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Oil Crash Slows, but Doesn’t Sideline Mexico’s Shale Sales Pitch

News Article Sponsored by Shale Gas International


Oil crash slows, but doesn’t sideline Mexico’s shale sales pitch.

The long slide in oil prices has sidelined energy projects around the globe, but it probably won’t stop Mexico from trying to lure investors to its shale fields.

The government late this year or early next year is expected to include at least some of the Burgos Basin — where the 400-mile-long oil and gas field known as the Eagle Ford Shale in Texas extends into Mexico — in an auction of contracts.

At a recent meeting in Houston between five Texas energy companies and officials from Mexico, the Mexican team came with specifics — maps and details about the size of the shale blocks it is considering putting out for bid — and requested feedback.

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“They asked the companies to nominate areas where they would have interest,” said Alejandra Bueno, an attorney with San Antonio’s Cacheaux, Cavazos & Newton LLP, who helped organize the meeting. Mexico was serious, even with crude trading at roughly a fourth of its value from 18 months ago. They sent officials from its National Hydrocarbons Commission, Ministry of Finance and newly formed environmental agency. “They said, ‘Just tell us what we need to put in place from a government standpoint to make you go to Mexico.’”

“It tells you how much the Mexican government has learned about approaching the experts,” Bueno said. “There’s no better experts on the shale industry than in Texas.”

Mexico’s national oil company Pemex has controlled nearly every aspect of Mexico’s oil production and distribution since its creation in 1938, but it is getting its first competition. Mexican officials decided in 2013 to open oil and gas fields to foreign companies for the first time in 75 years.

Oil prices have cratered since then. Crude is now trading at around $29 a barrel, down from as much as $107 a barrel in June 2014.

Explore crude oil prices, 1986-present: Prices for the benchmark West Texas Intermediate have taken a dive over the past year and are trading below $30 per barrel this week. Here’s a look at daily prices since 1986. (1 barrel of oil = 42 gallons)
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Though Mexico has deep water, shallow water, conventional onshore and unconventional shale fields, the lower prices have dampened the expectation that foreign companies will rush into Mexico to drill. Deep water is considered the untapped crown jewel of Mexican oil, while shallow water and onshore conventional fields are well understood and likely to draw investors. Shale, about which relatively little is known, represents the biggest geological and financial risk for companies.

The country has yet to offer any of its shale fields for bid, but its first auction last July attracted few companies and was considered a flop. A second auction in the fall was more successful after the financial terms were sweetened, and Bueno said the lesson seems to have stuck.

“They had fantastic conversations about the size of the blocks, the terms of the contracts,” Bueno said. “They went into the meat of the contracts. These public servants are very clever. They learned the lesson in the first round.”

In case no one bites, the shale blocks are likely to be included in an auction round that includes some of Mexico’s conventional oil and gas fields, which are considered attractive investments, Bueno said.

The Burgos Basin is between the Rio Grande and the city of Monterrey, and already provides up to 20 percent of Mexico’s natural gas from conventional formations.

Texas Railroad Commissioner Christi Craddick attended the Houston meeting to talk about the possible shale auction and the new regulations Mexico is creating.

“We have been a resource for Mexico since their energy reform process began, and as Mexico initiates shale exploration and production, we welcome greater cross-border cooperation, collaboration and regional success,” Craddick said in a Jan. 28 news release.

Bueno said Mexico is looking at other countries with well-developed oil and gas reserves, especially the U.S. and Canada. Texas can offer some advice, but because the U.S. is the only country in the world in which individuals — and not the government — can own minerals, it isn’t always the best example.

“Someone said there’s no need to reinvent the wheel, but definitely we need to put a Mexican tire on the wheel,” Bueno said.

Antonio Franck of Cacheaux, Cavazos & Newton said the agreements with surface owners, in particular, will be very different in Mexico than in Texas, where at least a percentage of the mineral ownership is usually, but not always, tied to whoever owns the surface of the land.

Also, Texas requires permits for each well, but Mexico instead will require a drilling program to be outlined in the terms of the contract.

 Rigs“You can drill as many wells as you want, but you have to have them in your working program,” Franck said. “It can be changed, but it has to be pre-approved.”

Even if some shale fields are offered for bid in 2016 or 2017, Franck said it will take two to five years to complete contracts and start development. “We’re talking about maybe 2022 approximately,” he said. “This is just throwing around time frames that may change.”

In the meantime, the U.S. has been exporting increasing amounts of natural gas to Mexico, and companies have rushed to build more cross-border pipelines to meet the demand.

Natural gas exports to Mexico by pipeline increased to 91 billion cubic feet in November, up 56 percent over the same month of the previous year, according to the U.S. Energy Information Administration.

While Mexico has one of the world’s richest reserves of oil and gas, its production has dropped in the last decade. The sweeping energy reform is intended to boost production and fuel electricity generation.

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