Mexico’s gas dependence on US pushes politicians to consider fracking

Mexico’s new president Andres Manuel Lopez Obrador, popularly known as AMLO, has said there will be no fracking during his six-year term, igniting a debate about Mexico’s energy security amid rising gas consumption. But mixed signals on the issue have emerged from elsewhere in the government.

So what is all the fuss about? Saying no to fracking will mean leaving more than half of Mexico’s total natural gas reserves in the ground. This could be risky for Mexico, since the country’s natural gas production has fallen dramatically in recent years, descending to 2.6-2.7 Bcf/d in 2018 from a historical high of 5.1 Bcf/d in 2010, according to S&P Global Platts Analytics.

The decline in production coincided with rising domestic gas consumption off the back of growing gas-fired power generation, new factories, and favorable gas prices in the US. This combination of factors has caused a rapid increase in natural gas imports from the US through pipelines and as LNG.

Mexico’s gas imports now account for more than 70% of  total demand. Pipeline flows amounted to around 4.2-4.5 Bcf/d in 2018, but insufficient pipeline infrastructure amid surging demand has led Mexico to become the second-largest buyer of US LNG, taking  around 19% of the overall LNG exports from the country.

This growing reliance on imported natural gas from the US  is fueling a debate on self-sufficiency goals, and energy security. Mexico is one of the few countries in the world that depend on a single other state for gas imports. That leaves its energy supply heavily exposed to US export strategy. What would happen if the US decided to liquefy more of its natural gas and sell it to other countries that pay more than Mexico?

Fracking could yield significant domestic gas output, alleviating the country’s dependence on natural gas imports. The technique dramatically altered the US energy balance, taking it from a country heavily reliant on the Middle East for its energy needs, to an oil and gas powerhouse. Oil production in 2018 reached around 11 billion b/d, and natural gas production reached 16.86 Tcf in 2017, a 39% increase over the last decade, according to the US Energy Information Administration. Furthermore, the US hydrocarbon bonanza has helped reduce energy prices, saving consumers billions of dollars and spurring economic growth.

In Mexico, fracking has been used for more than half a century, and has been applied to about one in five conventional oil and gas wells, according to former energy secretary, Pedro Joaquin Coldwell. This year, there were plans to start applying the technique in unconventional basins. However, AMLO cancelled a bidding round scheduled for February 2019, which involved nine unconventional onshore blocks.

Without the use of fracking for shale gas extraction, hydrocarbon production will depend on the country's conventional basins. According to the National Hydrocarbons Commission (CNH), more than 50% of Mexico’s gas reserves are in non-conventional resources, and the only way to extract them is by hydraulic fracturing.

Furthermore, Mexico ranks sixth worldwide in volume of unconventional resources. It is estimated that the hydrocarbons contained in shale across all the oil provinces of the country are equivalent to 4.1 times the total historical production of oil and gas of the mega deposit Cantarell, according to Coldwell.

But despite AMLO’s blunt fracking ban, there is a twist: Pemex, the state oil and gas company, contemplates investing in fracking in its 2019 budget, devoting about Mexican Peso 3.8 billion to evaluating multiple areas with oil and shale gas. Additionally, the Energy Secretary, Rocio Nahle, mentioned in early 2019 that this government will use fracking, though she was careful to emphasize that she was not advocating a free-for-all. Strict conditions would apply, she said, including the use of the most modern and environmentally-friendly technology.

Furthermore, in February, CNH approved Pemex’s plan to test shale potential in up to eight exploratory natural gas wells in northwest Veracruz. This suggests the new administration has no clear position on fracking, and it is watching to see what happens with the exploratory wells to inform its next steps.

Politics aside, there are other obstacles to producing shale gas in Mexico. Firstly, there are the environmental concerns about water use, air and groundwater pollution and earthquakes that have drawn opposition to fracking in Mexico just as they have in other countries including the US.

There are also challenges more specific to Mexico, of land holding and mineral rights; a lack of knowledge on unconventional resource geology; a small service industry; a poor regulatory framework; lack of pipelines; and security issues.

Meanwhile, given the efficiency and abundance of US shale gas plays, and the resulting low prices, Mexico faces stiff competition in its bid to develop domestic resources. Given a green light for fracking, would Mexico be able to emulate US efficiency? To promote the production of natural gas in unconventional reservoirs, at least in early stages, the government would need to implement a comprehensive program including incentives and tax breaks, as was done in the US in the 1980s. 

To frack or not to frack, is the dilemma that lingers. Either continue relying on the US to meet Mexico’s natural gas demand and let go of the country’s vast shale reserves, or start the exploitation of these deposits to attempt to reverse the significant fall of conventional deposits.

All oil and gas activities carry a risk, and what Mexico needs is to tighten regulation in all processes, not only for fracking, but also for traditional extraction, in order to reduce any possibility of damage to the environment. And before allowing or prohibiting fracking, there should be a deeper analysis and discussion that covers not only gas and oil output, but also the impact it might have on the petrochemical and electricity industry, employment, and national security.