The United States experience as a reference of success forshale gas development: The case of Mexico
Juan Roberto LOZANO-MAYA

Researcher, Asia-Pacific Energy Research Centre (APERC)
Inui Bldg.-Kachidoki 11F, 1-13-1 Kachidoki, Chuo-ku, Tokyo 104-0054 Japan
Telephone +81(3)5144-8557 Fax: +81(3)5144-8555
Email: lozano@aperc.ieej.or.jp, lozzano@gmail.com

Highlights•

This paper illustrates the misleading effects in the employment of the United States
experience as a benchmark to support shale gas development without accounting for the
structural aspects and circumstances that made it possible.

•

The findings suggest that the greater value of this benchmark lies in its use as a guide for theexamination of the processes and factors conducive to those results, to ultimately develop
adaptive knowledge oriented towards policies and strategies to fit other contexts and exploit
unique opportunities in other countries.

•

The development of domestic natural resources and shale gas in particular, is a complex taskthat requires appropriate planning, financial and technological capabilities, adequate
infrastructure, favorable regulation and governmental support.

•

In spite of Mexico’s inferred shale gas resources and proximity with the United States, energy
policy makers must first overcome several structural deficiencies in the Mexican natural gas
industry to foster a more favorable environment for production to take off, as otherwise
Mexico might be jeopardizing its energy security mandate, by depending on resources thatmight eventually be costlier or take much longer to develop in comparison with the initialexpectations made.

Abstract

Shale gas has gained increasing attention worldwide in the light of the rapid production and significant
effects in the United States. Using this case as a reference, several countries have taken the first steps todevelop their own resources, with Mexico in particular including shale gas in its energy planning priorities
and rushing towards its commercial production, although results have remained elusive. This paper argues
that due to the intrinsic complexity embedded in the shale gas development of the United States, its use asa benchmark by Mexico for policy making purposes is misleading, given the challenges in reproducing thesame factors of success on the basis of the contextual differences between both countries. The findingspresented can ultimately be helpful for other countries looking forward to or in the process of developing
their shale gas resources driven by the same reference.

Keywords
Shale gas; United States; Mexico

1. Introduction
The steady growth of energy demand, the rapid depletion of conventional energy resources and thesignificant contribution of energy production and consumption to global warming have resulted ina general transition towards fuels with lower carbon intensity. Given the predominance of fossil
fuels in the primary energy composition, most countries have increasingly favored natural gas over
oil and coal, entailing greater efforts to meet the rising gas demand from both conventional andunconventional sources.

1

This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

Among these unconventional sources, shale gas in particular has drawn international attention in
response to the fast pace recently observed in the United States output. With a modest average growthof 2.7% per year from 1995 to 2000, shale gas production in the United States started to increase much
faster, reaching an average annual rate of 17.4% from 2000 to 2005 that escalated to 47.9% from 2005
to 2011. This growth with the decline of conventional gas production at an annual rate of 5% from 2000
to 2011 enlarged the share of shale gas into the total gas production of the United States, passing from
1.7% in 2000 and 4.1% in 2005 to as much as 34.1% in 2011 (EIA, 2013a). In consequence, the gap
between natural gas demand and imports has decreased, with the share of net imports passing from
16% in 2007 to 8% in 2011. Moreover, its effects have transcended to prices, with the Henry Hub spot
price driven down 55% from 2008 to 2011, shifting from 8.9 to 4 dollars per million BTU (EIA, 2013b).
In the middle of this momentum, that has been generally described as a “revolution” in terms of thetransformation entailed for the energy balance and outlook of the United States, the World Energy
Council (2010) highlighted the advantages of shale gas in terms of its increasing affordability andresource size, with estimations of its total economically recoverable resources amounting to 6,444
trillion cubic feet, in addition to its considerable potential to reduce CO2 emissions by replacing otherfossil fuels, especially in their use for power generation.
Nonetheless, an official report on the initial geological assessment for shale gas resources in 48
basins from 33 countries including the United States (EIA, 2011) became the milestone that spurred realinterest to the worldwide development of this unconventional gas source, due to the resource
estimations of nearly the size of the conventional gas proved reserves in 2010. As this information also
indicated the shale gas resource base to be more widely dispersed than the proved reserves of
conventional gas, of which more than half is held by three countries alone; several countries jumped on
the shale gas bandwagon, hastening policies to foster the commercial development of their domestic
resources in an effort to replicate or approximate the results observed in the United States (Selley, 2012;
Lozano Maya, 2012; Gény, 2010).
Although some of these early efforts have been encouraging, evidence indicates shale gas
production to be very complex, let alone to the extent reached in the United States. In Poland, where
estimations of its shale gas resources were the highest in Europe with 187 trillion cubic feet (EIA, 2011),
subsequent official re-assessments by the Polish authorities have reduced this potential significantly, toa range between 12.2 to 27.1 trillion cubic feet (Polish Geological Institute, 2012) that on average justrepresents 11% of the initial figures. It is noted that in spite of the positive expectations for shale gas in
Poland, the underdeveloped infrastructure, regulatory deficiencies and little competition in its gas
market along with the poor results in exploratory wells have resulted in some major companies
abandoning their production plans (Johnson & Boersma, 2013, p. 295).
In the United Kingdom, in spite of shale gas production being considered decades ago due to thepotential resources assessed, the lack of governmental support halted any further advance until theinterest was revived recently and it is still uncertain the success in the application of the technologies
used in the United States and the public response to them (Selley, 2012). In this regard, while theexperience observed in the United States pushed shale gas development in Europe, in spite of theconsiderable volumes presumed for some countries its future is still questionable (Johnson & Boersma,2013).
Among the countries that have shown interest in producing shale gas, Mexico in particular has
expressed remarkable optimism pulled by the favorable early estimations of its resource base from EIA(2011) but especially by its territorial proximity with the United States that indicates geologicalformations spanning the borders of the two countries. This led top-level Mexican government officials topraise their country’s shale gas potential and implement successive policies for its eventual
development. In the practice though, results have been minor and are far from supporting the initial2This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

