Mexico Shale Oil and Gas Preliminary Study

By Dr. Tom Tunstall, UTSA Institute for Economic Development

Recently, the Center for Community and Business Research at the UTSA Institute for Economic Development completed a preliminary study on the prospects for shale oil and gas in Mexico. The study included an overview of the economic landscape, the current progress of legal reform, and a high level roadmap for private companies interested in doing business in the Mexican energy sector. A comprehensive report on Mexico shale opportunities is expected to be released sometime in 2016.

Opportunities for unconventional or shale oil and gas production in Mexico are in the earliest stages of development. While shale gas production increased significantly in the U.S. since 2000, and shale oil production since 2008, no other country in the world has yet to replicate that success. Due to its close proximity to major shale field development in South and West Texas, Mexico is particularly well positioned to take advantage of unconventional extraction techniques. However significant challenges will have to be addressed.

Mexico already imports refined products and natural gas from the United States. In 2013 and 2014, for example, Mexico imported over 650 billion cubic feet of natural gas each year from the U.S., up from only 333 billion cubic feet in 2010. New natural gas pipeline projects will transport additional supplies to Mexico in future years. All of this while Mexico sits on top an estimated 545 trillion cubic feet of natural gas reserves. Estimates for unconventional oil reserves in Mexico are estimated to be 13 billion barrels (EIA 2013), though in both cases, the lack of available geological information remains an issue.

The importance of energy reform in Mexico cannot be understated. Despite increasing amounts of investment on exploration and production (E&P) by Pemex, oil production in the country peaked in 2004. Were it not for the prospect of energy reform implementation, Mexico would likely transform from a net exporter of crude oil to a net importer within a few years.

While some tentative steps at energy reform in Mexico were undertaken in 2008, they amounted to little more than the ability of private companies to work as subcontractors for Pemex. It wasn’t until 2013, when President Enrique Peña Nieto ushered in an overhaul across several sectors of the economy that the prospect for change began to get significant traction. Private companies are being allowed to bid on blocks of mineral rights that formerly were under the exclusive purview of Pemex.

The bulk of Mexico’s shale prospects appear to lie in the north and northeastern sections of the country, where infrastructure if often largely undeveloped. This means that in order to tap the country’s bounty of shale oil and gas, infrastructure such as roads, housing, rail, pipeline and many others will have to be built out first. The ability to develop a suitably skilled workforce will be essential to long-term success. Security issues must also be addressed.

The potential unconventional oil and gas production in Mexico poses many interesting challenges in the wake of recently enacted energy reform. Key shale development issues that will be examined include, but are not necessarily limited to:

• Pipeline infrastructure
• Road, rail and port infrastructure
• Security
• Workforce
• Working with PEMEX in the new environment
• Exporting services to Mexico

The effectiveness of the Government of Mexico at the state and federal levels will be critical to the ultimate success of energy reform. Successful implementation of energy reform initiatives will serve to encourage private sector investment and help achieve long-term sustainable community and economic development in Mexico.