Mexico Can Benefit by Tapping into its Shale Formations

Mexico has a tremendous opportunity available to grow the average income, create hundreds of thousands of new jobs and accelerate the building of a middle class – and all that is required is removing the current barrier to capital investment.

Matt Mackowiak1

Let us explain. The Eagle Ford shale formation in Texas produces approximately 2 billion cubic feet of natural gas and more than 500,000 barrels of oil per day. Geologically, the shale formation starts from south and west of Dallas stretching to Laredo in south Texas, fanning out into a wider footprint the closer it gets to the U.S. -Mexico border. The Eagle Ford shale in Mexico – and other similar formations – is even more promising than the Eagle Ford in Texas.

Of course, it will take significant investment and expertise to develop shale formations in Mexico. Where will that capital and technical expertise come from? That will depend on the incentives provided to investors by the Mexican government.

How promising is shale oil and gas south of the Rio Grande? We believe Mexico could receive – at the least – $1 trillion in incremental government revenue from operators who develop its shale resources.

The U.S. Energy Information Agency (EIA) estimates that total shale gas (proven reserves) in Mexico is 32 times what is in the Texas portion of the Eagle Ford shale. At only 90 percent of this estimate, Mexico’s proven natural gas reserves would be worth $2.4 trillion (at the low end of today’s prices). PEMEX, the state oil company of Mexico, says only half the EIA estimate is recoverable, but it has been talking down Mexico’s shale prospects for years in favor of its shallow-water offshore oil fields, which are undeniably immense.

Now, let’s consider oil. For our calculations, we assume shale formations in Mexico have at least as much shale oil as does the Eagle Ford in Texas: 3.4 billion barrels. Such a volume would be worth $272 billion. Throwing into our calculation just 1.25 billion barrels of natural gas liquids, our conservative estimate for total economic value of Mexico’s shale formations comes to $2.72 trillion.

By adopting the same severance tax and royalty interest structures that exist in Texas, Mexico would have oil and gas operators pay a 25 percent royalty fee to the government, which owns all mineral rights in the country, plus a 7.5 percent severance tax on natural gas, a similar 4.6 percent tax on oil and natural gas liquids, and an overall 4 percent ad valorem tax to local governments, most of which would go to school and local road construction.

By applying these severance taxes and royalty interest payments exclusively to the extraction of hydrocarbons from its shale formations, Mexico would receive $1 trillion in new government revenue on the production of $2.72 trillion worth of resources. Such a cash infusion to the Mexican public sector would be a boon to Mexico’s schools, infrastructure and public universities. Today, Mexico’s federal annual budget is a little more than $300 billion, about 40 percent of which comes from PEMEX.

A plan such as this would raise average income ($16,000 in Mexico) today, help grow the middle class and create hundreds of thousands of jobs for decades and improve North American economic security, decreasing the inflow of illegal immigrants from our southern border. Capital investment and increased energy production in Mexico would open up a tremendous market for U.S. and Texas-based energy producers, many of whom are already operating on the U.S. portion of the Eagle Ford shale. Downstream refining opportunities in Texas would also increase.

For Mexico, this will not happen overnight. The trillion dollars in added tax revenue will take years, but the upside warrants a longer time horizon. Plus, the economic growth associated with the development of its shale resources will give Mexico significantly more revenue, none of which is calculated in our trillion-dollar estimate.

Mexico will need an unprecedented amount of investment capital to develop its shale resources, no matter the source. To do nothing, Mexico runs the risk of leaving a trillion dollars in tax revenue – and an even larger amount of personal income for its citizens – on the table.

Also see,

Dream on, Liberals — Texas to Remain Red for a Long Time

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