Mexico Launches Bold Plan to Revive Shale Oil and Gas Production

Mexico is initiating a significant shift in its energy policy, focusing on shale resource development to revitalize the fortunes of the state-owned oil and gas company Pemex. The move comes as the company grapples with declining production and mounting debts. Under the leadership of President Claudia Sheinbaum, the government is now willing to embrace fracking, which had been largely banned under the previous administration of Andrés Manuel López Obrador.

In early August, Pemex and the Mexican government announced a ten-year strategic plan designed to reverse years of declining oil and gas production by tapping into unconventional resources. This policy shift marks a notable departure from López Obrador’s previous stance, which included canceling contracts for shale exploration and ruling out fracking entirely.

The new strategic plan aims to enhance energy sovereignty while attracting private investment, contingent on alignment with national interests. Key components of the initiative include financial instruments to address Pemex’s substantial debt, as well as the establishment of an Investment Fund to support exploration and production efforts. The government estimates that the Pimienta and Eagle Ford shale formations could yield over 250,000 barrels per day of liquids and 500 million cubic feet per day of gas production by the early 2030s.

Revitalizing Shale Production

Historically, efforts to develop Mexico’s shale resources have met with mixed success. In the late 2010s, former President Enrique Peña Nieto sought to encourage private investment in shale basins, particularly in the Burgos Basin. However, López Obrador’s administration reversed these initiatives, leading to a stagnation in production.

Now, under Sheinbaum’s leadership, Pemex is poised to embark on a renewed exploration of these resources. Analysts from Wood Mackenzie highlight the potential of the Pimienta and Eagle Ford formations, which are recognized for their favorable geology. Each formation is capable of producing both oil and gas, offering a dual advantage for Mexico’s energy landscape.

Despite the promising outlook, significant challenges remain in securing the necessary investment to exploit these resources effectively. “The strategy needs major capital investment and international operators working under profitable contract terms,” said Ismael Hernandez, a Research Associate at Wood Mackenzie.

The Mexican government acknowledges that it must create attractive conditions for international operators to boost confidence in the shale sector. The establishment of the Investment Fund for Pemex is a step toward this goal, as it aims to alleviate supplier obligations and finance upstream investments. Furthermore, the ratings agency Moody’s recently placed Pemex ratings under review for a potential upgrade, reflecting optimism regarding the new strategic plan.

Challenges and Opportunities Ahead

While the intention to boost shale production is clear, practical implementation will require overcoming several hurdles. No projects have yet launched under the new partnership model, which involves mixed contracts where Pemex retains a minimum of 40% participation in ventures alongside private operators. The absence of competitive bidding rounds raises transparency concerns regarding the selection process.

Wood Mackenzie’s analysis indicates that to optimize production, many of these projects must commence operations promptly or initiate secondary recovery programs. The Pimienta and Eagle Ford formations could significantly contribute to Pemex’s objectives to reverse output declines and enhance oil and gas production. Nonetheless, the transition to commercial viability will take time, necessitating the development of specialized supply networks and the recruitment of experienced unconventional operators.

In summary, Mexico’s pivot towards shale development signals a potential transformation in its energy strategy. With the right investments and partnerships, the country could harness its substantial shale resources to stabilize Pemex’s financial standing and reinvigorate its energy sector. As the plan rolls out, the international community will be watching closely to see how effectively Mexico can implement this ambitious agenda.