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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.1 Oil and gas producers began to explore it in late 2010,2 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.3      

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.4 The Sabinas Basin covers a total area of 35,700 mi2 in northeast Mexico.5 Its geological structure impedes oil and gas development, but a small area in the basin’s northeast side may be productive.6 The principal source rock in the Tampico Basin is the Pimienta Shale, which has a prospective area of approximately 13,600 mi2. The Pimienta Shale has well-developed conventional production7 and will be an important shale play.8 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.9 Finally, the Veracruz Basin covers a total area of 9,030 mi2.10 This field is smaller than previously thought, likely because the shale dips at a steeper angle than previously mapped.11

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.12 After this early success, however, Pemex has drilled only a limited number of test wells.13 This may be due to the relatively high cost of drilling a shale well14 and the significant budget cuts Pemex sustained in 2015 and 2016.15 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.16 Mexico has made substantial reforms in pursuit of this goal, but some analysts remain underwhelmed.17 Other obstacles, such as security concerns and a shortage of water, may also impede Mexico’s shale development.18      

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, many observers worry that Pemex could run into a shortage of water as it expands shale gas exploration.19 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.20 The issue is especially acute in the Burgos Basin, which is located in arid northeastern Mexico.21

The northeastern Mexican state of Tamaulipas, which borders Texas and contains much of the Burgos Basin, presents important security concerns.22 For example, Pemex reported that fuel thefts from pipelines jumped from 3,674 in 2014 to 5,574 in 2015, an increase of more than 50%.23 The thefts cost the company approximately $3 million per day.24      

Statutory and Regulatory Framework

Oil exploration in Mexico began under the Mining Law of 1884,25 which gave surface owners title to subsurface oil, and the Petroleum Law of 1901, which authorized oil concessions on public lands.26 But when Mexico ratified article 27 of the 1917 Constitution it granted direct ownership of all subsurface natural resources to the Mexican state.27 Moreover, Mexico’s state-owned company, Pemex, was exclusively to exploit and develop oil and gas resources.28     

Under the Petroleum Law of 1958, Pemex may sign contracts for services with private participants, referred to as E&P contracts.29 Mexico’s Constitution prohibits production sharing contracts and concessions.30 Incentive payments may not be based on a percentage of production, but 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.”31

No E&P contracts regarding shale oil and gas were executed under this system.32 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."33 

In response, Mexico reformed the system significantly. 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.34 The historic reforms ended a 75-year state monopoly on the oil and gas industry.35 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.36 The constitutional amendment that Congress passed permitted profit-sharing and service contracts, production-sharing contracts, licenses allowing parties to own hydrocarbons at the wellhead, and more.37 

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.38 The implementing legislation, among other things, established a new environmental agency, the National Agency of Industrial Safety and Environmental Protection (Ansipa).39 Ansipa regulates fracking specifically and health and safety issues generally, and it has the power to sanction, suspend, and even terminate operations.40 Importantly, Ansipa’s jurisdiction overlaps with Mexico’s National Water Commission (Conagua).41 Conagua reviews petitions for industrial uses of water.42 Once Conagua approves or denies such a petition, Ansipa manages the appropriate use of the water during drilling.43     

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.44 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.45 Round One consisted of five tenders, two for offshore fields, one for onshore fields, another for deep-water and extra heavy crude projects, and a fifth tender for unconventional deposits like shale.46 

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.47 Mexico responded by improving the terms it offered to bidders48 and has seen a more robust market in the two subsequent auctions.49     

In March 2018, Mexico announced that it would auction development rights to shale blocks in the Burgos Basin.50 The auction will be the first the country has offered private oil companies the chance to develop unconventional resources in Mexico.51 Pemex has drilled approximately 20 exploratory wells in the area.52 The nine blocks contain an estimated 1.16 billion barrels of oil equivalent (boe), plus another 53 million boe of conventional oil and gas resources, according to energy ministry data.53 The blocks are believed to mostly contain natural gas.