hype associated with the benchmark set with the United States, with subsequent efforts being moreconservative and cognizant of the critical challenges ahead.
This paper proposes that the use of the United States experience as a reference to validate theperformance of any shale gas policies undertaken is unreliable, given the complexity in reproducing thecontextual conditions embedded in other countries. For this reason, the use of such benchmark and its
major implications for policy making are discussed in the following section. Next, the major factors ofsuccess for the United States shale gas experience are discussed to highlight its divergences with
Mexico. The paper concludes with a proposal conducive to the design of policies for shale gas
development adapted to Mexico’s characteristics.

2. The use of international benchmarking as a source of
public policies
Because of its success as the major developer and being the example best documented so far, theUnited States is generally regarded as the major benchmark to guide shale gas development, whichis reminiscent to the way in which firms measure their own performance by tracking the successful
results of their competitors or their exemplar performers to try catching up with them. At
international levels, benchmarking aims to identify specific indicators in particular fields for
systematic measurement and comparison among countries (Dominique, et al., 2013, p. 1) and thus,
it provides a reference to contrast and assess a country’s performance against what is considered
best.
Less common but increasing with the pace of globalization, policy making has been
influenced by benchmarking, entailing different levels of impact depending on the type of practice
adopted. Mexico’s interest for shale gas was publicly announced after the publication of thepreliminary results (EIA, 2011) that suggested the country’s potential to be fourth worldwide,
equivalent to roughly 10% of the total resource base estimated, with part of it belonging to theneighboring geological formations in the United States, where production is taking place. By theend of 2011 this preliminary information was used by the Mexican Minister of Energy at the time to
tout shale gas as a game changer for improving domestic energy security and bringing economic
prosperity, linking it to the successful experience seen in the United States (Secretaría de Energía,
2011). However, the implicit assumption that the sole existence of resources in Mexico would
reproduce the benchmark employed ignores the strong divergence in the structural and transitory
characteristics between both countries, not to mention the fact that the information on which thisofficial optimism stemmed from (EIA, 2011) is the only one of its type, with further dedicatedresearch and studies being required to contrast or confirm it.
The predominant aspirational and quantitative scope encompassed in this international
benchmarking practice is evocative of its utilization for political advantages, by “citing results thatare favorable and eschewing those that are unflattering” (Dominique, et al., 2013, p. 6). This
practice, also termed as “naïve benchmarking” (Lundvall & Tomlinson, 2002) is aimed at copying
practices considered remarkable from another country but without accounting for their specificcontext and hence, limiting their real adaptability to another environment. This exercise may imply
that “[t]he same ‘best practice’ instrument in one country-specific systemic context may fail to bringgood results in another, if the complementary environment does not exist or is radically different”(Paasi, 2005, p. 23) but is carried out anyway to bring legitimacy and credibility to political decisions(Dominique, et al., 2013). While this type of benchmarking is mostly based on results andperformance, it is possible for it to shift towards a more qualitative approach centered on theanalysis and knowledge of the practices and methods involved in obtaining those results, to makeit more adaptive to other environments (Dominique, et al., 2013; Huggins, 2010; Papaioannou, et al.,2006; Paasi, 2005).

