The Nation owns the following: …all the oil and all solid, liquid and gaseous hydrocarbons…
…With respect to oil and solid, liquid, gaseous or radioactive hydrocarbons no new permit shall be issued and those already issued shall be cancelled in order to allow the Nation to carry out the exploitation of the materials mentioned above according to statutory law. The Nation shall be in charge of generating, conducting, transforming, distributing and providing electricity as a public service. No permit shall be issued to private individuals or corporations in order to provide such a public service. The Nation will use all necessary commodities and natural resources available to achieve the goals set so far…
…The State’s activities performed within the strategic areas that follow will not be considered as monopolies: …oil and all the hydrocarbons; basic petrochemistry; radioactive minerals and nuclear energy production; electricity and other activities expressly pointed out by the Congress…
Article 27th of the Political Constitution of the Mexican United States
It is not uncommon to talk nowadays about the future of energy in Mexico. The last few years have been a rollercoaster of good and bad news regarding our most valuable goods: going from energy reforms, new laws and oil discoveries to gas shortages, critical alerts and tragic explosions. It is in every Mexican’s interest to know about Pemex, since they are the state-owned wealth measure of Mexico. After all, the country’s federal budget depends, to the tune of around 40%, on the income that Pemex provides.
Even if experts talk about having a Pemex that is run in a business-like fashion, which seems to be the line of action that the new government will be following (see Fundación Colosio’s report on the future, the PRI’s think tank opinion on the next six years’ priorities) every business has to look at all of its different product lines. In this case, Pemex is not only in charge of exploring, exploiting and producing oil. Following the recent oil discoveries and the rumors of a new energy reform coming to address Pemex E&P, we seem to have forgotten about gas. And just when we thought Pemex was about to leave this resource on a secondary role for their energy priorities, the Ministry of Energy informed through a press release that a new fund inside the Conacyt-Sener-Hydrocarbons Fund was approved, holding $3.13 billion pesos to bolster the development of shale gas.
Shale gas reserves were discovered by the use of fracturing techniques in low permeability geologic formations, such as shale formations, back in the 1950s. However, the technology wasn’t there to extract it until the last decade, when horizontal drilling in conjunction with hydraulic fracturing was used to expand the ability of producing natural gas from these formations.
There has been a lot of talk about the privileged position of Mexico in the shale gas world’s landscape. According to April 2011’s World Shale Gas Resources report by the EIA (US Energy Information Association), Mexico holds the 4th place in top countries, with 681Tcf in prospective shale gas resources. This means that, even though we have heard about Pemex’s critical alerts and shortage reports, gas is an abundant resource in the country.
Then… why isn’t Pemex exploiting those resources?
It is as simple as the economic principle of demand and supply. Since the greatest quantity of reserves was found in the United States, and they actually dedicated themselves to extract them, our neighbors in the north increased the supply available for shale gas in the region. Therefore, the price went down, and now, the project to extract shale gas in Mexico has become less attractive than betting on finding oil. The expected value of having a slight probability of discovering oil in deepwater justifies the expenses Pemex has to incur to do so, and is bigger than the expected value of extracting the proven shale gas reserves, because the price of gas in the US is currently so much cheaper.
In simple math, the idea represents itself this way:
How to restore the supply of natural gas in the country?
The objective of Pemex, as a monopoly, is to supply all the energy needed for the country. Nevertheless, they will prefer right now to import the gas needed to satisfy that demand, rather than exploiting the resources they currently possess, since it would be cheaper. But if Pemex was acting as a business, the only ways of restoring the supply would be to make changes to current regulations, or to invest in the construction of the infrastructure needed to import more gas from the United States.
Let’s talk first of the importing option. The idea would develop by investing resources that eventually would end up counting against Pemex’s yearly budget, without bringing enough profit to justify such expenses. That is why Conacyt and Sener are pitching in: they’ve built a fund to try and incentivize the not-so-lucrative idea of extracting shale gas right now.
The other idea would have to go through public and legislative judgment, since the regulations that would need to be modified are written in the Constitution. There have been some reports that this might be the idea of the new government: to modify the parameters by which shale gas is regulated.
The public opinion on privatisation of oil is well known: people are generally against it. Nevertheless, the ideas that have floated around to obtain new alternatives for extracting shale gas have been well received. The public opinion against alternative contracting options, such as production sharing agreements, on shale gas isn’t as negative. This might be the break that the new government needs to start the wheels on a new energy reform.
Are you against this kind of contract for shale gas? What other options would you suggest to exploit these so urgently-needed resources?