Unconventional oil & gas in Mexico – Can Mexico replicate US Eagle Ford success?

Potential of the Eagle Ford in Mexico-Early Findings

The world is well aware of the unconventional oil and gas renaissance in North America and its implications. And… its questions: can this unconventional oil and gas phenomenon be replicated elsewhere in the world? What are the challenges that must be overcome for global tight oil and shale gas to impact energy supply? In our global tight oil study, IHS did a great deal of analytical work using the North America plays as analogs for potential plays elsewhere in the world. With information gaps, analogs play a critical role in understanding production potential elsewhere.

Mexico not only has analogs to review to evaluate shale gas and tight oil potential in the country, it has the actual formation that has become the largest producing tight oil play in the US, the Eagle Ford. Early results from Eagle Ford wells in northern Mexico as reported by the national oil company Pemex have left key questions on the play's potential there largely unanswered.

The Rocks

There is little doubt that Mexico has a large shale gas/tight oil resource base. The Eagle Ford's deposition and its carbonate components are most similar to the formation in Texas in the extension of the Maverick Basin/Rio Grande Embayment south of the Rio Grande and in the Burro-Picachos Basin. In Mexico, shale zones are less continuous and more structurally disrupted than in the US. To the east, the Burgos Basin is faulted and tilted but fairly simple structurally. The Burgos will be a drilling target. To the southwest, the Sabinas Basin also contains the Eagle Ford but as a result of the tectonic folding and faulting complexities created by the Sierra Madre Oriental Uplift, the formation changes from the US fairway "carpet" deposition to broken up, complicated blocks, more steeply dipping than in the US (see Fig 1 map).

Recent Well Results

Pemex released information on several wells the company drilled in the Eagle Ford and also in the La Pimienta and La Casita formations, Haynesville equivalents in northern Mexico. The map shows the location of these wells. The Eagle Ford wells are in the Maverick Basin, just south of the Rio Grande. Pemex has extended the known oil, wet gas and dry gas windows from the US into Mexico. In the oil window, no details have been released from the Nomada 1 well other than its total depth at 2850 meters with a productive interval from 2737-2806 meters. The Montañes 1 well produced 0.11 MMcfd with 19 barrels of condensate on an initial potential test.

In the wet gas window initial potential rates, the Habano 1 produced 2.77 MMcfd with 27 barrels of condensate, and the Emergente 1 produced 2.86 MMcfd with no condensate reported. Two Pimienta wells in the Burgos Basin report higher initial potential flows and may signal better commercial potential than the Eagle Ford. The highest initial rate reported for any of these wells is at the Arbolero 1 to the south. The well flowed 3.18 MMcf with no condensate from the La Pimienta zone (Haynesville).

These gas volumes are low and the condensate recoveries are extremely low compared to US wells. Well costs vary from $7 to 10$ million or even more. These results mean the economic viability of the Eagle Ford in Mexico remains in question. A liquids rich trend has not yet been defined in initial Mexico Eagle Ford wells. Average performance of Mexico Eagle Ford wells is below the breakeven threshold based on produced volumes and the fact that Mexican gas prices are tied to US prices-currently hovering around $4.00 per MMbtu.

Figure 1: Eagle Ford and La Pimienta wells with oil, wet gas and dry gas windows assumptions. Source: emex

US Eagle Ford Clues

The primary sweet spot for the Eagle Ford in the US is the liquid rich fairway in the central part of the play (see Figure 2). IHS North America Supply Analytics has divided the Eagle Ford well performance into quintiles with the best preforming wells in dark red. Well quality degrades and disperses in the western part of the play as you get nearer the Rio Grande River, and in fact, the dry gas phase of the Eagle Ford West is not commercial at current gas prices. Even though there is no clearly defined sweet spot in the US Eagle Ford West area, the volatile oil and wet gas trends are commercial at current oil and gas prices. The economics for dry gas plays only work with high volume producers like wells in the Haynesville and Marcellus plays and where direct access to markets is available. Tight cost controls and operational excellence are also critical factors for profitability in the US. Most importantly, expertise is required to understand the plumbing of unconventional resource plays and to develop the best practices for wellbore placement and multi-stage completions.

Figure 2: US Eagle Ford Well Production Performance. Source: IHS North America Supply Analytics

The importance of expertise is underscored by recent developments of the Eagle Ford East play in Texas. Until recently, the eastern portion of the state had seen little Eagle Ford success, despite the play dominating exploration and development activity in South Texas. Halcón Resources has been developing this portion of the play with new Eagle Ford wells topping 1,000 barrels of oil per day on initial potential tests. Halcón's entry into what had been such a poorly performing part of the Eagle Ford trend shows the impact of an operator that has learned the best techniques to produce tight reservoirs. Many of the people in Halcón come from Petrohawk, the key company in the Eagle Ford's original discovery and producing potential. (See Eagle Ford unconventional oil success extends into eastern Texas in Aguila Vado field.)

La Reforma Solution

Pemex, for a variety of reasons including its position as the sole operator of the oil industry in Mexico, does not yet possess the expertise to fully evaluate the Eagle Ford's potential. The Mexican constitution of 1917 declared that the government, and not oil companies, would own the oil reserves below ground. In 1938, President Lazaro Cardenas of the PRI party, which then had a total monopoly on political power, declared the foreign oil companies "in rebellion" and on March 18, 1938, he nationalized them altogether. Today, facing declines in conventional oil and gas production with serious impacts on the country's economy, Pemex can no longer go it alone. Bringing in foreign companies to work side by side with Pemex would provide needed expertise and help reduce inefficiencies in Pemex operations.

In November, Mexico's Senate approved an energy bill, La Reforma, which permits foreign oil and gas companies to drill for oil for the first time since 1938. Mexico's states have since ratified the legislation to modify the country's constitution. These developments will bring US experts for resource development to Mexico. The next rounds of proposed delineation wells in Mexico's Eagle Ford and Pimienta plays will be critical to demonstrate commerciality. Pemex has put shale exploration and expansion on hold pending the implementation of the reform's details.

Bringing in the experts and technology transfer are certainly key components, but Mexico also must establish adequate horizontal rigs, crews, services, supply chain and downstream infrastructure to support an increase of 200 unconventional wells per year to meet Pemex's shale production volume goals. Developing these new resources would take tens and tens of billions of dollars that Pemex does not have and will not have. For economic success it will be important for Mexico to establish a competitive environment that will attract participation by several experienced US unconventional operators who can be confident that their investment dollars will provide an economic return as they answer the question of the Eagle Ford's potential.

Posted 23 January 2014

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.