Student Blog: Tapping Mexico’s shale gas resources — Future promise and practical challenges – Baker Institute Blog

After the 75-year monopolistic reign of state-owned Petróleos Mexicanos (Pemex), Mexico’s energy sector was transformed this August by the enactment of secondary legislation opening up the energy sector to foreign companies. Advocates of the reform hope that foreign investment can help expand shale gas extraction in Mexico, which the U.S. Energy Information Administration rates sixth among countries with technically recoverable shale gas resources. Last year, productivity of natural gas in Mexico was only 3.9 percent higher than in 2006, while imports of natural gas increased threefold during the same period. Although the reforms might boost production and wean Mexico off its reliance on imports, major uncertainties remain for Mexico’s natural gas success. Along with security concerns for energy sector growth in Mexico, additional issues of land rights and use, water shortages, and investment risks for foreign companies might impede the reform’s progress.

For natural gas extraction, the appeal of northern Mexico’s Burgos Basin — the geological extension of South Texas’ Eagle Ford Shale — is undeniable, but an influx of multinational oil and gas companies could spark conflicts over claims to the land. Located in the states of Tamaulipas, Nuevo León and Coahuila, the Burgos Basin already yields two-thirds of Mexico’s current natural gas production. However, taking greater advantage of these resources represents a particular threat for those who fear that extracting resources also means being stripped of their land. During the reform debates, farmers and members of the minority left-wing PRD (Partido de la Revolución Democrática) party cringed at the potential for the government and foreign companies to expropriate both private and collectively owned property. In late July, farmers and “ejidatarios,” those who cultivate communal lands, blocked highways as they marched to Mexico City in protest against the reforms.

To appease the opposition, the newly enacted energy legislation states — almost euphemistically — that the government retains the right to grant permits for “temporary occupation” of the land to other parties if it falls under the “interests of the nation.” With one-third of the government’s budget currently coming from Pemex, landowners are understandably wary that energy exploration will trump land rights and other activities, such as agriculture.

Furthermore, the practice of hydraulic fracturing (fracking), which exploits shale reserves at the expense of huge quantities of water, could unearth a tremendous wealth of resources and, by the same token, provoke remonstration from communities and leftist politicians. The northern areas of Tamaulipas and Nuevo León belong to the second-driest of Mexico’s 12 hydraulic administrative regions, and water shortages in these areas already create conflict without the strain of diverting water for fracking. While the president of the Special Commission of the Burgos Basin promises that wastewater will be recycled through the system, this will not fully eliminate the additional strain on the area’s water resources.

Despite these dilemmas, fracking and other extraction techniques in the Burgos Basin might be legitimized by their potential economic gains. Given Mexico’s current economic landscape, with a lagging energy sector and 45 percent of the population living in poverty, the government is counting on a surge in competition and foreign investment to spur growth. However, the limited scope of Mexico’s current well count in the Burgos Basin, totaling less than 20, will first require investment in more exploratory wells to determine the viability of these resources. In addition, the lack of infrastructure — including sufficient pipelines, roads and railways — in Mexico means that major, costly construction needs to be completed before any additional shale reserves can be fully developed. These issues, compounded by insecurity from organized crime and deficiencies in public safety and the rule of law, generate risks for foreign investor

via Student Blog: Tapping Mexico’s shale gas resources — Future promise and practical challenges – Baker Institute Blog.