David Steven Jacoby

Fracking in Mexico: Challenges and Key Success Factors

Fracking in Mexico Blog PicturePemex plans to increase shale activity in the next few years, budgeting over $575m in 2014, highlighting some 200 shale gas opportunities in five geologic provinces in eastern Mexico, and opening up the bidding process for drilling shale fields. It aims to attract as much as $1t in energy investment to exploit Mexico’s shale oil and gas reserves, on the back of the energy sector reform signed by President Enrique Pena Nieto in August 2014.

Based on similarities with Eagle Ford shale in Texas, Mexico’s Eagle Ford shale this is considered to be the country’s top-ranked prospect for shale exploitation. Other basins in Mexico in which drilling has not yet occurred, and where potential is far less certain than the Burgos Basin, include the Sabinas, Tampico, Tuxpan, and Veracruz basins. Pemex (Petróleos Mexicanos), the state-owned oil company, previously identified Tamaulipas, Coahuila and Nuevo Leon, in addition to Chihuahua, as the states where fracking could be used to obtain new energy sources. The other Mexican states officials identified are Puebla, Oaxaca and Veracruz, and Mexico’s technically recoverable shale gas reserves are heavily influenced by the newly discovered Chicuantepec and Burgos.

Shale drilling in Mexico faces many hurdles. Mexico drilled its first shale gas well as recently as 2011, in the Burgos Basin in the North. Drilling was later abandoned by most operators for gas due to low price and high cost. As of February 2013, there were only six productive shale gas and tight oil wells drilled in Mexico (a seventh was abandoned as non-productive). Most of the challenges have to do with infrastructure and technological constraints, and high costs:

  1. Infrastructure constraints: Fracking activities have its own critical pre-requisites and infrastructure is one.  Mexico will need infrastructure such as new roads, rail lines, and rail terminals, and storage units that can hold large amounts of sand, and pipelines that can carry water so that it doesn’t have to be trucked to each site. Each well will require approximately 100 train cars full of sand and 4-5m gallons of water. This is a very large logistical operation.
  2. Technology constraints: Deep-water wells, especially in the Eagle Ford deposits, cut through multiple pancaked layers of oil-soaked rock, and each layer must be fracked to get the most hydrocarbons out, a task that can take a full day to get to the bottom of the well. Halliburton and other oilfield service companies have figured out a way to save time and money by fracking all those layers in one trip down the well, instead of doing each layer separately. This more intense fracking means larger volumes of water, sand, and equipment are needed for greater production. The volumes of inputs needed, especially for these lower tertiary fracks, are huge and the technology required to drill down the multiple layers also need to get more sophisticated. Drilling will not be fruitful without sufficient knowledge of how much sand, water, and chemicals will be required and what will be the best available technology to undertake complex shale drilling to optimize cost.
  3. High cost: “Efficiency is difficult to achieve, quality control is difficult, and corruption increases costs”, explains Garry Ward, expert on oilfield investing.  Drillers pay more than in the US, but do not receive the same quality of chemicals and equipment, which can make all the difference between a good well (profit) and a bad well (loss).  In such a scenario, careless procurement can lead to high cost, poor quality, and losses.

The bottom line is that E&P companies seeking to exploit shale plays in Mexico need expert supply chain strategies to manage their logistics and the cost of purchased materials and services. Boston Strategies International has been in supply chain management for oil and gas, and has supported the planning of every aspect of drilling, completion, production, and transportation, as well as downstream activities.

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