Mexico’s new chapter in natural gas

16th Mexican Energy Conference November 13-14, 2012

Houston, Texas

Dr. Edgar Rangel Germán

2

Agenda

• Current supply and demand situation of natural gas in Mexico

• Developing Mexico’s gas resources and the implications of new gas discoveries

• The role of shale gas

• Infrastructure challenges

• “Gasification of México”

• Can Mexico become an energy hub?

• Final remarks

3

Current supply and demand situation of natural gas in Mexico

4

Background

• From some 7 to 8 trillion barrels of conventional oil, 3.3 trillion barrels are considered technically recoverable, and 1 trillion have already been produced.

• Seven trillion of non-conventional (heavy oil, bitumen, oil sands, and oil shales). Estimated technically recoverable quantities vary from 1 trillion to 3 trillion barrels; roughly 0.01 trillion barrels have been produced to date.

Source: IEA

• From some 6 trillion barrels of conventional oil, 3.3 trillion barrels are considered technically recoverable, from these, 1 trillion have already been produced.

• In addition, there are 6 trillion boe of conventional and non-conventional gas.

Additional supply required:

≈5,000 mmpcd

Estimated gas demand for

2025

11,063 mmpcd

2010 Production

5,916 mmpcd

Source: Prospective natural gas market 2010-2025 (SENER)

In the 2010 – 2025 period, SENER forecasts an average annual growth of at least

2.4%, this figure is even greater than the worldwide average estimated by the

Energy Information Administration, 2.0%.

Demand forecast 2025

(mmcfd)

Historical Forecast

MM

CFD

Natural Gas Demand forecast

6

Other Sectors

Natural Gas production

7

Natural Gas production (mmcfpd)

Natural Gas by Asset (mmcfpd)

Natural Gas production by type (mmcfpd)

Source. CNH

Gas Natural Supply

In the short term, imports will help to meet the demand of our growing economy.

Producción gas natural por activos integrales, includes Nitrogen

(mmcfd) Fuente: Sistema de Información Energética

con información de Petróleos Mexicanos.

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Macuspana Muspac

Burgos

Cantarell

Samaria-Luna Abkatún-Pol Chuc

Bellota Jujo

Imports

(mm

cfd

)

2008 2009 2010 2011 2012

447 422 536 791 794

Imports mmcfd

8

CAPEX OPEX

mmp mmp

Burgos 6,070 221,417 44,971 2011-2025

Macuspana 297 5,914 6,207 2011-2042

Veracruz 1,008 24,952 10,254 2011-2025

Lankahuasa 182 5,101 1,409 2011-2025

Gas del terciario 276 6,867 1,346 2011-2034

Lakach 845 24,808 4,359 2011-2023

PeriodGas production

mmmpc

Natural Gas Oil and gas projects

(Associated gas) Gas projects

(non- associated gas)

9

2012 Gas Production (Jan-Sept)

Trends in Gas Production

Source: BP Statistical Review of World Energy, 2012

mm

cfd

mm

cfd

10

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US Canada Russian Federation

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Trinidad & Tobago Argentina Bolivia Peru

Big players

Latin America

Trends in Gas Production

11

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

China Indonesia Malaysia Nigeria

mm

cfd

0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Iran Oatar Saudi Arabia United Arab Emirates

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Norway Turkmenistan United Kingdom

mm

cfd

mm

cfd

Europe Middle East

Asia

Source: BP Statistical Review of World Energy, 2012

2004 2005 2006 2007 2008 2009 2010 2011 2012

20,740 20,433 19,957 18,957 18,077 17,650 16,815 17,316 17,224

20,474 20,703 20,087 20,486 20,562 20,111 20,694 20,905 17,612

22,679 22,743 22,311 23,602 22,720 22,614 23,727 23,044 26,804

Proved Probable Possible

Historical Gas Reserves

3P 63,893 63,879 62,355 63,045 61,359 60,374 61,236 61,266 61,641

Source: CNH 12

Natural Gas Reserves 2012

1P

2P

13

Natural Gas Reserves

3P

14

Reserves-Production Ratio

3P 2P 1P

32

19

10

33

20

11

26

14

7

Reserves-Production Ratio Mexico (years)

PCE

Aceite

Gas

Marina Noreste Marina Suroeste Norte Sur

9

33

41

14

7

18 18

13

6

9

5

10

Reserves-Production Ratio (years)

