When a portion of Mexico’s gas-rich Burgos Basin opens to foreign investment as expected later this year, the progress of investment and development will be a critical test case for both foreign industry and the Mexican government, according to the authors of a new research report by Cambridge Energy Research Associates (CERA).

In “The Burgos Gas Basin: Will It Meet Mexico’s Expectations?,” the authors examine the coming move by Mexico to allow private investors a chance to bid on developing natural gas properties onshore and offshore. The state oil monopoly, Petroleos Mexicanos (Pemex), plans to select the first 10 multiple-service contracts in November (see Daily GPI, Aug. 7).

“Pemex has ambitious plans for its upstream operations, and the performance of the Burgos has broad implications both within Mexico and for potential foreign investors,” concluded authors Gregory Smith, director of oil industry activities and Alejandro Gonzales, associate, Latin America.

“The Burgos is a cornerstone of Mexico’s energy strategy, and the outcome of development efforts there over the next several years will affect Mexico’s future gas supply strategy and drive investment decisions.”

Located along Mexico’s northern border with Texas and first drilled in 1945, the Burgos has emerged in the last eight years from a secondary asset to one of critical importance. “The boost in significance is due to a growing awareness of a potential gas shortage in Mexico and the recognition that large amounts of this non-associated gas basin’s reserves had been left in the ground by past production practices.”

Pemex has invested more than US$3 billion in Burgos in the past five years, but since 1999, production capacity growth has stalled. Output reached only 0.99 Bcf/d in 2001; it was 0.97 Bcf/d in 1999. However, CERA noted that Burgos now is “an object of great interest to the international exploration and production community,” especially with the coming of the new contracts with Pemex.

“The opportunity to finally participate in Mexico’s upstream is something many companies are anxious to examine closely,” said the authors, who noted that Pemex’ success in opening the basin to foreign investment will serve as a “litmus test” for Mexico’s energy strategy for four reasons, including the following:

Burgos is the cornerstone for Mexico’s energy future. Pemex needs production to double there by 2006 to reach its production goals of 6.7 Bcf/d of raw gas.

Gas development in the Burgos will affect Mexico’s future supply strategy and investment decisions. Not meeting capacity goals would force Mexico to develop alternative gas sources to meet expected demand, requiring investments in new import capacity, i.e., cross-border pipes and liquefied natural gas.

Burgos projects will be test cases for Pemex’s new contracts; with initial success, it will likely use them for other things in the future.

Finally, Burgos offers foreign E&Ps the opportunity to enter Mexico’s upstream.

“CERA’s view is that Pemex’s goal is ambitious indeed, and that achieving the desired level of gas productive capacity within the time frame planned will be a nearly insurmountable challenge,” said the authors. “If the basin continues to perform consistent with trends of the last two years, increasing productive capacity significantly by 2006 will require unprecedented levels of capital spending to rapidly grow both capacity and the gas reserve base to support it.”

For more information on CERA, headquartered in Cambridge, MA, or the Burgos Basin report, contact Alberto Bullrich at (617) 498-9191.

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