• Natural Gas News

    [Premium] Mexico's Gas Potential Needs Pipes

Summary

No matter how prospective its shale gas resources, Mexico will not extract much value from them unless it finds ways to attract companies to build the pipelines and storage.

by: Jim Bentein

Posted in:

Natural Gas & LNG News, Americas, Premium, Gas to Power, Corporate, Exploration & Production, Import/Export, Investments, Shale Gas , Political, Ministries, Infrastructure, , News By Country, Mexico, United States

[Premium] Mexico's Gas Potential Needs Pipes

Mexico has the potential to become a major natural gas producer, with world-scale shale gas resources. But the success or failure of an upcoming auction of gas-prospective onshore blocks will go a long way to deciding if that potential can be realised.

In a recent report, PwC Mexico's energy leader Irene Hernandez said the July 25 auction of unconventional energy blocks in the Burgos Basin and other gas-prone areas should determine if the country can achieve its natural gas potential. The success of the auction, particularly in attracting investment by private sector companies good at hydraulic fracturing to produce gas from shale, could mark the birth of a new era for Mexico.

“(The upcoming round) represents an important opportunity to maximise natural gas production with the extraction of shale gas through fracking, and in doing so, leverage energy assurance to uphold national consumption (of gas),” she said in the report. “Today, Mexico’s prospective shale gas resources are in the sixth position globally (545 trillion ft³), based on information provided by the US Energy Information Administration.”

However, she also noted that a lack of investment by state-owned Pemex in developing natural gas reserves over the last 14 years has led to a decline in proven and potential natural gas reserves of 12.4% and that some barriers stand in the way of future unconventional gas development.

One is the impact of that development on farming and cattle lands. “Communal landowners will have to sell or lease their properties; they could even be expropriated in the interest of the nation,” she said.

Water use and other environmental impacts will also be a major issue, she said. “Groundwater table pollution, excessive use of water, competing with surrounding communal lands, subsoil openings, air pollution and methane emissions or induced seismic activity (are among the concerns),” she said.

However, she said environmental regulations that were first developed last March by the country’s Safety, Energy and Environmental Department have set the stage for a regulatory environment that can help assure the safe development of unconventional resources.

Hernandez, in an interview with NGW, predicted the upcoming auction “will be very, very popular” and will attract many companies interested in shale resources.

While she’s convinced there will be great interest in the July 25 auction of 37 former Pemex onshore fields, she said the problem, once substantial shale gas reserves are tapped, will be getting the gas to domestic users. “We don’t have enough infrastructure,” she said, and the government needs to focus on that.

EY Mexico, meanwhile, suggests developing that infrastructure will be expensive and cites recent estimates from Texas A&M International University suggesting that $17bn of capital investments will be needed in Mexico’s midstream over the next five years.

“The issue extends beyond lack of facilities, as the transportation and storage business in Mexico is fragmented and unsophisticated,” EY said in a recent report examining Mexico’s emerging infrastructure opportunities and challenges.

“For natural gas, Mexico has about 5,500 miles of pipelines, while Texas alone has more than 58,000 miles of natural gas pipelines,” the EY report said. “Overall, it is expected the lack of midstream infrastructure will quickly become an issue for E&P companies in Mexico.”

The firm concluded that Mexico’s tax structure will have to change to attract new midstream investment. For example, there has been no tax-free or low-tax entity in the country similar to the master limited partnership (MLP) structure which underpins the development of most midstream assets in the US. However, the country has now allowed for the creation of a FIBRA structure, which allows firms that develop infrastructure to reduce or eliminate their corporate tax obligations.

PwC’s Hernandez said it’s possible that midstream companies that are active in the Eagle Ford shale play in Texas, which is directly north of the Burgos, will want to invest in storage and pipelines on the Mexican side of the border.

She said Mexico’s energy ministry (Sener) and regulator the National Hydrocarbon Commission (CNH), which oversee the auctions and are trying to encourage more gas production, will be seeking bids from midstream companies later this year to possibly invest in infrastructure assets.

With many offshore and onshore oil and gas blocks having been auctioned off to private sector firms, she believes the next great opportunity in Mexico’s energy sector will be in developing infrastructure, such as transportation and storage. “The upstream contracts have been signed, but these contracts require (the development of) infrastructure,” she told NGW.

Although Mexico’s gas imports – primarily from the US – are growing steadily, Hernandez remains optimistic that will change in the next four or five years.

“Mexico is an oil producing country and we haven’t explored our natural gas resources. But, as a result of the energy reform, the situation will be different in the future, because we have the resources.”