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24 December 2018
In his inaugural address, President Andrés Manuel López Obrador confirmed that fracking will be prohibited in Mexico. This prohibition had already been proposed by both the Senate and Congress prior to López Obrador's statement, mainly due to public health and environmental concerns.
Mexico is highly dependent on the natural gas potential of basins located in the northern part of the country. According to a 2013 estimate by the US Energy Information Administration, nearly 550 trillion cubic feet of recoverable shale gas is thought to be located in Mexico, with the Burgos Basin said to hold the largest undeveloped shale resources.
In early 2018, in an attempt to exploit such resources, the National Hydrocarbons Commission (CNH) released the bidding rules for Round 3.2 of the tender process for contracts to explore and exploit 21 blocks of the Burgos Basin in Tamaulipas (among other blocks in other regions), which are expected to produce wet and dry gas. This bidding round was initially postponed by the CNH until January 2019, but the new administration has declared that the rounds will be suspended for at least three years, subject to the contracts awarded during the prior administration achieving certain results (for further details please see "New administration confirms suspension of bidding rounds").
Mexico is not in a position to disregard its natural gas reserves: the country is almost a net importer of natural gas (80%). In addition, 60% of power generation is gas fuelled (this could reach 72% to 75% by 2022) and the industrial sector runs almost exclusively on gas. Further, Mexico's gas storage capacity is a mere few days compared with nearly three months for its Organisation for Economic Cooperation and Development allies. Gas supply is thus crucial for Mexico's productivity, and fracking should form a part of the country's energy plans in order to lessen its dependency on natural gas imports.
Despite the technical barriers against shale gas production (ie, storage and transportation infrastructure and water shortage issues), the prohibition on fracking will deny Mexico access to resources which it needs to achieve energy sufficiency. Thus, both the executive and legislative branches should instead consider appropriate regulation (rather than a simple ban) that allows for the rational use of oil and gas resources while simultaneously maintaining the health of the environment and the communities that live in producing regions.
Arguably, the new administration's decision to cancel future bidding rounds, ban fracking and reverse other key aspects of the energy reform will ultimately prevent it from achieving its goals of revitalising Mexico's oil and gas production, improving its energy capacity and reducing its dependence on foreign resources.(1)
For further information on this topic please contact Carlos Ramos Miranda at Hogan Lovells BSTL SC by telephone (+52 55 5091 0172) or email (email@example.com). The Hogan Lovells BSTL SC website can be accessed at www.hoganlovells.com.
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Carlos Ramos Miranda