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Natural Gas in Mexico: Unrealized Potential

The natural gas situation in Mexico is frustrating when considering the country’s ample supply. While Mexico has significant unexplored potential that would benefit power generation, investment is deficient. The country must currently import liquefied natural gas (LNG) from the Middle East and Africa, paying four times the going rate in North America, in order to keep up with domestic demand. Despite the surplus of natural gas in the United States, all of the pipelines coming to Mexico are full, and thus Mexico must import from other parts of the world at a high premium. In order to meet its domestic demand—and potentially export—private investment could engage in exploration and production of the country’s ample natural gas reserves.

Petróleos Mexicanos (Mexican Petroleum—PEMEX) , the Mexican state oil company, holds a monopoly over the energy sector and has not yet been able to fully extract deep water oil and natural gas reserves due to a lack of technical expertise and limited spending on new investments for equipment and research. PEMEX is estimated to be sitting on approximately 500 trillion cubic feet of natural gas reserves. In addition to conventional natural gas, Mexico has significant shale gas capabilities, estimated to be the sixth largest amount in the world. The famed Eagle Ford Shale in South Texas has been a boon to the United States, yet the formation does not end at the border. Rather, it extends south into Northern Mexico and represents a tremendous economic opportunity.

The shale gas boom in the United States demonstrates how unconventional drilling techniques–such as hydraulic fracturing, or “fracking”–are leading to a significant reduction in natural gas imports. If Mexico brings in foreign expertise and investments to develop similar techniques, it would no longer need to import LNG from places like Nigeria or Yemen, and instead be able to enjoy a boom in natural gas production at home.

Private companies are currently able to participate in Mexico’s energy sector through incentive-based contracts. Within these contracts, companies are paid a fee for their services, but they are not able to own any reserves.  The fruit of former Mexican President Felipe Calderón’s 2008 energy reforms, these contracts have allowed for some foreign participation in the sector. Despite these advancements, the July 2013 auction was considered a disappointment as PEMEX only awarded three of the six available blocks.

The current system is preventing PEMEX from going beyond its dependence on large, onshore oil fields with declining production in places such as Cantarell. Cantarell was discovered in 1976 and production there peaked in 2003, when the field produced 2.1 million barrels of oil per day. In contrast, it now produces less than one-fourth of its peak levels. The aging field is a symbol of what PEMEX once was and the industry’s need to go in a different direction. 

These issues are all part of the ongoing energy reform process in Mexico, and it remains to be seen how the Mexican public will respond to them. One option would be for private companies to buoy investment in infrastructure, drilling techniques, and exploration, helping Mexico’s natural gas sector reach its potential.

*Christian Gómez, Jr. is a contributing blogger to AQ Online. He is director of energy at the Council of the Americas. Follow him on Twitter at @cgomezenergy.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Mexico energy reform, Liquefied natural gas

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