A Mexican Gas Dilemma

A Mexican Gas Dilemma

by | published June 4th, 2012

This morning I begin three days of workshops for the state oil company Petroleos Mexicanos (PEMEX) here in Mexico City.

My real interest, however, is north of the capital city, in the regions that abut the U.S. border.

That’s where the company’s considerable shale gas is located.

It makes sense that the reserves would be there, given the close proximity to the Eagle Ford basin in southern Texas, currently one of the hottest prospects in American unconventional gas and oil production.

Prospectors have thus far identified five major shale gas basins in Mexico. And the Energy Information Administration (EIA), the division of the U.S. Department of Energy that provides a wealth of data about energy developments worldwide, has determined the country is among the top four in the world (along with the U.S., China, and Argentina) in terms of gas reserves.

This would seem to be good news for PEMEX.

The company has been struggling with stabilizing crude oil production and has never had a very good record developing natural gas fields. Most of the gas production that makes it to market here is actually associated gas – gas that almost seems like a production byproduct from an oil field.

Shale gas could fundamentally change the future energy climate in Mexico.

But there are at least four significant impediments to its rapid development.

First, the infrastructure will be expensive, as will the required technology base. PEMEX has never had a good record in the efficient usage of capital investment. And that’s an especially important consideration in view of the current political climate (more on that in a moment).

It is clear, however, that PEMEX does not have the expertise for shale gas drilling. And it is limited by legal and constitutional roadblocks from entering into genuine joint ventures with foreign parties.

Second, the essential secondary service market is lacking. Every need – from geological prospecting and seismic study, through drilling, completions, well logging and rework, to maintenance, water treatment, and pumping/pressure equipment – is in short supply.

Then again, this would require a new series of gathering, feeder, and trunk pipelines, along with compression and pumping stations.

In a country that has not prioritized such activities and has made sourcing them from the outside difficult, it would take some time to rev up the sector domestically. The entire matrix of needs and shortcomings may be the main reason PEMEX has scheduled only 175 wells in the promising northern shale area. (In contrast, Texas issued more than 2,100 well permits just above the border for Eagle Ford drilling in 2011 alone.)

Third, given the abundance of U.S. shale gas, it is relatively cheap for Mexico to import volume rather than to drill for it at home. This is a balance issue and will change as the mix of energy needs and production priorities are worked out at PEMEX. Still, the cost differential has been an important consideration, especially with the shale gas surplus in the states likely to remain.

But it is the fourth consideration that is the most important and, in fact, could become quite historic.

Elections Play a Major Role in Future of Gas Development

Federal elections in Mexico take place on July 1.

The frontrunner to become the next president is Enrique Pena Nieto. He is the candidate of the Institutional Revolutionary Party (PRI).

The PRI had been the dominant party in Mexico throughout the twentieth century, producing almost three generations of consecutive presidencies until two-party politics entered the scene in the last decade.

Pena Nieto declared last November he would open up both PEMEX and the Mexican oil/gas sector to foreign companies, in a noticeable departure from the intense monopoly position the company has held since its creation.

Some of the reasons for the candidate’s position involve the problems I have summarized already. But there are effective limitations on how far this could actually go and how quickly it could get there.

For one thing, popular sentiment runs strong to keep Mexican oil and gas a national asset, even if PEMEX itself is not always that popular with the people. For another, the dominant position of PEMEX is enshrined in the national constitution. That means a genuine change in the situation will need more than an election or the passage of a law.

Nonetheless, there is now rising sentiment both in Mexico and with foreign oil majors that an opening of the sector is coming and quickly. And these days there is a model frequently discussed on how this might take place.

In the 1990s, Brazil opened up its state company Petroleo Brasileiro (Petrobras) to foreign participation and joint ventures, as well as the floating of shares in international markets. Petrobras has since catapulted into global major status, transforming itself into one of the best-run oil companies anywhere.

Should changes move forward after the election, major opportunities await south of the border for both U.S. and Canadian shale gas operators and support companies.

Pena Nieto cannot wait for the development of a domestic base to support PEMEX in the new operations. That must be provided by joint ventures with outside companies that already have the experience and the technology.

Still, this is Mexico. Reform comes at a creeping pace here, and events have a way of unfolding in unanticipated ways. The latest polls show leftist challenger Andres Manuel Lopez Obrador closing the gap. Obrador is no stranger to such elections. He was the runner up in the last one held in 2006.

Pena Nieto’s lead, once thought to be insurmountable, has now narrowed, following charges of corruption and massive demonstrations here in Mexico City against the PRI.

Obrador has also talked of opening up PEMEX, but he may be constrained by the opinion of his supporters – regarding the national oil and gas sector as the primary source for expanding social benefits to the population.

We will all have to wait a month to see if this opportunity will really open up.



Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. No comments yet.
  1. No trackbacks yet.