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Shale & Fracking Tracker

Mexico

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According to a 2013 Energy Information Administration (EIA) assessment, Mexico has technically recoverable shale resources estimated at 545 trillion cubic feet (Tcf) of natural gas, and 13.1 billion barrels of oil and condensate, stored in marine-deposited, source-rock shales distributed along the onshore Gulf of Mexico region. Oil and gas producers began to explore it in late 2010, concentrating on five geologic provinces: (1) Paleozoic shale gas in Chihuahua region; (2) Cretaceous shale gas in the Sabinas-Burro-Picachos region; (3) Cretaceous shale gas in the Burgos Basin; (4) Jurassic shale gas in Tampico-Misantla; and (5) unspecified shale gas in Veracruz. 

The Burgos Basin, located in northeastern Mexico’s Coahuila state, covers approximately 24,200 square miles (mi2) and accounts for two-thirds of Mexico’s technically recoverable shale gas. The Sabinas Basin extends over a total area of 35,700 mi2 in northeast Mexico. Its geological structure will make development very difficult, but a small area on the northeast side of the basin may be productive. The principal source rock in the Tampico Basin is the Pimienta Shale, which has a prospective area totaling approximately 13,600 mi2. The Pimienta Shale has well-developed conventional production and will be an important shale play as well. Several conventional petroleum development wells in the southern Tuxpan Platform, which is southeast of the Tampico Basin, have penetrated thick organic-rich shales of the Pimienta and Tamaulipas formations, but no shale gas or oil exploration has been reported. Finally, the Veracruz Basin extends over a total area of 9,030 mi2, near the city of Veracruz. This field is much smaller than previously assumed, likely because the shale has been shown to be dipping at a steeper angle than previously mapped.

In April 2013, Mexico’s national oil company, Petróleos Mexicanos S.A. de C.V. (Pemex), announced its first ever production of shale gas from a test well in the Burgos Basin, which is part of the Texas Eagle Ford Shale. After this early success, however, Pemex has drilled only a limited number of test wells. This may be due to the relatively high cost of drilling a shale well, which the government estimates is $10 to $20 million, and the significant budget cuts Pemex sustained in 2015 and 2016. As a result, Mexico must attract additional producers to build the 40,000 new wells it estimates are needed to realize the potential of its shale resources. While Mexico has made substantial reforms in pursuit of this goal, as further detailed below, some analysts remain underwhelmed. Other obstacles, such as security concerns and a shortage of water, may also impede Mexico’s shale development. 

MexicoMap 

Source: U.S. Energy Information Administration: Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States (June 2013): https://www.eia.gov/analysis/studies/worldshalegas/archive/2013/pdf/fullreport_2013.pdf

Indeed, given the droughts Mexico experiences from time to time, many observers worry that Pemex could run into a shortage of water as it expands its shale gas exploration in the coming years. Mexico’s Energy Regulatory Commission (CRE) estimates that fracking in Mexico takes 7.5 million to 30 million liters of water per well to release the gas, while a field of 10 wells would need between 25 million and 40 million liters of water. The issue is especially acute in the Burgos Basin, which is located in arid northeastern Mexico. 

Security concerns are particularly acute in the northeastern Mexican state of Tamaulipas, which borders Texas and contains much of the Burgos Basin. More generally, Pemex has reported that fuel thefts from pipelines jumped from 3,674 in 2014 to 5,574 in 2015, an increase of more than 50%. The thefts cost the company approximately $3 million per day. 

Statutory and Regulatory Framework

Oil exploration in Mexico began under the Mining Law of 1884, which gave surface owners title to subsurface oil, and the Petroleum Law of 1901, which authorized oil concessions on public lands. However, when Mexico ratified article 27 of the 1917 Constitution, it granted direct ownership of all subsurface natural resources to the Mexican state. Moreover, the exploitation and development of those resources was to be carried out exclusively by Mexico’s state-owned company, Pemex, which operates in both oil and gas.

Under the Petroleum Law of 1958, Pemex is allowed to sign contracts for services with private participants, referred to as E&P contracts. Mexico’s Constitution prohibits production sharing contracts and concessions. Rather, because incentive payments cannot be based on a percentage of production, incentives may be included "when Pemex increases its profitability due to improved results on works executed and services rendered by the contractor, or the application of new technology." 

No E&P contracts regarding shale oil and gas were executed under this system. One commentator noted that existing requirements would not foster development "because multinational oil companies raise money from investors based on the estimated amount of oil they own the rights to, and Mexico’s prevailing model affords them no ability to claim, or 'book,' reserves, there’s little incentive to drill there." 

In response, Mexico has reformed this system significantly over time. On December 12, 2013, Congress voted to amend Mexico’s Constitution to open the state-run oil-and-gas industry to private investment and competition by letting private energy firms produce oil and gas through profit-sharing deals and joint ventures with Pemex. The historic reforms ended a 75-year state monopoly on the oil and gas industry. They allow greater private participation in the upstream oil and gas sectors by changing the constitutional provision that reserves participation in petroleum and hydrocarbons exclusively for the state, expanded private participation in the midstream and downstream sectors, and permitted private participation in the electricity sector. The constitutional amendment that Congress passed permitted profit-sharing and service contracts, production-sharing contracts, and licenses allowing parties to own hydrocarbons at the wellhead, among other things. 

On August 11, 2014, President Enrique Peña Nieto signed into law secondary legislation that implemented constitutional amendments allowing private and foreign companies to develop oil and gas assets in Mexico. The implementing legislation, among other things, established a new environmental agency, the National Agency of Industrial Safety and Environmental Protection (Ansipa). Ansipa regulates fracking specifically and health and safety issues generally, and it has the power to sanction, suspend, and even terminate operations. Importantly, Ansipa’s jurisdiction overlaps with Mexico’s National Water Commission (Conagua). Conagua reviews petitions for industrial uses of water. Once Conagua approves or denies such a petition, Ansipa manages the appropriate use of the water during drilling.

On December 11, 2014, the National Hydrocarbons Commission of Mexico (Comisión Nacional de Hidrocarburos) announced its bidding guidelines for its so-called Round One auction of development blocks to private companies. It follows a so-called Round Zero auction, during which Pemex identified the projects it wished to continue developing on its own or in joint ventures with private companies. Round One consisted of five tenders, two for offshore fields, one for onshore fields, another for deep-water and extra heavy crude projects, and finally another for unconventional deposits like shale.

Following strong initial interest, lower oil prices have weakened bids for Mexico’s oil and gas fields. Only two of the 14 blocks included in the first auction found buyers, and neither of the buyers were foreign majors. Mexico responded by improving the terms it offered to bidders and has seen a more robust market in the two subsequent auctions.

To date, Mexico has completed three of the five auctions. Terms for the fourth auction were finalized in July 2016, with the winners expected to be announced in 2017. Mexico revised the blocks it included in the fourth auction in response to low oil prices.

Terms for the fifth auction were finalized in August 2016. Twelve onshore blocks have been offered, nine of which nine are in the Burgos Basin and offer conventional drilling opportunities rather than shale. Some investors have been underwhelmed with Mexico’s offerings in the auctions to date, with one analyst referring to the acreage as "not . . . especially exciting."

Last updated September 2016.

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