an opinion editorial written exclusively for ANZMEX 

21 March, 2019
By Chris Sladen

Energy matters – Everyone’s doing it, right?

A colleague from a US independent oil & gas company called me up the other day. His company has made a fortune for itself in Texas by drilling and fracking shale gas wells and helping lead the ‘shale revolution’. He wanted some advice on shale gas in Mexico. The first thing he said was “Why is Mexico not doing it? We are all doing it”.

Drilling wells for shale gas and oil has transformed the global energy scene in under 20 years. The leader has been the USA, developing new technologies, operational efficiencies and supply chain capabilities never seen before. The US has catapulted itself from a major importer of both crude oil and natural gas to become no.1 global oil producer, an exporter of natural gas around the world, and at the same time increasing its proven reserves. As well as helping the US become self-sufficient in energy, its onshore shale industry delivers taxes and royalties to the Government, whilst also appearing largely immune to OPEC decisions aimed at controlling global oil prices and supply/demand.

The oil & gas supermajors (Exxon, Chevron, Shell, BP etc.) are now leading the second era of the shale revolution in the USA. Their ability to invest at great scale and create vast ‘factory-style’ drilling operations, combined with never-ending technology improvements is giving them a superior position. Coupled with midstream and downstream positions they can find added value across the value chain. Their ability to buy and then absorb smaller companies that may have held good shale acreage positions or perhaps had some unique operational skills has speeded the progress of the supermajors.

The ability to quickly drill wells and put them on production creates an outstanding commercial advantage for shale investors offering both very early cash flow and payback, measured in months not years or decades. The ability to scale-up a repetitive style of operations leads to enormous cost efficiencies. The business model is very different to, say, capital intensive deepwater offshore projects which often do not have production and payback for many decades. Shale operations can adjust very quickly to changes in supply and demand, or prices. It makes it a winner.

The USA is expected to lead growth in global oil supply over coming years, fed by its shale revolution. In a few years, oil exports from the USA will overtake Russia and close in on Saudi Arabia, bringing diversity of suppliers. Accompanying this is less relevance of Mexican oil in US markets.

Shale is not just a US phenomenon. Shale techniques and skills are now being applied in onshore Canada, Argentina & China, together with other countries of significant shale resource potential such as Australia and the UK. If they are all doing it, then why not in Mexico?

Mexico’s high potential shales have been studied and well documented for over a decade. However, in 2019, Mexico will drill only around 10 shale wells mostly to evaluate resources. Meanwhile, the USA will drill perhaps 10,000 shale wells, mostly for production. In other words, US shale drilling activity is around one thousand times more intensive than in Mexico!

Yet Mexico clearly has shale resource potential. For example, an initiative to rapidly advance shale gas production in northeast Mexico could easily and quickly deliver 5 bcf/d (billion cubic feet per day). This could create over 300,000 new well-paid jobs, with Mexican natural gas enabling not only potentially cheaper power supplies but also much-needed feedstock to rejuvenate the long suffering petrochemicals industry. This would bring with it a significant economic multiplier effect as well as Government income. At the same time, the elimination of imports could save Mexico spending US$ ~15 million every day on imported US natural gas!

Within a period of 10 years in the USA (2006-2016), shale gas production went from less than 5bcf/d to over 45 bcf/d; it has become a critical part of the energy transition. The USA is now both a significant global exporter through Liquefied Natural Gas projects, and its petrochemical industry is roaring ahead. It shows the scale and speed of transformation that is possible. Now pause to imagine a similar type of transformation happening in Mexico. Will Mexico seize the opportunity?

Maybe shale gas & oil techniques were born in the USA but nowadays everybody can do it, if they want to. Mexico can do it too. The shale skills, the know-how, the drilling equipment etc. are all sitting less than 500kms north from Mexico, where everyone is doing it.

I could now write a lengthy paragraph about what is holding back Mexico from exploiting its shale resources – such as complex land ownership, a dislike of private investment, security problems, lack of infrastructure and so on. But all Mexico has to decide is that it wants to do it. Right?

About the author:

Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.

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