3P

2P

1P

These metrics must drive the Energy Policy design

Developing Mexico’s gas resources and the implications of new gas discoveries

16

New Projects

2011 Discoveries

Source: CNH 17

Basin Field Well Type 3P mmmpc

Burgos 56.1

Nejo Lindero-1 Wet gas 17.05

Bragado Bragado-1 Wet gas 13.75

Bocaxa Bocaxa-1 Wet gas 25.3

Sabinas 118.25

Emergente Emergente-1 Dry gas 118.25

Veracruz 197.45

Chancarro Chancarro-1 Dry gas 27.5

Gasífero Gasífero-1 Black oil and gas

169.4

Sureste 7664.8

Pareto Pareto-1 Light oil 614.35

Tokal Tokal-1 Light oil 68.75

Xanab Xanab-101 Light oil 189.75

Tsimin Tsimin-1DL Light oil 149.05

Kab Kinbe-1 Light oil 1284.8

Piklis Piklis-1 Dry gas 994.95

Nen Nen-1 Dry gas 448.25

Hokchi Hokchi-101 Black oil 512.6

Sihil Sihil-8 Black oil 704.55

Kayab Kayab-1 Black oil 2697.75

Total 8036.05

18

The role of Shale Gas

U.S. Natural Gas Supply, 1990-2035 (US dry gas trillion cubic feet per year)

19

Investment in Shale Gas

20

Select basins, 2009 (trillion cubic feet)

Proved Natural Gas Reserves

Technically Recoverable Shale Gas Resources

Source: US Energy Information Administration

Shale Gas Resources

-

200

400

600

800

1,000

1,200

1,400

Ch

ina

Un

ite

dSt

ate

s

Arg

en

tin

a

Me

xico

Can

ada

Ch

ile

Bo

livia

Co

lom

bia

Ve

ne

zue

la

107

273

13 12 62 4 27 4

179

1,275

862 774

681

388

64 48 19 11

2.93 20.60 1.46 1.77 5.63

0.05

0.45

0.37 0.65

3.1 22.8 1.5 2.2 3.0

0.1

0.1

0.3 0.7

Production Consumption

Shale Gas

Well Target Total depth

(m)

End of

completion

Producing

interval (m)

Drilling

days

Completion

days

Result

EMERGENTE 1 Cretácico 4,071 17-feb-11 3,618-3,670 78 50 Commercial producer of dry gas

PERCUTOR 1 Terciario 3,436 30-mar-12 3,330-3,390 45 75 Commercial producer of dry gas

MONTAÑES 1 Cretácico 3,200 30-abr-12 3,155-3,080 65 191 Non commercial producer of gas and condensate

HABANO 1 Cretácico 3,770 15-abr-12 3,703-3,643 74 44 Commercial producer of gas and condensate

NOMADA 1 Cretácico 2,850 30-jun-12 2,806-2,737 37 215 Non producer

ARBOLERO 1 Jurásico 4,007 07-jul-12 3,878-3,825 100 59 Commercial producer of dry gas

21 Source: Pemex

It makes sense that the Tampico-Misantla basin will

be the best

Shale Gas Strategy

• Non-Conventional Play Study:

K Eagle Ford-Agua Nueva • Drilling of Emergente-1

Confirming Play Eagle Ford continuity from Texas to Mexico

• Completion of Emergente-1 • The first producer well in Mexico. • 81 bcf of 3P certified reserves. • Study of Nonconventional Upper Jurassic

Play La Casita- Pimienta • Montañes Drilling • Use of superficial microseismic in Montañes • Magnetotelluric Test in Montañés-1 • Percutor-1 drilling.

• Drilling of Percutor-1 • Drilling of Habano-1, • Drillling of Arbolero-1, • Completion of Montañés-1 and

Nómada-1 wells. • Initial development studies of

some fields. • Anhelido-1 and Habano-21 drilling • Shale Laboratories (Five Projects)

to evaluate, select and execute new technologies

2010 2011 2012

Source: Pemex 22

SENER estimated Mexico would need to invest more than $10 billion annually for the next 10 years to tap into its shale resources that could double the country's 6 Bcf/d production. 175 wells will be drilled during the next 4 years.

PEMEX will invest 240 million dollars for the exploration of two possible shale gas production fields or unconventional gas, located in the north of the country. The funds come from the Oil Sector Fund Sener-CONACYT and the project would begin this year.