3

This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

In Mexico’s case, the relevance of shale gas passed from official speeches to energy policy
priorities, with two scenarios of production included in the Energy Strategy 2012. The Strategy is
the major legal instrument of long-term energy planning submitted annually to the Mexican
Congress for approval and is developed upon three major elements: a) energy security, to meet thecountry’s energy demand competitively and reliably; b) economic efficiency, to provide costeffective energy resources and c) environmental sustainability. With five shale basins preliminarily
identified, the business-as-usual scenario in the Strategy encompassed the development of only
one shale gas play, with the more favorable scenario adding another play. For each scenario,
production would start by 2016 with the output expected amounting to 15% and 29% from the total
gas production expected by 2026 (Secretaría de Energía, 2012b), however, the total preliminary
shale gas potential estimated was between 150 and 459 billion cubic feet, which is respectively
lower in 78% and 33% from the benchmark employed from EIA (2011).
In compliance with these policies, other operational objectives were set, encompassing
geologic studies, 20 exploratory wells up to 2014 and the identification of the most promisinggeologic plays and areas (Pemex, 2011). Nonetheless, up to February 2013, only seven wells had
been drilled, with two not being commercially productive, three being dry gas producers, two being
gas and condensate producers and only one being successful as an oil and gas producer (CNH,2012). These results are relevant since as further discussed in Section 3.2, the economics of shalegas production have recently depended on the ability to switch gas production to “wetter”
reservoirs with larger contents of heavier hydrocarbons linked to higher oil prices. By early 2013,
the thrill of shale gas started to transform, with less fanfare in the newer edition of the Strategy,
which recognized that in spite of the considerable shale gas potential, the path of development
chosen would be constrained by Mexico’s legal and economic framework, with more favorable
opportunities depending on the implementation of measures of promotion more ambitious(Secretaría de Energía, 2013). To make matters worse, the structural limitations of the Mexican
natural gas market manifested during 2012, with serious shortages of natural gas as a result of
infrastructure bottlenecks to meet the peaking demand derived from the lower Mexican gas pricelinked to the descending Henry Hub. Needless to say, these market conditions are distant from theones prevalent in the United States, emphasizing the divergence between both countries.
As stressed in Paasi (2005), contextual differences amplify the limitations of performancebased benchmarking, with many institutional and structural conditions that cannot be easilychanged such as economic settings, endowment of resources and cultural and historicalbackgrounds. More important, context determines the timeframes and resources required in
adopting a benchmark, which is of utmost importance, as the process must be cost-effective to beconsidered for policy making purposes. In this way, while benchmarking may be limited to selecting
few key countries with outstanding performers of which their success is assumed to be entirely
reproducible, once contexts are recognized, the emulation involved in the political speech requires
further modifications in order to achieve some degree of applicability (Dolowitz & Marsh, 2000).
Since detaching the benchmark from its context is very complex and costly, it thus represents
the main driver of the level of success from implementing the practices gained from a benchmark
in a domestic context and determines the resources and timeframes potentially involved. The
understanding of the context embedded however, requires a more qualitative and multifaceted
approach that transcends a comparative stage towards the development of a learning andadaptive experience leading to better policies and performance (Paasi, 2005; Lundvall & Tomlinson,
2002). It is noted in Huggins (2010) that due to the reproduction of practices but not contexts,
benchmarking efforts have evolved towards the understanding of the processes that make these
operations effective, paving the road for a more ambitious approach that ultimately employs
international experiences as an input for a learning process of policy making.

4This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

Although benchmarking is relatively recent for policy making purposes, it bears a considerable
potential as a vehicle of knowledge towards designing and implementing policies for performance
improvement (Papaioannu, 2006; Paasi, 2005). While a focus on performance favoring theimitation and replication of ideas might best suit political interests, it gives little room to a deeper
knowledge of the complexity, dynamics and contextual differences necessary for adaptive policy
learning. This was eventually acknowledged by Mexico’s energy policy makers on its newest
Strategy, highlighting the constraints imposed by the environment and thereby, the need to adapt
the strategies and policies derived. For this to happen though, it depends on the country’s ability tolearn from the processes and practices of the benchmark adopted, its capability to translate theknowledge acquired into policy making for its own environment, and the costs and efforts involvedin the modification of its structural and institutional frameworks (Paasi, 2005).

3. Factors for the shale gas success in the United States
As the influence of shale gas has grown worldwide, attention has been drawn to determining thefactors that made possible the success observed in the United States, in the hope to reproduce it
elsewhere. However, as structural conditions, long-matured processes and transitory conditions
underlie this success, in the practice taking off commercial production of shale gas in other places
has been very complex.
Although shale gas in the United States can be traced long back ago, the technical constraints
and the abundance of cheaper conventional gas resources discouraged its production, until theenergy shocks in the 1970s revived the interest to explore energy alternatives to strengthen
domestic energy supply and avoid the shortages resulting from depending on foreign energy
supplies. Within this environment, the United States looked to several unconventional sources ofenergy, promoting technological breakthroughs that could allow their eventual commercial
utilization, being one of them shale gas. Once the support to technological research anddevelopment from the government passed to and was refined by private companies, structural
factors such as the expertise and infrastructure of a mature gas industry, competitive free-market
conditions and an institutional framework providing regulatory certainty converged with transitory
market dynamics and high price levels to make production economic and allow shale gas toflourish in the 2000s. The factors influential to this success can be broadly classified in the
categories discussed below.

