“I think that we still have a window of time to explore and develop our natural riches, but we need to do so now,” said Sergio Pimentel, Commissioner at Mexico’s Comisión Nacional de Hidrocarburos (CNH). “If not, we are leaving these resources in the ground and could be depriving future generations of Mexican citizens of economic and social opportunities.”
Pimentel, a Commissioner at the CNH since 2014, spoke with NGI’s Mexico Gas Price Index as part of an ongoing question-and-answer (Q&A) series about the Mexican energy industry. One of the most respected voices in the Mexican sector, Pimentel added that, given the global push in the industry to transition away from fossil fuels, the future of oil and gas is uncertain.
“We don’t know how much the resources we have in the ground in Mexico will be worth in 20, 30 or 40 years,” he said. “No one knows what will happen in the future of the energy industry in that time.”
Pimentel, the 43rd Q&A in the NGI series, will leave his Commissioner post at the CNH at the conclusion of 2020. Prior to his term at CNH, he worked in the legal advisory team within the Mexican government as an adjunct advisor of constitutional studies, where he assisted in the drafting of the 2013 energy reform. Additionally, he served as the adjunct general director of legal regulation of hydrocarbons at the Energy Regulatory Commission (CRE), where he also held the role of the general director of legal matters.
In his more than 20 years as a Mexican government employee, Pimentel, a lawyer by trade, has worked in the legal offices at the Attorney General’s Office (PGR), the Foreign Ministry (SRE) and the Interior Ministry (Segob). He also worked as an advisor to the consul general of Mexico in Houston.
NGI: What are your thoughts on the development of natural gas in Mexico currently, and do you think it will become more of a priority during the current government term through 2024?
Pimentel: I think that natural gas – and this isn’t a personal opinion – is fundamental to create energy security in the country. This is something the CNH has been saying for at least a few years. Natural gas is fundamental to electricity generation, and thus energy security, in Mexico.
Mexico has significant prospective resources of natural gas. According to the U.S. Energy Information Administration, or EIA, Mexico has the sixth largest natural gas reserves in the world. And now, as we know, the energy policy of the current government of President López Obrador does not intend to utilize fracking to develop those resources, which is a very, very sensitive subject. The large majority of the natural gas resources in the country are located in basins where the technology of fracking would be necessary to produce them.
Natural gas is necessary for energy security and we need it to feed the productive chains of the country. Currently, we are in this position with a new energy policy that, while I respect it, has impeded in recent years the development of these natural resources.
Mexico imports 80% of the natural gas that it consumes. That’s an important amount. There are countries that import 100% of the natural gas that they consume because they don’t have gas beneath the surface to produce. That is not the case with Mexico.
In terms of energy security, we import 80% of the natural gas that we consume and, of that 80%, some 90% of that is imported from one source of supply. It is there that a red light should be flashing in terms of natural gas in Mexico. No other country in the world imports so much gas from one single supplier. The countries that import 100% of their natural gas have a more diversified matrix of energy sources. In Mexico, if we continue to import 90% of our gas from one source, it is a topic worthy of evaluation if the goal is to reach energy security in the country.
NGI: When you refer to 90% of Mexico’s imported natural gas coming from one source, do you mean the U.S., or are you referring to just Texas in particular?
Pimentel: The U.S. and of course Texas are very important. They are our neighbors. We have the cheapest natural gas market in the world right next door.
Our proximity to the U.S. has always provided good market terms and conditions to take advantage of, and this has usually applied to oil. Historically, the relationship between the two countries has centered on oil. It’s always been a very competitive market and now even more so, as we have the cheapest market in the world as a neighbor in the U.S.
I think Mexico has to take advantage of this. It has to respect the policies of the current government, but the hard data is there and the information is convincing. I hope that there will be a clear signal in the current energy policy that will allow us — in the immediate future and midterm – to take advantage of the riches that we have in the Burgos basin, for example, as well as the north and northeast of the country, such as Tamaulipas and other northern states. But, as we know, it is a touchy subject currently.