Challenges to developing Shale gas in Mexico

• Technology: Well engineering and reservoir engineering

• Identify sweet spots in the plays.

• How much gas/oil is producible? Where is it?

• Thousands of wells to be drilled, geosteering.

• Water, Sand/proppant and other materials used while fracking.

• Cementing and Completion, microseismic.

• Environmental issues, carbon footprint.

• Infrastructure to transport gas.

• Strategies and time to develop massively.

• Pricing.

• Human Resources: The great crew change!!

23

Appropriate regulation should take some of

these issues into account.

Key issues

• The “Golden rules” to address environmental and social impacts:

1. Measure, disclose & engage

2. Watch where you drill

3. Isolate well & prevent leaks

4. Treat water responsibly

5. Eliminate venting, minimize flaring & other emissions

6. Be ready to think big

7. Ensure a consistently high level of environmental performance

24

We have excellent timing to implement these rules, as we are just starting…

Source: OECD/IEA (2012)

The role of shale gas

• Self sufficiency.

• Access to the fuel of the future for a long time.

• Lower prices.

• Jobs creation.

• Added value, revenues.

• Triggering of other sectors: industrial, electric, petrochemicals, etc.

25

An appropriate balance in policy-making between

prescriptive regulation and performance-based regulation

in order to guarantee high operational standards while also promoting innovation

and technological improvement… (IEA, 2012)

However, Shale Gas won´t solve all the challenges that Mexico is facing.

Shale gas should be just one more component of Mexico’s hydrocarbon policy.

26

Infrastructure challenges

Current Infrastructure 2011

Fuente: Pemex y Prospectiva del Mercado de Gas Natural 2012-2026. SENER. 27

Pipelines: 11,296 km.

11 gas processing centers (compression).

328,310 HP compression capacity

Source: Prospectiva del Mercado de Gas Natural 2012-2026. SENER

Planned gas pipelines

28

Gas Pipeline CAPEX (mmUSD)

Lenght (Kms.)

Capacity (mmcfd)

Main user

1 Manzanillo Guadalajara 358 313 500 CFE

2 Tlaxcala-Morelos 210 170 320 CFE

3 Tamazunchale – El Sauz

600 200 630 CFE

4 Chihuahua 500 385 850 CFE

5 Frontera- Los Ramones-Centro

3,291 1,221 2,100* 1,400**

PGPB

6 Noroeste 2,448 2,041 1,606 CFE

7 Zacatecas (2 phases) 110 + 14.8

165 20 + 20 Private

8 Yucatán 125 75 300 PGPB

9 Jáltipan – Salina Cruz* 1,760 222 90 PR

*Rehabilitación del ducto

CFE Comisión Federal de Electricidad PGPB Pemex Gas y Petroquímica Básica PR Pemex Refinación

*2,100 from the border to Los Ramones **1,400 from Los Ramones to Central Mexico

Total CAPEX: 9,416 mmUSD

Total Lenght: 4,792 Km

Planned additions to current Infrastructure

LNG Terminals

Source: World LNG Gas Report 2011 IGU

Terminal CAPEX MMUSD

Storing capacity (cubic meters)

Max capacity MMCFD

Start of Operations

Altamira 379 300,000 0.76 2006

Costa Azul 875 320,000 1.3 2008

Manzanillo 783 300,000 0.5 2012

Indonesia, 4%

Nigeria, 20%

Peru, 11%

Qatar, 31%

Yemen, 3%

Mexico´s 2011 imports

29

International Role of LNG

A very large share of the LNG is used in the Asia-Pacific region

Source: World LNG Gas Report 2011 IGU 30

International Gas Prices

Source: SENER with information from BP and CRE

-8%

17%

-16% -57%

-54%

-55%

31

*Average annual price 1 Average price of the first hand sales

Supply and demand for natural gas

Source: Outlook for Energy a View to 2030, ExxonMobil.

A mix for the natural gas supply for Mexico should be determined

32

Main sources of Natural Gas

33 Source: CNH (2012)

Associated gas (Cantarell, Ku-Maloob-Zaap, Litoral

de Tabasco, Samaria-Luna)

Price Availability

Small ?

Small ?

Medium

High

Medium

Huge!!

Associated gas from Chicontepec

Non-associated gas: Burgos, Veracruz

Imported gas: Pipelines from the north

Imported gas from LNG plants: Altamira & Manzanillo

Shale gas Huge!!

