Mexico’s next government will have to create the appropriate incentives and policy framework for developing the country’s shale gas.

BY JEREMY MARTIN

The presidential election cycle in Mexico brought a host of policy proposals and election-year debates over critical elements of national policy. But key among them is energy. Indeed, during his candidacy Enrique Peña Nieto spoke often and forcefully about how his government would take on the energy challenges in Mexico.

Within the broad expanse of energy issues, there is an overarching topic of great importance for Mexico and all of North America: the role of natural gas and development of shale gas reserves.

Natural gas sales in Mexico have risen 70 percent in the last decade while production increased but 46 percent and imports from the United States hit record highs in 2012. Pipeline infrastructure has become increasingly jammed and further complicated by the Reynosa plant accident. Cuts by Pemex of natural gas supplies to industrial consumers underscore the challenge.

Mexico's increasing appetite for natural gas particularly for power generation bears mentioning. Indeed, natural gas is increasingly replacing oil as a feedstock for electric generation in Mexico. Estimates indicate that almost 50 percent of electric capacity additions in Mexico over the next decade will be gas-fired, combined cycle generation.

But all is not lost. According to the Energy Information Administration (EIA), Mexico has the second largest shale gas potential in Latin America and the fourth largest in the world. Mexico counts around 16 trillion cubic feet (TCF) of natural gas reserves but a 2011 Energy Information Administration (EIA) report indicated that Mexico has the second largest shale gas potential in Latin America, second only to Argentina and the fourth largest in the world.  The EIA report places Mexico's shale gas potential at 680 TCF.

The potential associated with the EIA figures for shale gas in Mexico has not gone unnoticed by Mexican energy officials. Indeed, some have increasingly advocated for a "Shale Revolution" of their own and the possibility for shale gas to jumpstart a lagging petrochemical industry. To wit, some senior government officials have argued that Pemex should create a new subsidiary focused exclusively on natural gas to spur nascent shale exploration and production, particularly given that shale gas technology and expertise differ from that of conventional fields.

Figures from Mexico's Energy Ministry indicate that ramping up a shale gas industry could mean investment between $7 billion and $10 billion a year. And many cite the possibility to jumpstart the petrochemical industry. Moreover, without shale, natural gas production in Mexico will not keep up with demand. But with shale gas development, Mexico could position itself to transition from its current status as a natural gas importer to a huge international player when it comes to natural gas.

There are issues that policy makers in Mexico, especially in the incoming government, must take into account as they endeavor to seize its shale gas potential.

Technology stands out as a key element for the successful development of shale gas in Mexico. Gaining access to the technology and know-how necessary to extract the gas in a cost-effective and environmentally secure manner is critical.

Pemex also plays a role. In mid-2011 Pemex completed its first shale gas well, tapping into the Eagle Ford formation near the Texas border. More recently, Pemex has indicated that it will drill more than 150 wells through 2016 in an effort to better assess Mexico's shale gas potential. By the end of 2012, three more shale gas wells should be completed by Pemex.

Despite forays into shale in the last year or so, the state firm has traditionally maintained a strategy of prioritizing oil exploration. Further, its gas production monopoly creates impediments to private upstream investment.

On top of these issues falls the price element. Mexico is linked to the US Henry Hub natural gas price index and historically low Henry Hub prices have dampened the investment potential for natural gas in Mexico.

It appears readily apparent that Mexico has the natural resources but must create the appropriate market incentives and policy framework to provide for the access to cutting edge technology and capital for development of its shale gas potential.

Such are the tasks that impatiently await the incoming Peña Nieto government on December 1.

Jeremy M. Martin is the director of the Energy Program at the Institute of the Americas at the University of California, San Diego. The institute is a nonprofit inter-American organization focused on economic development in the Western Hemisphere. He can be reached at jermartin@ucsd.edu and on Twitter @jermartinioa  He wrote this column for Latinvex.

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