frontier closed to private investment. All of us in the industrial sector and at university chambers, among others, knew there would be challenges related to the first oil rounds: what would be the contractual terms, what areas would be in the rounds and what area size. There were also questions over types of contracts, calendars, and what the bidding process would be like.

Immediately there were forums, discussion tables and worktables at national and international industrial associations and chambers. This frenzy, thanks to the previous oil prices, unleashed the creation of university courses related to hydrocarbons. Personally, I participated in several forums related to deepwater, shale gas, national content and oil contract schemes in various cities in Mexico and Texas.

In particular, among the meetings that most caught my attention was one that I attended in Eagle Pass, Texas, organized by the US-Mexico Business Association and held at its chapter in San Antonio, Texas. This one was very revealing because to a large extent the big shale gas producers are based in South Texas, and mainly in San Antonio.

At this meeting, all the social advantages that this industry had left to a region were discussed, such as the generation of jobs, economic growth in a region that practically lived without government attention. They touched on the tax revenues received by the municipalities based on their local participation, and many of these small municipalities had become rich overnight; many of them received revenues on the order of billions of dollars, monies never seen in their municipal coffers.

The authorities of these municipalities knew that these resources came from a non-renewable source and, therefore, were unique. They took on the task of bringing in economics and social experts to help them decide the best use of those resources.

Six years later, I traveled to the south Texas region and I was greatly surprised by the investments in infrastructure made during this time. In the state of Texas, things are always done well, based on great thinking, without dogmas or paradigms. Faced with fracking as a threat to water depletion or a source of aquifer contamination, they have relied on technology and university institutions to find the best solutions to allow them to mitigate the risks when operating the multilateral wells necessary to be able to produce shale.

In contrast, the vision in Mexico to seek energy sovereignty looks to reduce fuel imports and refine its own oil production. For many opinion leaders in the energy sector, this is a bad decision but, often with the projects undertaken by operators or countries, the project may be marginally good but it may be strategic for a region or a country because multibillion-dollar projects have geopolitical implications.

The problem does not lie in the construction of a refinery in Dos Bocas or the purchase of a refinery in Texas, since those may be aligned with the strategic plan to reduce private imports, but in issues of risk-mitigation projects, which is the worst scenario if the refineries that Mexico will have in the coming years do not operate at 100 percent and Mexico continues to import fuel. In this case, it would be considered a partial success.

The issue of reducing exposure from imported gas, while Mexico has access to cheap gas from Texas, exposes its dependence on a neighboring industry that benefits from that export. Generating rounds and allowing private parties to enter potentially gas-producing areas in shale would detonate regional economies in the northern states, such as Tamaulipas, Coahuila, Veracruz, San Luis Potosi and Puebla, that have awaited the arrival of these investments. But not everything comes from a bidding round; there must also be a regulatory and fiscal framework that provides certainty and viability to this sector of the oil industry, which is capital intensive.

In the electricity reform that is being discussed in the open parliament, renewable energies are taken as the solution, which although they are clean, the power of gas still makes it a source of energy that Mexico must take advantage of to reactivate the oil industry. Yet, no matter how nationalistic it may be, PEMEX does not have the financial or technical resources to execute it. Allowing private parties to take a more active role in this segment of the industry would provide support for the concept of energy sovereignty, which should be seen as a national supply regardless of who produces it to focus on the benefit of society.

Photo by:   Alfredo García