Guess Who's Looking to Cash in South of the Border

Guess Who’s Looking to Cash in South of the Border

by | published March 20th, 2014

It is an understatement to say that the “shale frenzy” is descending upon Mexico.

In fact, most of my presentation this afternoon will be devoted to what this may actually mean – both for the country and the region.

Of course, the drive to bring the shale revolution south of the border is not entirely new.

There have been expectations on pushing down from the Eagle Ford in South Texas into the Burgos basin in far northern Mexico for some time now. But the recent Mexican energy reforms have merely whet that appetite even further.

However, an unexpected development has suddenly emerged from the sidebar conversations I’ve had here at the Bloomberg Summit in Mexico City.

It has to do with a few unlikely sources of foreign investment…

The Best Plays South of the Border

But first I’d like to give you an idea of what’s piquing the interest of all this foreign money.

According to the latest estimates from the U.S. Energy Information Administration (EIA), Mexico has technically recoverable shale resources of 545 trillion cubic feet (cf) of natural gas and 13.1 billion barrels of crude oil and condensate.

That’s potentially larger than the all of the country’s proven conventional reserves and places Mexico sixth in shale gas and seventh in shale/tight oil reserves worldwide.

The best documented play remains the Burgos Basin.

The Burgos is clearly an extension of the oil and gas-prone windows in the Texas Eagle Ford providing an EIA estimated 343 trillion cf and 6.3 billion barrels of “risked,” technically recoverable shale gas and shale oil resource potential.

Saying it is “risked” merely reminds everybody that being technically recoverable doesn’t mean that every possible problem from geology to market conditions has been factored in.

What makes this even more intriguing is that the Eagle Ford is not the only play if the experience in Texas is any indication.

In Texas, there is additional production coming from horizons above and below the Eagle Ford, several in fact. These range from the Austin Chalk sitting about 8,000 feet above, to the Buda formation beneath the Eagle Ford at more than 14,500 feet, and clear down to the Pearsall shale/limestone stratum in excess of 17,000 feet.

But Burgos is hardly the only basin with potential.

Further to the south and east, the shale geology of the onshore Gulf of Mexico basin becomes structurally more complex and the shale development potential is less certain. Nonetheless, the Sabinas basin has an estimated 124 trillion cf of risked, technically recoverable shale gas resources within the Eagle Ford and La Casita shales. The problem is the basin is faulted and folded. That means there are technical challenges in locating and extracting shale gas.

More favorable structures include the Tampico, Tuxpan, and Veracruz basins that stretch out in the east near the Gulf as you move further south in Mexico.

These basins are expected to add another 28 trillion cf and 6.8 billion barrels of risked, technically recoverable shale gas and shale oil potential from the same prolific source rocks that have provided Mexico’s conventional onshore and offshore fields in this area for years. Still, there has been no serious exploratory drilling here.

Big Opportunies for Companies with Know-How

With five potential basins, there is little surprise that expectations for national (and soon to be opened for foreign investment) oil company PEMEX are on the rise. PEMEX is planning to begin shale gas production in 2015 and increase to about 2 billion cf a day by 2025.

However, there are already a few problems looming.

PEMEX has said it will invest $1 billion to drill 750 wells, mostly in the Burgos. Yet its initial shale exploration wells to date have come in way over budget (averaging $20 to $25 million each) and have provided only modest initial gas flow rates (less than 3 million cf per well with a steep and quick decline).

At those levels it would require a NYMEX futures contract price of about $7 per thousand cf (or million BTUs) to make the project financially doable. The current price of natural gas is closer to $4.50.

What’s more, while there are already 4,000 wells in the Burgos – primarily vertically drilled conventional holes at shallower depths – what they tell us is not encouraging. These wells are experiencing some major problems: among them, gas-loading back pressure, reduced permeability, and tight gas formations where production declines rapidly.

PEMEX and oil field global leader Schlumberger Ltd. (NYSE:SLB) have implemented a production surveillance system to estimate gas rates and liquid loading, along with monitoring Key Performance Indicators (KPI). But the extent of what is truly recoverable needs a more detailed examination utilizing a range of technical expertise and equipment not available in Mexico.

The country’s potential development of its shale gas and tight oil resources may also be constrained by several other factors, including potential limits on upstream investment, the nascent capabilities of the local shale service sector, and public security concerns in many shale areas.

All of these concerns, of course, provide significant opportunities for outside companies to move in, with the prospects of setting up joint ventures for the first time in 76 years adding to the excitement.

Why Money Make This World Go Round

And that brings me back to that unexpected development over the sources of this investment.

It may be American companies leading the charge into Mexican shale production, but it will be Asian sources of finance that will fund large parts of it.

As I have discussed in OEI before, we have already witnessed the advent of significant Chinese money moving into South America. Now with the crisis intensifying in Venezuela, further stability of an entire oil and gas network in the Caribbean is in question.

In this case, as energy prospects in both North and South America increase, with large new field projects, new opportunities will present themselves as major investment strategies are redrawn.

As Chinese state oil companies have recognized in places like Ecuador, control over oil and gas export revenues is more decisive than determining where the actual product is delivered.

But with the Caribbean reflecting an energy dynamic that is likely to be repeated in South American, there is a new avenue to test the effective mastery over product through control of receipts.

It’s Mexico.

And what first started as a Chinese experiment is now expanding into other Asian financing sources. What is about to happen in Mexico will likely broaden the use of funds to dimensions beyond product to process.

That may explain the large number of Chinese, Japanese, Malaysian, Singaporean, and Indian bankers in the audience. They far outnumber the representatives of oil and gas companies from these countries.

Once again, while most are looking at the product and its extraction, the real impact in Mexican energy is likely to follow another route…

“Show me the money.”

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

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