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Mexican energy sector likely to ride out AMLO's shale ban

President Elect Andres Manuel Lopez Obrador speaks during a press conference at Palacio Nacional on August 20, 2018 in Mexico City, Mexico.
President-elect Andrés Manuel López Obrador at a press conference on August 20, 2018, in Mexico City. Photo: Carlos Tischler via Getty Images

Mexican President-elect Andrés Manuel López Obrador (AMLO) proposed a ban on fracking last month, which would prevent the country from tapping its potentially vast shale resources. Despite Mexico's rising natural gas demand and increasing dependence on natural gas imports, the country's shale reserves so far have not figured into its energy reform.

The big picture: While a shale ban might have long-term effects on Mexico's economy, it's unlikely to do so during AMLO's term, which is limited to six years. Because of structural barriers to shale extraction that would nevertheless persist in that timespan, even a complete ban on fracking wouldn't significantly impact the Mexican energy sector.

Background: Mexico’s declining oil and natural gas production has motivated comprehensive energy reform that opened the oil and gas sectors to private investment. Though not without challenges, the reform promises to lift hydrocarbon production, mostly in the form of offshore crude oil. Despite past criticism of the reform, AMLO has has now seemingly come to accept its necessity.

In Mexico several factors hinder a rapid success akin to that of the U.S. shale revolution:

  1. Mineral rights are owned by the state, reducing the likelihood that potential landowners will accept disruption to their property. The process is additionally hindered by the government auctions required to assign exploration rights.
  2. The lack of well-developed private oil, gas and service sectors precludes shale production's high-intensity drilling.
  3. The lack of pipeline and road infrastructure, as well as worker housing and facilities, makes it difficult to tap shale resources located in sparsely populated and underdeveloped areas.
  4. Equipment, supplies, transport security and personnel concerns related to drug cartel activity and violence are likely to impede the development and make it more costly — as will the aridity of the areas where shale is located.

The bottom line: Given the prospects for crude production offshore, a shale ban would not hurt Mexico’s crude market. But a long-term ban on shale development — however slowly it might otherwise occur — would eventually impact Mexico's natural gas market, making the country increasingly dependent on imports. Most of those supplies would likely come from U.S. shale companies propped up by a large market at its Southern border.

Anna Mikulska is nonresident fellow in energy studies at Rice University’s Baker Institute's Center for Energy Studies and a senior fellow at the University of Pennsylvania's Kleinman Center for Energy Policy.