Focus: Shale Gas

Frack This Way

Frack This Way

Jul. 14, 2013

The company has also drilled six other wells in Nuevo León and Coahuila, while it is planning to build one in the southeastern state of Veracruz. It will cost $245 million over a space of 18 months to finish these wells. The company has a plan to drill 20 wells by 2016, coming to a total investment of around $2 billion. The long-term plan for PEMEX is to operate 6,500 commercial wells over the next 50 years; however, this grander plan will largely depend on whether President Peña Nieto decides to go ahead with energy market reforms.

PEMEX is currently the world's seventh-largest producer of oil and has monopolized the energy market in the country since it was nationalized in 1938. Under Article 27 of the Mexican Constitution, all oil and gas reserves in the country are owned by the state. However, PEMEX and the state are now beginning to realize that the company alone lacks the financial support and technical ability to fully explore and exploit the shale gas and oil reserves the country holds. PEMEX currently doesn't have the financial capacity to fund the multiple projects on offer in the country, such as shale gas and deep-water oil, which are extremely capital-intensive exercises. When President Peña Nieto was in Northern Ireland for the G8 Summit in June 2013, he told the media that he was looking into changing the constitution to allow for private investment in the shale reserves of the country. This would free up some of PEMEX's funds to be able to focus on specific projects, and the country as a whole would be able to more efficiently exploit its resources.

Under the current laws, PEMEX pays 41.1% tax on its revenues when exploiting the country's resources. Recent estimates put a conservative value of $2.72 trillion on the country's shale gas reserves, which would bring the government just under $1.12 trillion in taxes. The government's current annual budget is $300 billion, of which 34% comes from PEMEX. Such a cash influx would be hugely beneficial to the public sector and the people; however, at present it could take years if not decades to access this money. Another issue that Mexico has to consider is its northern neighbor. The US has estimated reserves of shale gas approximately 862 tcf. Also, the US is much further along in its production scale than Mexico with 514,637 gas wells currently in production in the US as of 2011. The recent gas boom in the US has sent gas prices plummeting to a 10-year low in September 2012, and as Mexico gas prices are tied to the rates of its neighbor, its prices have fallen as well. This may seem like a good thing for Mexico, but it is causing a lot of headaches for PEMEX and the government. Since the prices have dropped, demand from businesses has soared so much that PEMEX has had to ration supplies to large consumers. Gas prices are one-eighth of that in Asia. The prices may have dropped for the Mexican companies buying from PEMEX, but the fixed costs of supplying that gas are still the same. The lower the prices go in the US, the lower the margins are for PEMEX as the prices are fixed on external factors and not on supply and demand in Mexico. A way to address this would be to reduce the country's reliance on imports from the US and boost domestic production.

At the moment, Mexico is the second biggest importer of US gas, even though it has the fourth largest reserves in the world. This is partly due to the fact that the current low prices in the US are discouraging investment in gas due to the low returns they would receive. Another way to deal with the problem is to perhaps move to an EU style of pricing and fix it to the price of oil. Mexico has a few issues to iron out before it can truly capitalize on its huge potential, but if it does in the near future, it could well experience a major gas boom that could spur the economy on.