Global Shale Gas Potential – Mexico and Argentina

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Green, Macroeconomics

You would think the discovery of large — and I mean huge — gas reserves would be a major boon for any country. Just look at the transformational impact the US shale gas discoveries have had on the US energy landscape, not only allowing the generation of cheap and relatively low GHG electricity, but also allowing the US to double exports of higher value Liquefied Natural Gas (LNG) to Asian markets. The US is not alone in having shale gas and oil reserves, yet in some other markets the challenges almost appear to outweigh the possibilities.

Mexico’s Got Potential – And Some Roadblocks

Mexico’s national oil and gas firm, Pemex, began producing shale gas from its Emergente 1 well, in the township of Hidalgo, Coahuila, this year. Although the well is exploratory, and produces only 2.9 million cubic feet per day of gas, it is potentially the first of many aimed at realizing the development of Mexico’s vast reserves. The country has only 12 trillion cubic feet of natural gas reserves, but according to an Economist Intelligence Unit report, the US Energy Information Administration (EIA) estimates Mexico has the world’s fourth-largest deposits of shale gas, after China, the US and Argentina.

With around 681 trillion cubic feet of shale gas waiting to be released in a number of locations (particularly in eastern Mexico), what exactly is the problem, you may say; surely, this is a godsend! Well, yes, except for a few major challenges.

First, the cost and complexity of development. It is estimated the cost could be up to $80 billion and will require the drilling of thousands of wells, in remote areas with little or no infrastructure to transport the gas to users. Mexico has a low rate of natural gas consumption with large areas of the west completely without any kind of grid distribution. It is currently more economical to import low-priced gas from across the US border.

The development of liquefaction facilities to divert the gas for LNG exports has some potential, but at huge investment costs in a global market which will increasingly be awash with US and Canadian producers looking to export their shale gas LNG. Cash-strapped Mexico will have to partner with the private sector in order to realize the potential of these reserves and come up with some imaginative solutions to use the resources wisely.

Don’t Cry For LNG, Argentina

A little farther south in Argentina, the potential seems even larger (at least on paper.) A recent report by the US EIA shows that the country has 774 trillion cubic feet of shale gas reserves, the third-largest in the world behind China and the US. The challenges for Argentina are twofold.

First, oil and gas prices in Argentina are regulated, with the authorities keeping them so artificially low that in spite of significant reserves, the country imports gas from Bolivia. Oil prices, too, are kept artificially low. The basket price for Neuquén crude averaged around US $58/barrel in the first three months of 2011, about half the international level, discouraging investment in developing new sources. Shale gas and oil wells cost about three times as much as conventional oil and gas wells.

The second problem is atrocious labor relations that have resulted in repeated strikes among oil workers. But with unions holding significant political clout and the government more interested in short-term political gain than long term economic development, Argentina’s shale oil and gas reserves face strong headwinds to be developed comprehensively anytime soon.

Check for Part Two of this post tomorrow, covering Europe and China’s shale oil and gas markets.

–Stuart Burns

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