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It's 'Slow Going' in Mexico's Shale Gas Patch

In Mexico there is no debate about shale gas having potential, but there is an ongoing discussion in the federal government concerning whether to focus on finding out exactly what that potential might be. A relatively new government body, the National Commission for Hydrocarbons (CNH), is pushing other parts of the federal government to pursue a more diversified energy strategy.

One of five CNH commissioners, Javier Estrada Estrada has been campaigning for a broader, diversified approach to energy in Mexico based on projections for continuing steep declines in conventional sources of oil and gas through 2025 and demand growing by more than 5 Bcf/d over the 15-year period. CNH was created in late 2008 as a means of stimulating outside private investment in the Mexican energy sector.

Estrada said a diversified gas strategy is needed that incorporates unconventional sources of natural gas, but for this to happen he called for the end of the "tug-of-war" between oil and gas in the nation's exploration and production (E&P) strategies; the development of a lot of new infrastructure, including transmission pipelines and more use of "the best existing technologies," along with new technical solutions, including shale gas production technologies.

In the United States, some who are watching or participating in the gas industry are hyping the overall potential of shale south of the border, but there is not a lot of verification of the wide-ranging estimates because there is not much preliminary drilling work taking place for shale.

Houston-based Rice University energy economics professor, Ken Medlock of the Baker Institute of Public Policy, said the robust Eagle Ford Shale play in South Texas extends into two of Mexico's major oil and gas basins, but so far there has been little activity on the Mexican side of the play.

"You get south of the border and nothing is happening because no one is drilling down there," Medlock told NGI's Shale Daily earlier in September. "But it is known that the geology extends well south."

Medlock said it is an issue of the political and economic landscape being completely different. Petroleos Mexicanos (Pemex) is the national oil company and controls E&P activity, he said. "In the U.S. you deal with landowners, access infrastructure, etc., so it is a market structure issue," said Medlock, who has been watching shale developments on both sides of the border. "The geology is there in Mexico, but it is a matter of above-ground issues."

Negotiations south of the border (with Pemex or the government) take on a whole different tenor, he said. "The other negative from a developer's standpoint is that you can't have an actual equity stake in the gas wells in Mexico. If you are going to develop the wells, you basically have to sign a multi-service contract and get a fee for your activity instead of an equity stake in the reserves."

A recent report by the U.S. Energy Information Administration (EIA) placed Mexico's shale gas reserves as the world's fourth largest, approaching 681 Tcf of recoverable resources. Coalbed methane potential was placed at 2 Tcf. Yet the United States imported just 29,995 MMcf from Mexico in 2010, according to EIA data. That was just 0.12% of the gas consumed in the lower 48 states, and significantly less than the 54,062 MMcf (0.24%) imported in 2007.

Estrada maintains that Mexico is now entering the state where "investments are being made to identify and test these potential resources." Northeast and east-central parts of Mexico are where the riches of the shale gas deposits are thought to be, Estrada said.

"As you move farther south you get into drier and drier strata," said Medlock. "The shale that extends into the [Mexican] Sabinas and Burgos basins is typically a dry gas, so in the Eagle Ford the farther north you get you get into liquids-rich kinds of fairways, and that is where a lot of the development is occurring now because the liquids provide so much of an uplift on the pricing side."

From a geology perspective, Mexico's shales are correlated in geologic time periods to the U.S. shale plays (Eagle Ford, Haynesville, Bossier and Pearsall shales), Estrada said. "Structural complexity [faulting and folding], excess depths [below 5,000 meters underground] and locally thin or absent shale on paleo highs constrain [Mexico's] resource assessments."

The economics are favorable and the risks manageable in Mexico, according to Medlock, who said even at today's $4 gas prices in the United States, shale gas in Mexico could be economically produced.

Mexico will also have to wrestle with various regulatory issues, according to Estrada, who indicated the CNH is looking to learn from regulators in other nations about "the most efficient and less bureaucratic ways" of overseeing shale gas E&P activities. Eventually, he said it would be good in Mexico to have a debate on taxation, third-party contract and federal-versus-local supervision issues.

"In Mexico, all of the laws, regulations and permits that apply to conventional oil and gas E&P would also apply to shale gas," Estrada said.

So far, Pemex has drilled only one exploratory shale gas well (see Shale Daily, March 25).

"Most of the academic and commercial focus in Mexico is still on conventional reservoir development," Medlock said. "That is all Pemex is doing right now. There is talk about trying to move deeper and deeper offshore. If you ask me, they are not paying enough attention to the shale resource that is there.

"[Mexican shale gas] is all very speculative at this point until someone is actually drilling cores and wells." Medlock doesn't see that happening anytime soon. "You don't know whether it is going to bear commercially viable hydrocarbons." He thinks there are technological hurdles because it takes a different kind of approach to develop shale rather than a conventional reservoir. There is a "learning process" involved in shale, and Mexico is not taking that step.

What might change the mindset of Mexican officials? An uptick in the economy or higher gas prices?

"I actually think the prices are high enough now. It is an issue of constitutional law in Mexico. U.S. shale developers couldn't go into Mexico and apply the models they are used to using," Medlock said. "Here they acquire acreage, take equity stake, book the reserves and begin to produce. They can't do that in Mexico; it's that simple. Basically that means it is going to be slow going."

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