Latin America at Forefront of Oil Shale Shake-up

Advancements in oil extraction technologies could see Argentina, Brazil and Mexico bolster their oil output. But their economies might get in the way.


The world may be on the cusp of a shale oil and gas revolution, and few regions offer as much promise as Latin America.

The spread of hydraulic fracturing, or fracking, is boosting U.S. production of unconventional oil and gas, raising the prospect of an era of energy abundance that could break the grip of Middle Eastern producers on world markets.

Latin America could add plenty of fresh fuel to that scenario. The region has 1,817 trillion cubic feet of recoverable shale gas and more than 40 billion barrels of oil, according to estimates by the U.S. Energy Information Administration (EIA). The area’s gas reserves are slightly greater than those of the U.S. and Canada combined and represent 23 percent of global shale gas reserves. The oil reserves make up about 12 percent of the global total.

But it remains to be seen whether Argentina, Brazil and Mexico — the countries that harbor more than 90 percent of the region’s known shale deposits — can create an investment climate conducive to tapping that vast potential.

Besides Argentina’s discoveries in Vaca Muerta, the most promising shale deposits are along Mexico’s border with southern Texas, whose Eagle Ford basin is one of the world’s most prolific shale gas fields. “Geological basins don’t end at national frontiers,” notes Laura Atkins, director of upstream petroleum research at Hart Energy, a Houston-based research company. “So there is every reason to believe that the shale deposits on the Mexican side are potentially as productive as those in Eagle Ford.”

The EIA estimates that the Mexican field, known as the Burgos basin, contains 343 trillion cubic feet of recoverable gas. Petróleos Mexicanos (Pemex), the state-owned oil company, plans to spend $200 million to drill 150 wells in the basin over the next three years.

Pemex’s production from Mexico’s offshore oil fields has been falling for years, however. Tapping the country’s unconventional oil and gas reserves poses greater technological and financial challenges than Pemex has ever faced. To stimulate the search, the government of President Enrique Peña Nieto has proposed legislation that would open up Mexico’s oil and gas industry to foreign investment for the first time in decades. The proposed reforms would establish profit-sharing arrangements with foreign companies. But such deals would have to be especially generous to attract investment in shale, which tends to be far more costly to exploit than conventional oil and gas fields. The arid climate of northern Mexico also poses a problem because fracking requires drilling companies to inject massive quantities of water into the ground to break up shale formations and release oil and gas.

Still, market incentives are strong. Over the past decade demand for gas has surged well ahead of production, forcing Mexico to buy an ever-higher quantity of supplies abroad. The U.S. accounts for 75 percent of Mexican gas imports, mostly from those shale fields just across the Texas border, contiguous with Mexico’s own Burgos basin.

For now Brazil may offer better investment prospects. The government allows 100 percent-foreign-owned operations in shale gas. The country has 245 trillion cubic feet of technically recoverable shale gas resources, located in the north, northeast and southeast. There is no active exploration or drilling taking place yet, though. Until now most industry attention has focused on large oil discoveries in so-called pre-salt formations in the deep waters off the Brazilian coast.

Some analysts question whether Brazil will keep the door open to foreign companies if the shale fields prove to be larger than current estimates.

“Brazil has been preoccupied with the development and promise of the hydrocarbon reserves in the offshore pre-salt basins, and there has been little discussion of shale gas development,” points out David Mares, a politics and energy professor at the University of California, San Diego. At the time the huge offshore discoveries were made, Brazil was one of only three nations (along with the U.S. and Canada) that allowed 100 percent foreign and private ownership of oil concessions. But in 2008 the government limited foreign and private participation to less than 50 percent. That led to low foreign participation in the pre-salt auctions in October; no U.S. multinationals made bids.

Another red flag for Brazilian shale development: possible restrictions on the importing of equipment and qualified personnel. The pre-salt oil bonanza has slowed down in part because of government regulations requiring the use of Brazilian equipment and staff in the development of those deepwater fields. “If Brazil adopts similar regulations for the development of its shale gas resources, that development will be pushed further into the future,” warns Mares.

Read more about Argentina oil shale in Institutional Investor‘s feature: “Argentina Oil Shale Caught in Politics, Litigation”.