Nicolás Borda
Shareholder
Greenberg Traurig
/
Insight

Outlook for CBM and Shale Gas in Mexico

Wed, 01/25/2012 - 12:57

The Mexican hydrocarbon upstream policy has evolved from the Multiple Service Contracts in 2003, to the opening of coalbed methane gas (CBM) in 2006, to the Integrated Service Contracts in 2011. The Energy Ministry recently completed the legal framework for CBM production. However, there are many challenges ahead. The huge success stories for shale gas in the US have called the attention of potential investors to Mexico’s nonconventional gas resources.

CBM and shale are the two most important nonconventional gas resources in Mexico. CBM is the only nonconventional gas resource in Mexico that the private sector can produce directly. Shale gas is much more abundant, but it is considered a strategic activity that is part of the petroleum industry, and thus its production is the exclusive domain of Pemex. This article explains how Mexico’s CBM regulation works and the outlook for the country’s nonconventional gas resources.

The Regulation of CBM in Mexico

In June 2006, several important amendments to the Mining Law and the Regulatory Law of Article 27 of the Constitution on Petroleum (the “Petroleum Law”) allowed the self-use and/or delivery to Pemex of CBM by the holders of mining concessions. This was the first step in regulating CBM. These amendments were very important to Mexico for environmental, economic and safety reasons; unfortunately they have not had the desired eect, and have not yielded the expected results. From the safety perspective, CBM explosions, due to the lack of degasification in coal mines, have caused the death of hundreds of Mexican mine workers. The explosion in the Pasta de Conchos coal mine a few years ago killed more than 60 workers.

The Petroleum Law and the Mining Law were both amended to expressly include CBM. The Mining Law was also amended to include additional rights and duties for the Economy Ministry to draft and update CBM production and self-use policies in conjunction with the Energy Ministry. The aims of these modifications were to assure CBM’s rational exploitation and promote ecient use; establish the terms and conditions, as well as the administrative provisions of technical nature for the recovery and use of CBM; evaluate the feasibility of the projects for the recovery and use of CBM and its consistency with the energy policy; and resolve any appeals filed pursuant to the provisions of this law.

The regulations to the Mining Law prohibits the sale of CBM to third parties. In the event that a company breaches this restriction, its mining concession would be cancelled. The rationale is that CBM was liberalized not to speculate, but as an accommodation to the mining companies for safety and environmental reasons. Despite the limitation, the mining companies could form a self-supply consumption club in which the o-takers would be shareholders of the special purpose company.

The regulations bestowed the Energy Ministry with the authority to approve, modify or revoke authorizations for joint venture agreements, as well as the terms and conditions of the delivery service contracts with Pemex. On June 11, 2009, the Energy Ministry published the administrative guidelines. These guidelines establish: (i) the terms and conditions for Pemex and permit holders regarding the delivery point of the gas; (ii) the guidelines for the transport, storage and industrial activities for the use of CBM to the delivery points to Pemex; (iii) provisions regarding the terms of the contracts for the delivery of CBM to be executed by Pemex and the permit holders; (iv) the terms and methodology for the compensation to the permit holders; and (v) the gas specifications (NOM 01). Such administrative guidelines indicate that the compensation for the permit holder shall include: (i) the average reference price for natural gas in the corresponding period in the rate sector corresponding to the delivery point to Pemex; (ii) the total cost of transport service incurred by the permit holder; and (iii) the commercial commission for the handling of CBM by Pemex. Pemex and the permit holder shall agree on the delivery point, subject to technical feasibility and the transportation and storage of CBM shall be carried out pursuant to the regulatory framework applicable for natural gas.

On September 13, 2011, the technical guidelines to carry out the studies to prove the association of gas with coal deposits were published in the country’s ocial gazette Diario Oficial. These guidelines established the terms and conditions for geological studies and geochemical characterization of the gas.

Pursuant to the current Federal Governmental Fees Law (LFD), mining companies using or delivering the gas to Pemex shall pay a governmental fee of 40% of the dierence resulting between the annual value of CBM obtained in the year and the deductions allowed. The CBM price shall be based on the Texas Eastern Transmission Corp. index, South Texas Zone, published by Inside FERC’s Gas Market Report.

Conclusions

Mexico has great potential for nonconventional gas resources, but Pemex lacks experience. That being the case, the NOC requires huge investments and new technologies in order to develop strategic reservoirs with great long-term potential and very high complexity. Notwithstanding the good intentions of the amendments to the Petroleum Law and the Mining Law, the use of CBM has not triggered new investments or projects due to the profitability issues for holders of mining concessions. The legal framework has just been completed, therefore no CBM permits have yet been granted. The CBM legal framework remains complex and restrictive (i.e. no sale to third parties).

Shale gas, unlike CBM, has no special legal regime in Mexico. Shale gas is regulated in the same way as conventional natural gas: by the Petroleum Law and its Regulations, as well as by the Natural Gas Regulations, the directives issued by the Energy Regulatory Commission (CRE) and the Mexican Ocial Standards. Subject to the corresponding legal changes, shale gas could be developed by the private sector in order to bring the necessary capital, expertise and technologies that have developed substantially in the past decade in the US. This woule enable Pemex to focus on more profitable areas like oshore shallow waters with light crude oil.

Pemex Exploration and Production could use the risk performance-based contract model, subject to certain specific tailoring, to start developing the Burgos area to create employment, infrastructure, technology development, and train skilled local labour.

Lawmakers from the PRI recently submitted bills to derogate Article 267 from the LFD, which established the 40% fee. The PRI argues that companies should continue venting the CBM since it is complicated and expensive to use or deliver to Pemex, and is not profitable with the 40% fee. Unfortunately, as of today, these bills have not been approved.