Mexico is gearing up for another attempt at shale gas production, a Mexico City source has told Interfax Natural Gas Daily. The government could launch a shale-focused bid round as early as Q4 2017, although any decision depends on the outcome of a forthcoming tender for gas-rich acreage.

"The outcome of the ‘gas’ round is crucial to a decision over a shale push in late 2017 or early 2018," said the source, who is close to the country’s energy ministry (SENER) and wanted to remain anonymous as he did not have permission to speak to the media.

"If there is plenty of interest, it will accelerate thinking over shale, such as [drawing up] environmental regulations," added the source. At the time of publication, SENER had not responded to a request for comment.

The third phase of Mexico’s second competitive bid round will offer 14 blocks, several of which are highly prospective for conventional gas. The so-called Round 2.3 auction is scheduled for 7 April 2017 and will offer areas in Burgos, Tampico-Misantla, Veracruz and the Southeastern basins, among others. The contracts will be awarded in July 2017, and experts have forecast strong interest.

Mexican authorities had planned a shale-focused auction as early as 2015, but their ambitions were checked by the ongoing bear market. The government has claimed there is strong interest from United States-based drillers eyeing expansion south of the border.

"Mexico is definitely interested in developing the resource but it will likely be a longer-term play, especially for shale gas," Jed Bailey, managing partner of Latin America-focused consultancy Energy Narrative, told Interfax Natural Gas Daily last week.

Bailey said any exploration efforts would focus on regions with similar geology to the highly prolific plays in the US, such as the Burgos and Sabinas basins across the border from the Eagle Ford and the Permian regions of Texas, as well as areas for which there is already data and infrastructure.

"Some stratigraphic and seismic work has been done in both Burgos and Sabinas, but much more is known about the Tampico and Veracruz basins along the Gulf of Mexico coast. These regions are also closer to existing traditional hydrocarbon development and other infrastructure, which can help reduce development costs and timeframes," said Bailey.

"Although the resource base closer to the US border is considered more attractive, the lack of supporting infrastructure – pipelines, but also water access, roads, basic support for drilling crews, etc. – continues to be a hindrance," he added.

Despite issues such as scarce infrastructure, there is renewed optimism in Mexico’s upstream stemming from the success of Round 1.4 in December 2016, which saw eight of 10 deepwater blocks in the Gulf of Mexico awarded to major explorers.

Pemex’s plans

State-run Pemex said in November that it would create a shale-focused unit that would allow it to partner with private companies in future bid rounds. José Antonio Escalera, an exploration manager at Pemex, told local press the company was seeking to drill its first shale wells.

However, Pablo Medina, a Latin America upstream research analyst at Wood Mackenzie, is sceptical about the company’s shale ambitions. "Pemex’s [2017] budget was reduced [by] over 30% year on year, so significant investment in unconventionals is unlikely to occur," he told Interfax Natural Gas Daily. He said the company has set aside only $28 million for shale-related activities in 2017.

"Pemex has exposure to many other resource themes with potentially better returns – such as shallow water, enhanced oil recovery and deepwater," Medina added.

Private operators were most likely to lead any shale push in Mexico, he added. "The terms and conditions will need to be very attractive in order to make it work. The creation of a supply chain capable of supporting unconventional developments in Mexico will be expensive.

"Additionally, security is [a concern] in northern Mexico, where drug cartels have an active presence. Operators would most likely focus on the oil-prone Pimienta formation [in the Tampico-Misantla Basin] given that domestic gas production competes against US imports at very low costs," Medina added.

Bailey sounded an extra note of caution. "Pemex has limited experience and technology specific to efficiently developing shale plays [and] would need to import both through partners. The Mexican peso’s steady decline will [also] make this even less cost-effective relative to other opportunities."

The peso has been hammered by concerns that new US President Donald Trump will renegotiate the North American Free Trade Agreement (NAFTA). Trump won the US election last year on a swell of working-class distrust of NAFTA, which came into force in 1994 and broke down the barriers to trade and investment between the US, Canada and Mexico.

However, the authorities remain optimistic. Mexico’s energy secretary, Pedro Joaquin Coldwell, has said rules governing hydraulic fracturing will be published by the end of Q1 2017.

Source: Interfax Global Energy