Shale-development ban in Mexico could have ‘adverse consequences,’ Baker Institute experts say

David Ruth
713-348-6327
david@rice.edu

Jeff Falk
713-348-6775
jfalk@rice.edu

Shale-development ban in Mexico could have ‘adverse consequences,’ Baker Institute experts say

HOUSTON – (May 8, 2019) – Newly inaugurated Mexican President Andrés Manuel López Obrador has repeatedly declared — as he did when he was a candidate — that fracking would be banned during his tenure. That action could have “adverse consequences,” according to experts in the Mexico Center and Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

The experts – Adrian Duhalt, Anna Mikulska and Michael Maher – outline their insights in a new issue brief, “A Proposed Shale Ban in Mexico.” They wrote that above-the-ground factors such as limited access to water and a lack of infrastructure are likely to stall development whether or not shale gas development is banned in Mexico, but “in the long run, a ban on shale — even if it only stands for the six years of López Obrador’s presidency — may have adverse consequences in the absence of an effective scheme to diversify Mexico’s gas supply sources.”

“This is because beyond retarding new production, a ban would shelve the establishment of regulatory and legal frameworks that could encourage shale development – for example, exploratory drilling, pipelines and other infrastructure, and the creation of a local workforce and a base for equipment and supplies,” the authors wrote. “A ban would also impede foreign and domestic investment and innovation, which are both central to shale’s success in the United States.”

The ban discussion comes as Mexico’s natural gas industry is at a crossroads, the authors said. While domestic production has been on a downhill trajectory for almost a decade now and consumption has expanded, the resulting gap has been covered by ever-increasing imports. In 2018, 71% of the natural gas available in Mexico came from other countries.

As a result, López Obrador sees boosting domestic natural gas production as the backbone of his policy agenda to limit Mexico’s import dependency and strengthen energy sovereignty, the authors said.

“But while these goals are not controversial per se, the policy direction of Mexico’s president casts doubt on whether the proposed agenda can be realized,” the authors wrote. “Two main factors lend themselves very well to advancing Mexico’s strategy of increasing domestic natural gas production: the large unconventional (shale) resources Mexico is estimated to hold and the ongoing comprehensive reform that opened Mexico’s oil and gas sector to private investment.

“However, contradictory statements about whether shale development in Mexico should be banned and whether the country should postpone oil and gas auctions have raised a great deal of uncertainty about the future of these two factors,” they wrote. “This has made energy pundits wonder what would be an alternative route consistent with López Obrador’s aim of energy sovereignty.”

For now, Mexico will continue to focus its exploration on shallow waters and to rely on the U.S. for natural gas, the authors said.

“However, in the long term, a ban means that Mexico would miss the opportunity to start implementing the regulatory and royalty/taxing regimes that would support the development of shale resources, which are estimated to be significantly more abundant than the country’s conventional energy resources,” they wrote.

“As a consequence, Mexico is likely to deepen its dependency on imports,” they concluded. “And ironically, much of those imports will come from shale. Also in the long term, closing the door to shale development deprives Mexico of the potential economic benefits of this unconventional energy resource, including increased employment and investment. In addition, domestically available shale gas could provide cheaper feedstock for power generation, chemicals including nitrogen fertilizers, or refining.”

The authors emphasized that even if the shale ban is short-lived, it will postpone institutional capacity-building and industrial development.

“In addition, Mexico’s import dependency may grow through the build-up of long-term infrastructure, such as cross-border pipelines,” they wrote. “Once in place, these are likely to discourage domestic production, which is already bound to be challenged. The ones to profit will be the shale producers who work in the U.S. section of the Eagle Ford and Permian basins and are happy to dispatch the gas associated with their oil production to Mexico.”

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Follow the Baker Institute Mexico Center via Twitter @BakerMexicoCtr.

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Related materials:

Issue brief: www.bakerinstitute.org/media/files/files/6d260d73/bi-brief-050319-mex-shaleban.pdf

Duhalt biography: www.bakerinstitute.org/experts/adrian-duhalt

Maher biography: www.bakerinstitute.org/experts/michael-d-maher

Mikulska biography: www.bakerinstitute.org/experts/anna-mikulska

Founded in 1993, Rice University’s Baker Institute ranks among the top three university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.