Mexico unlikely to tap its Eagle Ford Shale, expert says

HOUSTON — Despite the huge potential of the Mexican Eagle Ford Shale, the high costs and low potential returns likely will deter Mexico’s national oil company from developing those resources for decades to come, an industry expert said Thursday.

Petroleos Mexicanos, or Pemex, is not likely to develop its shale gas resources because of the high number of wells needed, the high labor costs and the company’s lack of experience, said Luis Miguel Labardini, a partner with Mexican energy consulting firm Marcos y Asociados, speaking at an energy forum hosted by the Rice University’s Baker Institute in Houston.

Shallow-water plays and a huge deep-water offshore play, Cantarell, have higher internal rates of return, drawing Pemex’s limited investment capital, Labardini said. That leaves its natural gas resources almost untouched, despite Mexico’s dependence on natural gas, he said.

Foreign interest: Eagle Ford’s future might lie in Mexico’s demand

Pemex drilled its first shale gas well in 2010. There are only five shale gas wells in the country today.

The relatively untouched shale resources could provide opportunities for US companies if Mexico implements a proposed constitutional change that would open it up to international investment.

However, even if the constitution is amended to allow investment, the shale plays in Northern Mexico might not be attractive to international investment, because of security issues and a lack of infrastructure to bring the natural gas to market, said Kenneth Medlock, senior director for the Center for Energy Studies at Rice University’s Baker Institute.

“Companies that operate currently in the Eagle Ford are extremely reticent to invest south of the border, even if the reforms pass,” Medlock said.

One challenge is that shale plays require thousands of wells to be drilled in order to understand where the “sweet spots” are, Medlock said, pointing out that it took 10 years and thousands of wells for Texas’ Barnett Shale to become profitable.

Natural gas: Declining Barnett Shale could remain strong producer

Because Pemex budgeting is tied closely to the country’s federal budget, making an upfront investment that will not provide immediate cash flow is unattractive to policy makers, Medlock said.

Ariel Ramos, a partner with Haynes and Boone, said that when Mexico’s shale gas plays are developed, U.S. companies will be positioned to provide the needed expertise, which will force better contract terms for companies.

If the constitutional amendment passes, the Mexican government is already considering offering a one percent royalty for wet gas production and a zero percent royalty for dry gas in order to encourage development, Ramos said.

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