The relative success of Mexico's efforts to open to outside investment its Burgos basin later this year will serve as a "litmus test" for that country's energy strategy, according to a recent study released by energy research firm Cambridge Energy Research Associates, Cambridge, Mass.
"The Burgos (basin) is a cornerstone of Mexico's energy strategy, and the outcome of development efforts there over the next several years will affect Mexico's future gas supply strategy and drive investment decisions," said Gregory Smith, CERA director of oil industry activities, and Alejandro Gonzales, CERA associate, Latin America, the study's authors.
Mexican state oil firm Petroleos Mexicanos has "ambitious plans for its upstream operations, and the performance of the Burgos has broad implications both within Mexico and for potential foreign investors," they said.
The basin
The Burgos basin—a broad expanse of land along the northern Mexico-Texas border—first saw drilling in 1945. In the last 5 years, Pemex has invested more than $3 billion in the basin, CERA noted, and in the last 8 years, the area has grown to become one of "critical importance" in Pemex's portfolio of assets.
"The boost in significance is due to a growing awareness of a potential gas shortage in Mexico and the recognition that large amounts of this nonassociated gas basin's reserves had been left in the ground by past production practices," CERA said.
Since 1999, however, the basin's growth in production capacity has virtually stalled, according to CERA, which noted that output has reached 0.99 bcfd of gas in 2001 from 0.97 bcfd of gas in 1999.
Interest on the rise
As of late, interest in the basin from exploration and production companies outside Mexico has been on the rise, particularly following Mexico's announcement that it would open up parts of the basin to outside investment under its new Multiple Service Contract (MSC) arrangements, which are expected to be finalized before yearend, CERA said.
"The opportunity to finally participate in Mexico's upstream is something many companies are anxious to examine closely," the CERA authors stated.
CERA noted four reasons why the opening of the basin will play such a large part in the county's energy strategy:
The realization of Pemex's plan to increase production to 6.7 bcfd of gas by 2006 from 4.5 bcfd of gas presently relies "heavily" on nonassociated gas production from the Burgos basin.
With Mexico's domestic demand for gas expected to reach 5.5 bcfd by 2006, its future gas supply strategy hinges on the outcome of development efforts in the Burgos basin. If attempts fail, the country will likely be forced to seek out alternative sources of gas to meet its anticipated demand, CERA said, adding, "This will burden Mexico with the need to make further near-to-midterm investments for additional import capacity such as cross-border pipelines and LNG importing facilities, and for development of other domestic gas discoveries like those recently announced in the Veracruz area."
Development projects in the Burgos basin will serve as a test for Pemex's MSC agreements. "Success here with the initial offering may encourage Pemex to use the MSCs in other areas in the future," CERA noted.
Development of Burgos gas allows an opportunity for outside E&P firms to penetrate Mexico's upstream sector. "How well the basin may perform and whether acceptable profitability can be achieved under the MSC agreements are critical questions," CERA said.
"(Our) view is that Pemex's goal is ambitious indeed, and that achieving the desired level of gas productive capacity within the time frame planned will be a nearly insurmountable challenge," the report said. "If the basin continues to perform consistent with trends of the last 2 years, increasing productive capacity significantly by 2006 will require unprecedented levels of capital spending to rapidly grow both capacity and the gas reserve base to support it," CERA said.
