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Mexico clears way for foreign investors in shale oil drilling

| Sunday, April 20, 2014, 12:01 a.m.

BATIAL-1 WELL, Mexico — The geological marvel known to Texas oilmen as the Eagle Ford Shale Play is buried deep underground, but at night you can see its outline from space in a twinkling arc that sweeps south of San Antonio toward the Rio Grande.

The Eagle Ford shale formation is believed to continue hundreds of miles into Mexico, where it is known as the Burgos Basin. While more than 5,400 wells have been sunk on the Texas side since 2008, Mexico has attempted fewer than 25.

A landmark energy bill approved by Mexico's Congress in December is aimed at altering this disparity. It has opened the country's oil industry to private and foreign investment for the first time in 75 years, with the goal of bringing in new technology, expertise and a risk-taking culture long missing at the state oil monopoly, Pemex.

Lawmakers will be hashing out the nuts and bolts of the law over the coming weeks, but expectations are that American companies will be able to bid on oil and gas projects by the end of this year, beckoning the fracking crews across the border into some of Mexico's most violent areas.

“The United States and Canada are exploiting their shale resources on a massive scale, and we're still in the prospecting stage,” said Gustavo Hernandez, director of exploration and production at Pemex. “But we believe the volumes we have are enormous.”

Pemex estimates that Mexico's shale formations hold the energy equivalent of 60 billion barrels of oil, an amount exceeding the entire volume the country has pumped out by conventional means since 1904.

Natural gas is thought to be especially plentiful. In a 2013 survey, the U.S. Energy Information Administration ranked Mexico's reserves of shale gas as the world's sixth-largest after China, Argentina, Algeria, the United States and Canada.

A glut of gas production in Texas has pushed prices so low that drilling for gas alone is no longer profitable, and much of it is simply burned off, or “flared,” as it comes out of the ground.

It's not clear whether the American contractors who have poured into south Texas would be willing to take their expertise into Mexico if the money is good enough - or the Eagle Ford ever slows down.

The biggest interest in Mexico's energy overhaul is expected to come from large global companies such as Exxon Mobil and Shell that have the capital and equipment to hunt the most lucrative prize: huge oil fields deep under the Gulf of Mexico.

Developing northern Mexico's shale beds could take much longer.

The reason, experts say, is that fracking is a completely different industry, dominated by smaller, independent companies and nimble contractors that can provide specialized equipment and services at precise moments in the drilling process.

Mexico has few of these things, and the willingness of foreign companies to test their fortunes in the wilds of its northern borderlands remains unknown. The region is almost totally lacking in the pipelines, highways and other infrastructure that spread across south Texas, and Mexico's shale beds sit beneath some of the most lawless parts of the country.

Then there is the problem of water. Fracking requires huge amounts of it, and northern Mexico is in the grips of a protracted drought.

Along a flat, baked expanse of scrubland south of the Mexican border city of Reynosa, Pemex engineers work alongside a fracking crew of 50 men in bright red roughneck suits that resemble baby pajamas, emblazoned with the logo of the global oil-field service firm Weatherford International.

The company and other international firms have been working for years in Mexico under the old model, earning a set fee from Pemex rather than a percentage of production. Once the new law takes effect, foreign operators will finally get their wish — a chance to obtain licenses to drill on their own.

Like many of the well sites in this part of northern Mexico, the Batial-1 is in Zeta country. The cartel specializes in kidnapping and extortion, and when Pemex geologists and survey crews need to look for new well sites, they often travel in the company of a military escort.

A group of Weatherford employees came under fire at their hotel in the nearby town of Ciudad Mier this month during a cartel gun battle, though none of the workers were hit.

While big oil companies working in countries such as Nigeria and Iraq are used to dealing with such security threats, the smaller operators that specialize in fracking are not.

“You can hire private security to keep workers safe, but all of that implies cost and slows down business,” said Duncan Wood, an energy expert and the director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

“And if a company has a shipment of supplies hijacked, that's lost time,” Wood said. “It's something they wouldn't have to deal with in Texas.”

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