For more information download: Southern Pulse Energy Report Feb 2015
While Mexico’s energy demand continues to grow, the country’s oil production has steadily decreased since 2005 as a result of natural production declines mainly from large offshore fields. In December 2013, in an effort to address the declines of its domestic oil production, the Mexican government passed constitutional reforms that ended the 75-year monopoly of Petroleós Mexicanos (PEMEX), the state-owned oil company.
Oil is a crucial component of Mexico’s economy. The oil sector generated 13% of the country’s export earnings in 2013 while revenue from the oil industry (including taxes and direct payments from PEMEX) accounted for approximately 32% of total government revenues in the same year. Declines in production and need for private investment drove a large part of the reform process.
The Ministry of Energy in Mexico has estimated a $100 billion in investment is needed over the next 10 years to develop Mexican shale resources. The vast majority of this investment will need to come from private companies, both domestic and foreign.
The prolific Eagle Ford shale formation in Texas extends south across the border into Mexico’s Burgos Basin and accounts for two-thirds of Mexico’s shale gas resources, which are estimated to reach approximately 600 trillion cubic feet of recoverable shale gas and ranks 6th largest in the world.
Mexico is also estimated to have 13 billion barrels of recoverable shale oil resources and ranks 8th largest in the world. With the development of Eagle Ford in Texas and the ongoing energy reform, many believe that Mexico could replicate the success but now with lower oil prices, that road to success could be much longer or include more curves than previously anticipated.
Now, with commodities prices falling, the government needs to carefully structure the proper fiscal incentives to attract private investment and foster the appropriate appetite for risk within the framework of current market conditions.
Downward pressure on the price of oil continued to disrupt markets in Mexico in late January 2015. Regulators diminished the first round of bidding for concessions to explore and produce across 169 blocks, removing from the list all onshore blocks.
In a statement made January 20th 2015, Juan Carlos Zepeda, the head of Mexico’s National Hydrocarbons Commission, said that drilling rights for 64 of the 169 blocks, all those blocks denominated “unconventional” or shale, will be available for bidding at a later date. The mouthpiece for Mexico’s energy progression offered that his team would judge opening of these blocks in March or April of this year against the oil markets, pointing to the high start up costs and short development cycles for the shale play as the underlying reason for the delay.
Sobering statements for Mexico’s shale gas opportunities continue at pace with undaunted interest and speculation over the potential windfall of untapped resources in a country where delays are less important than getting the process right the first time in a favorable market climate.
Amid expectation that the price of oil will correct and stabilize at a higher level, Mexico’s onshore opportunities still push against a broad spectrum of challenges.
Barriers to entry may be categorized by politics, access, and security.
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