In preparation for the auction, in August 2017 Conagua revised rules regarding water conservation and protection and energy producers must implement during exploration and development of unconventional oil and gas.54 The revised rules apply to fracking and other techniques like coalbed methane extraction and enhanced oil recovery.55 They contemplate producers submitting to regulators the chemical additives used in fracking fluids, including their chemical formula and Chemicals Abstracts Service registry numbers, and more; producers providing exploration and development plans for their blocks, including a work calendar, the number of wells to be drilled, and an estimate of the water needed for the project; producers building a network of hydrogeological wells Conagua would use to monitor water quality; and technical specifications for designing wells.56

As of June 2018, Mexico had conducted 9 oil and gas auctions, awarding approximately 90 contracts covering onshore and offshore acreage.57 If successful, the contracts could be worth more than $150 billion over their lifetime, according to energy ministry estimates.58

Useful Resources

Last updated September 2018.

1 U.S. ENERGY INFO. ADMIN., TECHNICALLY RECOVERABLE SHALE OIL AND SHALE GAS RESOURCES: AN ASSESSMENT OF 137 SHALE FORMATIONS IN 41 COUNTRIES OUTSIDE THE UNITED STATES (2013), available athttp://www.eia.gov/analysis/studies/worldshalegas/pdf/chaptersi_iii.pdf?zscb=59944211.

2Id.

3Id.

4 U.S. ENERGY INFO. ADMIN., supra, note 4.

5Id.

6Id.

7Id.

8 Stephen Trammel, Unconventional Oil & Gas in Mexico--Can Mexico Replicate US Eagle Ford Success?, IHS UNCONVENTIONAL ENERGY BLOG (January 23, 2014), http://blog.ihs.com/unconventional-oil-gas-in-mexico-can-mexico-replicate-us-eagle-ford-success.

9 U.S. ENERGY INFO. ADMIN., supra, note 4.

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12 David Alire Garcia, Mexico still far from tapping shale potential, minister says, REUTERS, May 8, 2013, available athttp://www.reuters.com/article/2013/05/08/mexico-shale-idUSL2N0DP29H20130508.

13 John Burnett, Excitement Over Mexico's Shale Fizzles As Reality Sets In (National Public Radio broadcast, Mar. 16, 2015) (transcript available at http://www.npr.org/sections/parallels/2015/03/16/393334733/excitement-over-mexicos-shale-play-fizzles-as-reality-sets-in).

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15 Adam Williams & Andrea Navarro, Mexico Cuts Oil Spending to Nine-Year Low as Foreign Firms Enter, BLOOMBERG.COM, Sept. 9, 2015, http://www.bloomberg.com/news/articles/2015-09-09/pemex-2016-spending-budget-reduced-as-woes-build-after-reform.

16 Burnett, supra note 9.

17 See Joe Fisher, Mexico Reforms Underwhelm; Any Shale Gale Not Yet A Breeze, NGI’S DAILY GAS PRICE INDEX (Sept. 12, 2016), http://www.naturalgasintel.com/articles/107724-mexico-reforms-underwhelm-any-shale-gale-not-yet-a-breeze.

18 Burnett, supra note 9.

19 Emilio Godoy, Mexico Lacks Water to Frack for Shale Gas, INTER PRESS SERVICE, April 18, 2013, available at http://www.ipsnews.net/2013/04/mexico-lacks-water-to-frack-for-shale-gas/.

20Id.

21 Burnett, supra note 9.

22 Id.

23Mexican Crowds Defy Authorities, Steal Diesel from Pipelines, WALL ST. J., Jan. 16, 2016, http://www.wsj.com/article_email/mexican-crowds-defy-authorities-steal-diesel-from-pipelines-1452922768-lMyQjAxMTA2NjEzOTUxNTkzWj.

24Pemex Pipeline Theft Continues to Soar, MEXICO NEWS DAILY, Sept. 21, 2015, http://mexiconewsdaily.com/news/pemex-pipeline-theft-continues-to-soar/

25 “Código de minería de la Repúblico Mexicana” [“Mining Law of Mexico”], cited in HARRY K. WRIGHT, FOREIGN ENTERPRISE IN MEXICO 55, n.9 (1971).

26Id. at 56.

27See MEX. CONST. art. 27 (amended 1998).

