Mexican energy reforms are forecast to double national oil production and increase foreign investment by as much as USD 15 bn annually from 2015. As well as offshore exploration and production, shale oil and gas will provide a major growth sector. New investors however face multiple security challenges and some of the largest known shale deposits are located in areas exposed to exceptionally high rates of crime, especially the north eastern state of Tamaulipas. Threats to operators new to the Mexican market will affect staff security and profit margins.
The reforms have attracted considerable interest from investors, drawn to Mexico’s estimated 42 bn barrels of potential oil reserves, additional to 545 tn cubic feet of shale gas and 13 bn barrels of shale oil. Key among these are the shale reserves contained in Tamaulipas state. The Burgos Basin shale formation – the southern part of Texas’s well-developed Eagle Ford formation – is estimated to hold around 300 tn cubic feet of shale gas, yet as of April fewer than 25 wells had been attempted in Tamaulipas, as opposed to 5,400 on the Texan side of the border. Licensing rounds for shale blocks are expected to begin in 2015.
New operators in Tamaulipas will face considerable security challenges and the activities of criminal groups, most notably Los Zetas and the Gulf Cartel, have already had a significant effect on the domestic oil sector. Drug trafficking organisations seeking to diversify their income sources have engaged in large-scale theft of oil and gas in recent years, often with the collusion of workers at the state-run oil company Pemex. Companies and individuals in the US have also been accused of complicity in the crime and Pemex has launched lawsuits against two US-based brokers for the purchase of illegally siphoned fuel. Nationally, the problem is estimated to have amounted to USD 1.15 bn in losses between 2012 and 2013, or around 4.5 percent of state oil firm Pemex’s sales. In 2013, more than 500 illegal pipeline siphons were discovered in Tamaulipas, representing around a fifth of the national total and a doubling of the figure from the previous year. The theft of oil tankers has also risen in accordance with the higher rates of HGV crime on Mexican roads and the growing sophistication of operations. Criminal groups have established controls on the sale of fuel to consumers, effectively overseeing local distribution networks of the stolen product. Local reports have suggested that criminal groups control up to 15 percent of the oil business across the state.
Kidnapping and extortion present noteworthy physical security considerations for companies entering the Mexican market. In Tamaulipas, the kidnapping rate in the port city of Tampico is 20 times the national average and key transport routes such as the Highway 2 conduit that runs along the US-Mexico border have experienced high rates of abductions. Tamaulipas state has the second highest rate of kidnapping in Mexico, according to statistics from the National Institution for Public Security (SNSP). Although abductions most typically target Mexican nationals, this will present a credible threat to operators and could increase as local content laws stipulate a growing number of local employees in operations up until 2025. Up to 20 percent of businesses in the state report paying extortion money to criminal groups.
Poor security in Tamaulipas forced Weatherford International to restrict the movement of staff outside its shale fracking site in Reynosa, and the military has been tasked with transporting staff since an attack in April targeted their hotel in Ciudad Mier. The Mexican military and police will not be capable of providing security to an increasing number of companies expected to enter the Mexican shale sector in the next 12 months. Many of these less experienced and specialist companies will likely not have the established security and risk management practices in place that some of the supermajors eying investment in Mexico’s offshore sector possess. Continued increasing rates of crime, the growth in the illegal oil industry, and the inability of Mexican security forces to guarantee the security of the sector, ensure that companies considering operations in Mexico will look to invest in private security measures to guarantee the safety of staff and operational continuity. Companies could increasingly pressure the government to amend legal restrictions on weapons ownership and foreign private security firms, should operators find profitability undercut by illegal activity and extortion or if investment decisions are being shaped by security considerations. Security will invariably be a key operational cost consideration for new companies entering the shale sector next year.