Mexico Welcomes the World to Its Shale Fields

When the World Shale Oil Summit met in Dallas last month, North America (the United States and to a lesser extent Canada) naturally took center stage. However, sponsor CWC promotes this annual gathering, now in its fifth year, as an international event so shale opportunities around the globe were also discussed. While an entire morning was devoted to Asia, Mexico tended to dominate many of the international discussions. Small wonder since the country is perennially ranked among the top 10 in terms of shale resources and is opening its doors to international E&P players for the first time in three quarters of a century. It is also is just across the Rio Grande from Texas and its vast network of pipelines and service contractors. Furthermore, geology doesn’t recognize international borders and one of the hottest plays in the US, the Eagle Ford, extends into Mexico.

In the 12 months since Mexico adopted the changes to its constitution necessary to allow international players in, the country has made remarkable progress implementing them. Following Round Zero, in which national oil company Pemex chose the acreage it will retain, Mexico’s Energy Secretariat (Sener) has moved quickly to outline the blocks to be offered in Round 1. This call for bids, which will kick off in January 2015, includes tracts in two unconventional plays: eight blocks with dry gas potential on the Burro-Picachos trend and 62 blocks with shale oil potential in the Tampico-Misantla Basin. The former, located just south of Del Rio, Texas, cover 900 sq km and hold prospective resources of about 142 million boe. Meanwhile the Tampico-Misantla Basin acreage comprises 7,401 sq km on the Gulf Coast near Tampico; shale oil potential is estimated at 8.9 billion boe in prospective resources.



Robert Clark, manager of unconventional oil and gas at Wood Mackenzie, told attendees at the shale summit his company believes the Jurassic play in the Tampico-Misantla Basin has the better potential. Known as the Pimienta tight oil play, it is believed to be an analog to the Barnett and has shown better productivity. Also this acreage is close to established operations and therefore should be cheaper to drill.

In Round Zero, Pemex had to relinquish most of its unconventional acreage, keeping only specific areas both on the Eagle Ford trend and in the Tampico-Misantla, where they drilled a well in 2012 that is to date Mexico’s oil shale oil producer. Located in the Tamaulipas province, Anhélido 1 had an initial production of 429 bo/d and 1.3 MMcfg/d from the Jurassic Pimienta Formation. Final recovery is expected to be in the range of 250,000 to 500,000 boe. As is the case with much of the acreage Pemex retained in Round Zero, there is a good chance the company will be looking for partners with technical expertise to further explore and develop its leasehold in this play.

Regarding opportunities in the Mexican extension of the Eagle Ford, Clark sees a number of problems facing operators who are thinking of crossing the Rio Grande. First of all, in Mexico the Eagle Ford is gas prone. It is also in a very isolated and waterless terrain. And, being close to the border, it is also in one of the most dangerous places on earth. Security will prove tough and very expensive. In other words, it is no country for old men.

“Don’t put your money in the Eagle Ford basket,” Clark advised. “The Pimienta trend isn’t in Cancun but it is far enough south to be safer.”

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Stratfor Analyzes Next Steps in Mexico’s Energy Reform

Mexico has taken its first official step toward implementing the energy reform that Mexican President Enrique Pena Nieto signed into law roughly a year ago. The government recently unveiled many of the contractual terms for the first 14 shallow offshore blocks that will be auctioned off to oil companies early next year. Bidding for the blocks will end July 15, 2015, and the results will be announced shortly thereafter.

Since 2004, Mexico’s oil production has dropped from about 3.4 million barrels per day to around 2.3 million barrels per day for a number of reasons. Petroleos Mexicanos, commonly known as Pemex, has fallen significantly behind its international peers in terms of technological expertise, and high tax burdens have limited the company’s exploration efforts. (Until the energy reform law was passed last year, Pemex was the only company allowed to explore and produce oil in Mexico since the country’s oil industry was nationalized in 1938.) At the same time, the supergiant Cantarell Field, which was the main source of Pemex’s production boom in the late 1990s and early 2000s, is quickly being depleted.

But now that the energy reform has passed, Mexico City has announced it will auction off 14 new offshore exploration blocks. Pemex does not control these blocks, but it can attempt to qualify for and bid on the blocks like any other company, though its limited financial resources could hinder its success. Once the initial auction is complete, Mexico City will hold subsequent auctions for unclaimed deep-water offshore blocks, unconventional natural gas blocks and onshore heavy oil blocks later in 2015. Meanwhile, Pemex will be seeking joint-venture partnerships for the blocks it currently controls, including the shallow-water Bolontiku, Ek and Sinan fields; the heavy-oil Aatasil-Tekel-Utsil field; the onshore Rodador, Ogarrio and Cardenas-Mora fields; and the deep-water Kunah-Piklis, Trion and Exploratus fields.

