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Mexico hopes energy reforms will spark drilling boom

A platform belonging to Mexico’s state-run oil monopoly Pemex is seen in the Bay of Campeche April 19, 2013. The country is enduring a crippling shortage of gas and pipeline capacity.

Victor Ruiz/REUTERS

As most of North America adjusts to a glut of natural gas brought about by new extraction technologies, Mexico is enduring a crippling shortage of gas and pipeline capacity that the government hopes to rectify with an ambitious energy reform plan it announced this week.

Mexico's underdeveloped gas industry is having a devastating impact on the country's manufacturers and its broader economy, Economy Minister Ildefonso Guajardo told The Globe and Mail in an interview from Mexico City. "It is unthinkable that we have plenty of resources in the ground and we have not been able to invest to exploit them."

Demand for gas has outpaced growth in the country's production, and imports have doubled over the past five years, to 600 billion cubic feet in 2012, according to data from the U.S. Energy Information Administration (EIA).

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Domestic output has risen much more slowly, to 1.9 trillion cubic feet from 1.7 trillion cubic feet in the same time frame. Before 2000, Mexico was a net exporter of the fuel.

That has forced state-owned energy giant Petroleos Mexicanos (Pemex) to cut off some industries over the past two years, which has led to unplanned shutdowns and unscheduled layoffs at factories across the country. Some regions don't have access to gas supply.

If reforms could spark a drilling boom in Mexico similar to what has been seen in the United States and Canada, the entire country would benefit from access to cheaper, clean reliable source of fuel that could represent a competitive advantage for manufacturers who are now competing with low-cost Asian producers, the minister said.

The EIA estimates Mexico has the sixth-largest shale-gas resource in the world at 545 trillion cubic feet – nearly as much as Canada's – although it adds that the geology is more complex in Mexico, which makes deposits there more difficult to crack.

While companies in Texas have drilled about 9,000 wells to develop booming basins, such as the Permian and the Eagle Ford, Pemex has drilled and fracked a mere four shale-gas wells. The company is instead focusing on oil – which is both more profitable to produce and badly in need of investment to reverse a decline that chopped the country's production by a third in the past decade.

The country is now building gas pipelines from the United States – with involvement from outsiders such as Calgary's TransCanada Corp. – in order to boost imports of the fuel, even as it aims to develop its own fields.

But the state-owned monopoly is ill-equipped for the nimble exploration and development efforts needed to kick-start the kind of shale gas revolution that the U.S. and Canada are experiencing, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center for Scholars in Washington.

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"Pemex is very good at hunting elephants but they aren't very good at hunting rabbits," he said.

Mr Guajardo said the government is counting on private sector companies, including Canadian producers, to partner with Pemex in order to develop the resource. It expects to have the reforms in place by the end of the year.

The government forecasts that the overall energy liberalization could add a full percentage point to Mexico's economic growth within four years, and two percentage points by 2025.

Much will depend on how attractive the government can make the investment regime, while assuaging nationalist concerns industry dominance by foreign oil companies and profits leaving the country. Mr. Wood said foreign companies want to be able to book reserves, and the government believes its profit-sharing approach will allow them to do so under rules set down by the U.S. Securities and Exchange Commission.

Mr. Guajardo said the government is well aware of what it takes to attract investment. The new regime "will definitely be highly competitive in the international oil markets," he said.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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