If US politicians are looking to Mexico to fill shortfalls in gas production, they'd better turn somewhere else. Mexico can't fill its own increasing demand, and restrictive laws will keep it from drawing enough foreign investment to fill the supply gap.
Mexico's gas production reached a plateau in 1998 and 1999 at 4.79 Bcf/d and dropped to 4.51 Bcf/d last year, said Dr. Amando Jiménez San Vicente, director general for energy policy in Mexico's Energy Ministry. Meanwhile, gas not associated with oil production has taken a record 28% of the load, and its contribution continues to grow.
Gas demand will climb 120%, or 8.1% a year, from 2000 to 2010, Jiménez said, with 55% of that demand increase aimed at power generation.
In short, Mexico's domestic production will supply only 76% of demand by 2006 and 80% by 2010. That demand will climb to 7.1 Bcf/d by 2006 and to 9 Bcf/d in 2010.
Pipeline capacity from the United States to Mexico, about 1.9 Bcf/d, will grow to 2.9 Bcf/d by 2010. That pipeline isn't full now. Mexico used 292 MMcf/d of imported gas last year, but with a growth rate of 38%, it will use 1.9 Bcf/d by 2006.
The main line of offense is its own expanding exploration program, but a taxing program that places Petróleos Mexicanos (Pemex) at the mercy of politics hampers that system. In 2000, Pemex paid US $31.1 billion in taxes on an operating profit of $29 billion. Each year, the central government doles out operating funds for the company.
The second line of defense will be multiple service contracts (MSCs), or contracts with non-Mexican companies to produce nonassociated gas.
If a company signs an MSC, it can drill wells, build pipelines and manage field operations as a contractor, but it will be paid on the pre-agreed flat rate of the contract. That rate cannot be tied in any way to gas prices or the amount of gas produced. Thus there is no incentive to excel, no incentive to increase production, no incentive to go beyond the strict terms of the contract and every incentive to work that contract as inexpensively as possible.
Pemex Director Raul Munoz Leos said the company wants to award $10 billion worth of contracts for gas in the next decade. Pemex officials have been talking about 10 to 12 properties in the Burgos Basin on the Mexican side of the border with Texas for some time.
Luis Ramirez Corso, head of Pemex exploration and production, said those gas contracts would be awarded according to low bid under 2- to 3-year work programs, and he expected them to add 1 Bcf/d to production by 2006.
The inability to meet rising demand will create higher prices, and Mexico is particularly sensitive to high prices. When gas exports to Mexico rose to $6/MMBtu, demand fell 60%, said Charles Lucas-Clements, president of American operations for the economics and consulting division of IHS Energy. That is a key element. The proposed contracts say the contract operators will be paid if Pemex sells the gas. They don't say what happens to the contractor in the event of a recession or high-price, low-demand situation when Pemex can't sell the gas, he added.
The contractors must put together a work and environment package, and they will be allowed to drill only in designated fields. They may or may not be able to drill stepout wells and deeper zones, Lucas-Clements said.
For that work, the contractor should be able to earn a "reasonable, visible" rate of return. That rate hasn't been set, even though it will be the major factor - along with the latitude of work allowed - in a company's decision about entering the Mexican market.
Under the constitution, Pemex has few choices. If the mood of the country isn't right, the nation will need a crisis to align politics with national need. "The process has to go through its course. They know where they'd like to get to, but there's no way with this setup," he said.
"The way I see it playing out, some will want a foot in the door with the hope of improvement, some will be confident with the risk, and a lot will say, 'No way,'" he added.

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