Small ? Non-associated gas:

Deep waters

Natural Gas Production forecast

Estrategia Nacional de Energía 2012, Producción de gas natural por grandes proyectos

The two scenarios of the ENE consider large volumes of shale gas

Inertial Scenario

Scenario ENE

mm

cfd

mm

cfd

34

“Gasification of México”

35

The Grand Energy Transition

36

Per

cen

tag

e o

f T

ota

l M

ark

et

“Gasification of Mexico” as a Transition policy

GASIFICATION OF MEXICO

TECHNOLOGY

• Consumption reduction • Increase efficiency • Low-carbon sources • CCUS • Natural repositories and

storage sites • EOR:

Conversion Bridge to CCUS Storage

• Synergies.

ECON TOOLS • Life-cycle analysis • Merit order

REGULATION

STRATEGIES • Infrastructure • Energy security • Long-term planning (30-50 years) • Avoid bad economic policies • Define scale and pace

37

Main natural gas derivatives*

Ammonia

Methanol

Agriculture, clothing, plastics,

automotive, metals,

photographic, paper, etc.

Plastics, automotive, construction,

pharmaceutical, photography, clothing, etc.

Basic petrochemical

Secondary petrochemical

Processing or manufacturing

Main end-use industries

* With information from the Mexican Petroleum Institute.

Nitrogenous fertilizers, synthetic resins and fibers,

etc.

Automotive parts, phones, furniture appliances, tires,

etc.

Carpets, explosives, plasticizers, adhesives,

dyes, etc.

Synthetic resins, fuel (gasoline), etc.

Disinfectants, fumigants, synthetic drugs, explosives,

etc.

Solvents, inks, wetting, bactericides, adhesives,

etc.

Acrylonitrile

Formaldehyde, methylamines, MTBE1/TAME2

Natural gas (methane)

1 Methyl Tertiary Butyl Ether 2 Tertiary-Amyl Methyl Ether

38

Can Mexico become an energy hub?

39

Energy planning and legal reforms

• Energy planning should not result from operators’ production forecasts. It must be the result of planning and energy policy.

• First we need technical solutions before legal reforms: Do we know how to develop our shales? Is concession or risk contract the right model?

• Both regional and integral (consider all sectors) planning process is needed.

• While dealing with reforms we need to keep in mind that we can’t defeat the basic laws like Physics, Chemistry or market: can you really treat gas separately from liquids??

• With the proper legal framework Mexico could become an energy hub. 40

The 2008 Energy Reform had some

caveats in its design and unfortunately

has not been properly

implemented

A new reform must consider the

international arena, most importantly our

North-American region

41

Mexico as an energy hub

• Mexico has a unique geographical location

• Mexico has access to the main natgas markets.

• We must design our technical solutions, public policies and legal framework, thinking on a larger scale.

Final Remarks

42

Final Remarks

Demand grows, but it shouldn’t be the only

driver for planning

• Industry can´t grow

• Natgas-powered electricity plants can´t

grow

• Petrochemical industry is severely affected

• Cement/Copper/Etc. power plants are stuck

• New Investment is discouraged

• Etc.

Low gas prices in the

international markets, not necessarily forever

Gas shortfall: • Critical alerts • Imports • Losses

43

No natgas molecule

Final Remarks

• Fossil fuels will still be the major source of energy for the next 100 years, and there are plenty of resources in the world and in Mexico.

• We must foster the natural gas transition (The gasification of México) and low-carbon energy econom.

• We require new strategies in the way we finance and manage shale gas/oil projects. Shale gas eventually will become the main source of natural gas for Mexico.

• Appropriate regulation is fundamental to the massive development of shale gas and to increase natural gas reserves (not only resources!).

• Generational replacement is an issue. We will need lots of extremely talented and certified professionals.

• The era of boring oil is over! And so the most interesting chapter in the Mexican Oil and Gas Industry is just beginning.

• The gasification of Mexico is the best strategy towards transition, self-sufficiency and why not? Turn Mexico into an energy hub.

44

Thanks!

45

The future role of USA

46

• According to the IEA, the US will become the world´s largest oil producer by 2017.

• The increase domestic production and energy efficiency measures will reduce the imports into the US. The US will become an oil exporter in 2035.

Source: US set to become biggest oil producer, Financial Times, Guy Chazan and Ed Crooks, Novemeber 12, 2012.