NGI: When you mention fracking, it’s interesting to think that only two years ago, an auction round was being prepared to develop natural gas in the Burgos basin. The idea of fracking in Mexico seems quite distant currently.
Pimentel: Right, it was a pilot auction. There were just a few fields up for auction in Tamaulipas. What I think is perhaps the most important thing when you discuss fracking is — beyond just an opinion of being for it or against it — is that there is an open discussion about it that involves scientists, experts, petroleum engineers and people that have been involved in this technique for decades within the industry.
Fracking technology is constantly advancing. One of the criticisms against fracking is often about the use of wastewater. Now, there are new technologies that can mitigate that risk.
So, what seems important to me is that Mexico is open to have a debate on the topic. More than just a simple yes or no. A debate where the technique is analyzed and both sides hear arguments for and against the practice.
It’s important to remember that natural gas is a transition fuel. Climate change is a reality in the world, and so it makes sense to at least have this discussion so that the new government hears both sides of the debate and makes the best decision for the energy policy of the country.
I think that closing the door on fracking, without allowing for an open, objective discussion about the subject, is not the right decision, honestly. Even if the government arrived at the same conclusion it has now, which is opposition to fracking, it would at least allow for arguments from both sides to be heard before making an informed, objective decision.
What is true is that natural gas is vital for the productive chain of the country. It is a fuel that Mexico has in abundance, and it is a fact that to extract those resources, fracking is the technology that is required. So, I think it is indispensable that members of the industry have an informed discussion about the topic.
The objective of exploration and development of hydrocarbons, as indicated by the constitution of Mexico, is to provide the tools to the nation that contribute to the long-term development of the country. Therefore, a discussion about fracking and its potential value to Mexico should be on the table for debate.
NGI: There were more than 100 contracts awarded in the previous administration to companies to develop hydrocarbons in Mexico. How are those contracts advancing?
Pimentel: The rounds were implemented in the application of the legal framework in 2013, which is more than seven years ago now. While that seems like a long time ago, in practical terms, it is still a young reform. The implementation of this reform is something that will take time, in the medium and long-term. The contracts awarded are for 35 to as many as 50 years. So, to think that we should be seeing results within a few years of the implementation of the reform, doesn’t seem like an adequate measure for success.
What was accomplished was the awarding of 112 contracts (we now have 111 valid ones) in three bidding rounds. Once the new administration entered and stopped the auctions, a decision which I understand, it was decided that, for now, there will not be additional bidding rounds. I understand that the current government is waiting for the contracts awarded to produce expected results.
So, then the question is: What are the expected results? Currently, the fields awarded are producing 118,000 barrels of crude per day. Of the 111 contracts that we have now in Mexico, only 31 are in the production stage. The rest, the other 70% or so of the contracts awarded, continue to be in the exploratory stage. They are in the stages where the conditions are not yet ready to be able to produce even a barrel of oil.
It’s important to understand that there are several steps involved in the process of oil exploration and production. Surface studies of prospective resources, for example, take time. Then there is a period of evaluation to determine if the hydrocarbons located can be developed commercially. Additionally, time frames for hydrocarbon development are very different if you are talking about onshore, or shallow or deep waters. Deepwater oil and gas production, for example, takes at least 10 years. In shallow waters, it’s unlikely that a field is going to reach production – starting from nothing – in five or six years. Obviously, every field is distinct and has its own particular characteristics and time frames for production vary.
In my opinion, the contracts have produced the results that were expected given the timelines in which they are currently being judged. The projects have continued to advance and the contracts have continued to progress, but the process will take time. The energy industry is one that moves in the medium and long term. Mexican political periods are divided into six-year terms, but the oil and gas industry works on time frames that are much longer than that.
So, I think the contracts are advancing well. Despite the pandemic that impacted all the industries and economies of the world, the oil and gas contracts awarded in the previous administration continue to move forward as planned and will require more time as they mature. They are very important investments for the long-term development of the country.
NGI: Pemex has identified “priority fields” that it hopes to develop. How are those fields advancing?
