There is no difference in geology between the Mexican and US sides of the Texas border, but there is a difference in activity. South Texas is the centre of the US shale revolution. Thousands of shale wells have been dug and their production has enriched the region. The Eagle Ford Formation (EFF), where most of Texas’s wells are located, stretches into Mexico, but on that side of the border, the vast shale reserves have barely been touched. The discrepancy results from the fact that Petróleos Mexicanos (Pemex), which is focused on crude production, has little interest in exploring shale. Without the energy reform, Mexico’s shale reserves might have remained virtually untouched for decades.
When the government auctions contracts to exploit hydrocarbons blocks in 2015, Mexico’s shale reserves may be explored on a large scale for the first time. US companies, located just across the border, have the experience and technology to be successful in Mexico. The opportunity is sizeable. According to a 2013 US Energy Information Administration report, Mexico has 13bn barrels of recoverable shale oil resources, placing it eighth in the world, and 545bn barrels of recoverable shale gas resources, placing it sixth. Since the state has no way to exploit these reserves and derive revenue from them, it may be willing to offer favourable terms to the pioneers crossing the border for Mexican shale. Also, Mexico is a robust market for natural gas, where demand far outstrips supply.
Taking Stock
However, there are key challenges to confront. Since exploration has hardly begun on Mexico’s side of EFF, many wells may be required to make initial finds. This kind of hit-and-miss exploration is expensive and today shale margins are low as a result of the US glut of supply hitting natural gas prices. Due to the low margins and high start-up costs, it may only be profitable to extract shale gas where there is also shale oil, or tight oil. This additional requirement will add to the complexity of exploration.
Infrastructure is also a problem. Mexico’s pipelines already function at capacity and, furthermore, they do not reach most of the promising areas of the shale formations. This is due to Pemex’s near monopoly on Mexican pipelines. Since the state body engages in little shale exploration and production, pipelines to shale fields have been a low priority. Energy reform will help to address this, as once implemented, private companies will have greater leeway to build pipelines on their own. Thus, if a shale industry develops in northern Mexico, private firms will be able to step in to meet the industry’s needs. However, if many of the areas rich in shale reserves remain inaccessible to pipelines, this would further eat into margins. The lack of water in the area will complicate hydraulic fracturing. Northern Mexico has suffered from repeated and prolonged droughts in recent years, and there are no natural bodies of water in the area that could be tapped for the massive quantities of water needed for fracking operations.
Safety
Lastly, security is a concern in the north of the country. The turf of the Zetas and the Gulf Cartel, two organised crime gangs, crosses through the Mexican side of the EFF. Some companies building pipelines in the area have had to organise military escorts to keep their workers safe. The security risk acts as a deterrent to investment and also imposes a cost: extra security is needed and there are higher risks of loss. In 2013, Pemex found 2600 illegal siphons planted in its pipelines around the country; 539 of those were found in the northern state of Tamaulipas that borders Texas.
The US has progressed in energy independence thanks in large part to its extensive shale operations across the country. Many of the conditions exist for Mexico to jumpstart a shale boom of its own: nearby expertise, extensive reserves, and, with the energy reform, a favourable legal framework. However, the challenges are substantial. Oil firms are already accustomed to working in regions with limited infrastructure and difficult security situations, but they do have their limits. When the government auctions the first shale contracts, probably in 2015, oil companies will reveal just how much risk they are willing to assume for Mexican shale.
Read More from OBG