The first 14 blocks up for auction cover a relatively small area and are only expected to collectively produce about 80,000 barrels of oil per day, but they are just the first of many blocks that Mexico will auction off. The process serves as an important benchmark that shows the energy reforms are proceeding smoothly, but even more important, contractual terms provide insight into how contracts for more lucrative blocks will be structured in the future. Mexico City is offering 25-year production-sharing contracts for the blocks with the option to renew the agreements twice for an additional five years. Production-sharing contracts and joint ventures are boons for international oil companies because they allow changes in ownership to be reported to the U.S. Securities and Exchange Commission. It seems likely that because such contracts have been offered for the first 14 blocks, Mexico City will continue using the production-sharing contract in future auctions as well.

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Oil Price May Slow Development of Mexico’s Burgos Basin

Mexico is getting ready to welcome the U.S. shale revolution into its borders after 75 years of state monopoly. The timing couldn’t be worse.

As a flood of supplies from Texas to North Dakota sends oil into a nosedive, U.S. producers are reducing investment budgets for 2015. The cuts dim the chances they’ll take their fracking and horizontal drilling capabilities down south anytime soon.

After changing the constitution last year to allow foreign oil investment into its territory, Mexico is having to adjust, too. Regulators are considering reworking and potentially delaying leases for the country’s portion of the giant shale formation that encompasses the Eagle Ford in Texas.

“They’re going to have all of the issues of depressed price that the people in the Eagle Ford are having now,” said Michael P. Darden, global chair for oil and gas transactions at law firm Latham & Watkins LLP in Houston.

Energy ministers from the U.S., Canada and Mexico are set to meet Dec. 15 in Washington to discuss the implications of Mexico’s energy reform for the rest of the continent.

Mexican offshore assets have drawn interest from oil majors from Exxon Mobil Corp. (XOM) to Royal Dutch Shell Plc (RDSA) as the end of the monopoly triggers a race to gain a foothold in the country. The question is how quickly producers will be willing to move into the higher-risk, more costly prospects.

With Mexican shale possibly having to wait, cheaper offerings in shallow waters might have to do for now.

“In response to the falling prices, the government is bidding out the most attractive, better margin projects first,” said James K. Alford, a partner focusing on Mexico energy reform for the law firm Locke Lord LLP in Washington.

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A Broader View of the Big Valley

Anyone who has been paying attention to the details would have a hard time arguing that the Rio Grande Valley is not on the verge of potentially becoming a great American economic story, and that it will complete its transformation from an outdated perception of impoverished backwater to a driver of U.S. recovery and expansion.

And yes I know that sounds like hyperbole.

"Theres a storm across the valley...."

“There’s a storm across the valley….”

But there are a few items to consider before dismissing the claim. The first is that the valley is situated in the midst of two of the largest oil shale fields in North America, the Eagle Ford of Southwest Texas and the Burgos Basin in Mexico. In one year, 2013, $46bn USD was invested in Eagle Ford. Burgos, however, is reported to be eight times larger, in terms of deposits, and the Mexican government, realizing the limitations of its national oil company Pemex, has decided to open up the shale play to multi-nationals.

Exploration and development companies will likely use the Port of Brownsville for shipping and staging operations on the U.S. side of the border. Economists have said that the Eagle Ford has enabled the current U.S. recovery. It’s reasonable to wonder about the impact of the Burgos Basin on the Texas and American economy, given its great size and proximity to the border.

There is also wind. Close to the coast, wind is consistent. More than a billion dollars in wind farms are being built in the region. Two of them are already in operation, including Los Vientos, by Duke Energy just north of the Harlingen airport. Duke is spending hundreds of millions in Starr County, and just started construction on two new sites that will standup 200 more wind turbines. Austin Energy and CPS of San Antonio are purchasing the electricity. E.ON Energy has a 112 turbine wind project in the same general locale.

In the past year or two, almost a billion dollars have been invested in Starr County, which not too many years ago had an unemployment rate of 40% and the worst poverty of any county in America. A new pipeline is also being built through Starr County to carry gas to Mexico from the Eagle Ford. Hotel and motel tax revenues for that county have gone up 18% annually and sales tax collections jump 7-8 percent monthly.

An endless growing season

An endless growing season

As exploration and development mature in the Burgos Basin, Mexico will also send natural gas back north of the border for export out of Brownsville. The port has options from five different companies wanting to build gas liquefaction plants at their location; each one will create about 3000 construction jobs.

Omnitrax of Denver, one of the most successful railroad companies in the U.S., has just signed a 30-year operating agreement with the short line Brownsville and Rio Grande Railroad, which has 50 miles of track delivering steel and other freight from the port to Mexico. Omnitrax has plans to build a huge industrial park and development at the port site in Brownsville.

Ninety percent of the freight coming into the Port of Brownsville goes to Mexico, vast amounts of slab steel from Russia and the United Kingdom. And because most of that comes back as automobiles, appliances, and other big-ticket items, the port was just named the number one Foreign Trade Zone exporter in the U.S. for the second consecutive year. And the first new railroad bridge across the Rio Grande in a century was just completed in an effort to expedite the freight movement.

Of course, most everyone knows about Space X. There will be about 600 permanent jobs but Elon Musk has indicated he wants to locate rocket construction at the site of the launch facility so there will be additional positions based upon need. Suppliers are expected to locate their operations close to Space X. Brownsville estimates there will be 20,000 people in the area for each of the monthly rocket launches.