Pimentel: Pemex has identified 17 priority fields to develop and, thus far, they have not had the results that they expected when they launched this oil and natural gas exploratory strategy. Last year, Pemex announced efforts to develop 17 priority fields and, to date, we only have reports of progress on ten of those fields.
On a national level, including Pemex and other hydrocarbon developers, there are some other important fields that have already entered the production stage. Miztón for example is already in production stage and being developed by the Italian producer Eni. The Hokchi field is another contract that is already in production.
One giant opportunity for Mexico, where the country is rich in resources, is in deep waters. The deepwater fields of Mexico represent around 20% of the prospective resources in the country. As we know, in deepwater fields, the financial and technological requirements are more advanced, meaning that few companies in the world are able to operate and develop hydrocarbons in such conditions, particularly alone. As a result, deepwater development is usually where we see associations and partnerships.
One advantage that Mexico has in its favor in the future is that it has a very diversified portfolio of assets, including deepwater fields, which are some of the most valuable resources in the industry. That said, in my opinion, the objective shouldn’t be just to produce the largest number of barrels possible. In my opinion, it is about producing the largest number of barrels that are profitable for the country, both in oil and cubic feet of gas.
NGI: For years we have been hearing about how Pemex plans to offer farmout opportunities in certain fields in Mexico. What is the status of the farmouts currently?
Pimentel: There are currently three farmouts in Mexico. In deep waters, it’s Pemex with BHP Billiton in the Trion field. And the other two are with Pemex and the German company Wintershall DEA and Egyptian company Cheiron Holdings in the fields of Ogarrio and Cardenas-Mora.
The only way for there to be more opportunities for farmouts in Mexico is if Pemex requests them. Pemex would have to ask the government to launch the auction, as is defined by the legal framework. Pemex’s partner in a farmout scenario must be chosen through a competitive, public process. To date, Pemex has not requested to partner with another third party through an auction. The legal framework and process is in place, but Pemex is yet to make an official request to seek new partners.
NGI: Another topic that has been discussed now for years regarding Pemex is the unification of the Zama field with Talos Energy. Is there any update on that process at this point?
Pimentel: Currently, Pemex and Talos are in negotiations to reach an agreement that benefits both parties. It isn’t just about the operator. People like to think that the “winner” of the negotiations will be the operator of the field. I look at it in a different way. Obviously, a defined operator will be a result of the negotiations, but the other party shouldn’t be seen as the one that lost something in the deal. These two companies will share the profits and benefits of this field. And, even more important to highlight, is that the oil produced in this field benefits the country of Mexico.
So, the negotiations continue between Pemex and Talos. The role of the CNH in the process has technically concluded, and it was ruled that it is a shared discovery. Once the two companies have arrived at a conclusion, the production stage of the field will begin, which will benefit Mexico.
NGI: In your opinion, what should be the top priority for the Mexican energy sector in the next year?
Pimentel: I think a fundamental aspect should be the slow recovery of the industry, in Mexico and globally, from the effects of the Covid-19 pandemic. I actually don’t think a year will be sufficient for the industry to recover entirely from the pandemic, but I think the focus should be on recovering hydrocarbons production to benefit the overall economy, which I think could take some 3 to 4 years.
NGI: What are currently your biggest concerns for the Mexican energy industry?
Pimentel: One topic I think is relevant and worrisome is that we leave an enormous amount of oil and gas riches in the ground. We don’t know how much the resources we have in the ground in Mexico will be worth in 20, 30 or 40 years. No one knows what will happen in the future of the energy industry in that time.
What I do think is that we still have a window of opportunity to take advantage of the riches of our natural resources. I think that what we have to be doing is studying the way to take advantage of those resources now. An energy transition is upon us, which I consider necessary, and we don’t know what to do with the oil and gas market in the next few decades.
So, that’s what worries me currently. I think that we still have a window of time to explore and develop our natural resources, but we need to do so now. If not, we are leaving these resources in the ground and could be depriving future generations and Mexican citizens of economic and social opportunities.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.
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