28 Mining Law of Mexico, supra note 29, at 126.

29 Tim R. Samples & José Luis Vittor, Energy Reform and the Future of Mexico’s Oil Industry: The Pemex Bidding Rounds and Integrated Service Contracts, 7 TEX. J. OIL GAS & ENERGY L. 215, 223 (2012).

30Frequently Asked Question, PEMEX: EXPLORATION & PRODUCTION: INTEGRATED CONTRACTS, http://contratos.pemex.com/en/Paginas/faq.aspx (last modified Dec. 20, 2012).

31Id.

32 Alberta, Canada Delegation in the Mexican Petroleum Congress, Mexican oil & gas industry overview, PRICEWATERHOUSECOOPERS LLP (June 6, 2013), available at http://www.albertacanada.com/mexico/documents/PwC_OG_Industry_-Alberta_Delegation_Updated.pdf.

33 Nick Miroff & William Booth, For Mexico’s leader, energy reform is path to future, WASH. POST (May 8, 2013).

34 Boyd Carano, Alan Alexander & Raul Garcia, Mexico's Congress Approves Historic Energy Reform Bill, V&E ENERGY UPDATE E-COMMUNICATION (Dec. 16, 2013), http://www.velaw.com/resources/MexicoCongressApprovesHistoricEnergyReformBill.aspx.

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37 Boyd Carano et al., Mexico Moves Toward Historic Energy Reforms, TEXAS LAWBOOK (Jan. 23, 2014), http://www.velaw.com/uploadedFiles/VEsite/Resources/MexicoMovesEnergyReforms2014.pdf.

38 Diana Villiers Negroponte, Mexico’s Energy Reforms Become Law, BROOKINGS.EDU (Aug. 14, 2014), http://www.brookings.edu/research/articles/2014/08/14-mexico-energy-law-negroponte.

39 MEXICO PROFILE – OVERVIEW, supra, note 1.

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44 David Alire Garcia & Adriana Barrera, UPDATE 1-Mexico limits shallow-water bids in energy opening, no word on tax, REUTERS, December 11, 2014, available athttp://www.reuters.com/article/2014/12/11/mexico-oil-idUSL1N0TV1ZG20141211.

45 Negroponte, supra, note 43.

46 Anthony Harrup, Mexico Prepares to Tender First Onshore Oil Blocks, WALL ST. J., May 11, 2015, available athttp://www.wsj.com/articles/mexico-prepares-to-tender-first-onshore-oil-blocks-1431378250?KEYWORDS=mexico+shale.

47 Bill Spindle and Laurence Iliff, Mexico Strains to Lure World’s Oil Giants, WALL ST. J., Sept. 29, 2015, http://www.wsj.com/article_email/mexico-strains-to-lure-worlds-oil-giants-1443569150-lMyQjAxMTI1MzM1MDczNTA0Wj.

48 Laurence Iliff, Mexico Sweetens Oil Auction to Draw Firms Hit by Low Oil Prices, WALL ST. J., Aug. 26, 2015, http://www.wsj.com/article_email/mexico-sweetens-oil-auction-to-draw-firms-hit-by-low-oil-prices-1440616643-lMyQjAxMTE1NjMxMDMzMzA2Wj.

49 Laurence Iliff, Mexican Firms Win Oil Contracts in Onshore Auction, WALL ST. J., Dec. 15, 2015, http://www.wsj.com/article_email/mexico-auctions-onshore-oil-fields-amid-low-prices-1450199493-lMyQjAxMTI1NTEwNzExMTc4Wj.

50 Adriana Barrera, Mexico to Offer First-Ever Shale Blocks in September Auction, REUTERS, March 1, 2018, https://www.reuters.com/article/mexico-shale/update-1-mexico-to-offer-first-ever-shale-blocks-in-sept-auction-idUSL2N1QJ1XG.

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54 Peter de Montmollin, Mexico’s Water Use Rules for Unconventional E&P Projects Updated, NATURALGASINTEL.COM, Sept. 5, 2017, http://www.naturalgasintel.com/articles/111639-mexicos-water-use-rules-for-unconventional-ep-projects-updated.

55Id.

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57 Barrera, supra note 50.

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