Grapefruit Grove

Grapefruit Grove

In terms of overland transportation, the last two incomplete interstate highways in the U.S. are under construction to reach the valley. Even with economic challenges for the National Highway Trust Fund, there are more than $700 million dollars of construction projects underway on I-69 inside Texas. I-69 will run from Port Huron Michigan to three different terminations along the border. The easternmost segment follows current U.S. 77 down through Harlingen to Brownsville while another leg will come down the U.S. 281 corridor to near McAllen.  Interstate 2 will run along the river from near Harlingen and will, eventually, connect to the westernmost terminus of I-69 in Laredo, which also will provide a junction to I-35, currently the biggest artery for Mexican produce and goods. There seems little doubt completion of these projects will deliver significant economic opportunities to communities like Harlingen and all of the cities connected to the international bridge systems with Mexico.

Equally significant, Mexico has recently completed construction of its first coast-to-coast superhighway, HD40 from the deep-water port near Mazatlan to Monterrey and up to the U.S. border in the Rio Grande Valley. This has already begun to change the dynamics of transportation in South Texas. Freight offloaded on Mexico’s west coast can get to the U.S. Northeast and Midwest much faster by going up to Rio Grande Valley border cities instead of Nogales, Arizona, El Paso, and Laredo. There are 12 bridges along that stretch of river to expedite transit, and produce houses from Nogales, Arizona, are already relocating to the valley. Texas A&M has assigned a senior economist to the valley just to study the impact of this one transportation development with HD40.

The context for all of this, of course, is critical. The valley, as recently as a few months ago, was called a “third world” by Texas politicians running for statewide office, and even a “war zone” because of its proximity to Mexico. But national crime statistics have shown McAllen, Harlingen, and Brownsville to be among the safest communities in the U.S. McAllen was named the fastest growing city in the country, best place to be a solo entrepreneur, and Harlingen recently was shown to be the most affordable and best place to raise a family. (Independent analyses provided by third parties, easily sourced.) Brownsville was selected an All-America City a few months previously in a national competition in Denver by the Urban League.

Historically, politicians in Austin and Washington, because of a lack of demographic clout, have ignored the region. The third world slur was close to reality in the 70s with the highest rates of unemployment, poverty, infant mortality, lowest per capita income, and lowest levels of literacy for the entire nation recorded in the valley.

But those days are long gone. The University of Texas has committed $700 million over ten years to the valley. The two historic campuses, UT Pan American and UT Brownsville are being merged to create what will become one of the largest universities in the country when the first class enrolls next August. The commitment also includes a new $54 million dollar medical school that is presently under construction in Edinburg, which will add to the medical education already taking place in hospital residences and an academic clinic. Medical training has already been underway for more than a decade at Harlingen’s Regional Academic Health Center (RAHC.) Third and fourth year medical students from the University of Texas at San Antonio gain valuable experience at the facility, and an estimated 90 percent of them end up practicing medicine in Texas. There are also already more than 50,000 students being served by a community and technical college system encompassed by South Texas College (STC), Texas State Technical College, and Texas Southmost College.

STC, which houses the North American Advanced Research and Education Initiative, has led manufacturing innovation being used by global corporations. Their leading concept, called Rapid Response Manufacturing, can be seen at Alps, Inc, in McAllen and Reynosa, a global parts company for automobile manufacturers that will employ 4500 people and will be generating a billion dollars in revenue next year. Rapid Response shortens the timeline from concept to market and, in some cases, makes it possible for companies to not produce a product until it has been purchased. One manufacturer in the valley begins production by 10 a.m. on day of purchase and promises delivery by the same time the next morning.

The economy in the valley has also begun to take advantage of a concept promoted as “Third Coast Manufacturing.” The idea, which appears to be taking hold, is that natural resources and partially developed products are shipped from Europe and Africa to Mexico’s east coast while Asian products are delivered to the west coast. Refinement and assembly occur in Mexico, which has very few trade barriers remaining, and then they are delivered to the U.S. at the Rio Grande Valley ports of entry for shipment to American markets.

Being in a central location and time zone also gives the RGV an ideal situation to continue to take advantage of as the region grows and prospers. The appeal of all that can be measured in the fact that a few weeks ago the McAllen Economic Development Corporation had 200 Japanese and South Korean companies visiting the valley at the same time. (Unfortunately, the governor was on network TV that night riding a swift boat on the Rio Grande with 50 caliber machine guns.) Most of the global car companies also now have large manufacturing facilities in Mexico.

There are 40 communities in the 120-mile stretch of the Rio Grande Valley and they have begun an unprecedented level of cooperation to take advantage of their geography and other circumstances. And when the governor ordered the National Guard to the valley, there was close to universal disagreement with his decision because of the harm that might cause to the emerging image of the area. Everyone viewed the increase of river crossers as a humanitarian crisis, and not one of criminals and terrorists.

The valley is more than 90 percent Hispanic and is leading the demographic shift underway in Texas. In fact, it might just be the laboratory where we can get a first look at the future of America. And early indications are that the future might be a bit brighter than everyone thinks.