3.1 TechnicalAs technology development and application are fundamental to develop those resources that were
not previously accessible, the combination of horizontal drilling and hydraulic fracturing is usuallycredited as the most influential element allowing the economic production of shale gas in the
United States; nonetheless, other factors have been just as important to reduce the technicaluncertainty associated. These elements include a generous endowment of resources withadequate geological characteristics, the availability of accurate geological information, theexpertise developed over decades by the industry, the ample distribution of infrastructure, awidespread supportive service sector and the availability of water to perform the particular
production techniques associated to shale gas.
Favorable geological characteristics. In spite of shale being the most abundant type of sedimentaryrock, most of them will not bear any gas unless there is enough organic content from whichhydrocarbons can be generated and to be considered for gas production, shale reservoirs need tohold appropriate characteristics of total organic carbon, thermal maturity, rock thickness, porosity,
depth and pressure (Binnion, 2012, p. 4). The geological characteristics in the United States5This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

resources have contributed to the growth of shale gas production, unlike other regions such as
Europe where conditions are less favorable (Gény, 2010, p. 27).
Precise geological information. Another factor supportive of shale gas production refers to theavailability of resource assessments. By means of the accurate information on the resources thatcan be actually produced, more certainty is brought to the industry as the geological knowledge is
improved to help producers optimize their projects, map prospective more accurately and findmore easily “sweet spots”, i.e. those particular areas within the shale in which the potential of
production is larger. More important, as this information is periodically updated on the basis of thetechnology employed and the productivity of the wells in operation, the estimated resource base of
shale gas has grown nearly fivefold from 2006 to 2010 (EIA, 2012).
Technological expertise. The development and application of directional –horizontal– drilling inshale, massive hydraulic fracturing and 3D microseismic mapping of deposits (Trembath, et al.,2012) made shale gas extraction economically viable, as larger volumes in the shale formations
could be accessed in comparison to the conventional methods of production. As seen in Figure 1,
the number of horizontal rigs increased steeply from 2005 and started growing again even after thedrop in 2009, in contrast to conventional vertical rigs, which have been much less dynamic.
Moreover, the development of the above technologies since the 1970s on one hand and the longexperience and pooling of resources of the gas industry on the other, have favored the assimilationof the knowledge conducive to a rapid and efficient shale gas expertise in the United States. This
aspect is critical, as shale gas formations differ from each other, even within the same play (EIA,2012) and “what works in one reservoir or well probably will not be as effective in the next[…needing ] a high degree of understanding to reach its full economic potential” (Parker, 2009, p.
50).
Figure 1
Rotary drilling rig count for oil and gas production by type in the United States, 2000-2011
1,400
1,200

Horizontal

VerticalNumber of driling rigs

1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Baker Hughes (2013)

Extensive infrastructure. In step with the development of the gas industry over decades, the scale of
the available infrastructure allowed the transport of shale gas output from the producing areas tothe processing facilities and the consumers. Located across the United States territory, theextension, diversity, capacity and access conditions of this infrastructure are remarkable. By theend of 2008, there were more than 210 pipeline systems with an approximate length of 491,000
kilometers, numerous underground storage facilities as well as several international trade points,
encompassing both pipeline interconnections with Mexico and Canada and several liquefied
natural gas –LNG– facilities to receive and ship gas (EIA, 2007). More significant, the market’s

6This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

competitive conditions and the prevalent regulatory framework provide a better access to
infrastructure, ensuring an efficient allocation of gas to the markets.
Well-developed auxiliary and supporting services. In addition to the capabilities of the domestic gas
industry, the existence of a strong oilfield services and equipment industry has supported thespecific requirements of shale gas production, which include more drilling and fracturing, intensive
mobilization of personnel, rigs, pressure equipment and transport of water and fluids to the well
pad to perform hydraulic fracturing. On average, the truck trips associated over the different stagesof a typical shale gas well, from the site termination until gas is produced, can range from 800 to
2,000 (European Parliament, 2011).
Water usage. For fracturing to be carried out, water is essential to keep the fractures open and let
the gas flow from the rock to the wellbore. In the United States not only water has been generally
available, but it has met the different requirements from the diverging shale gas regions across theUnited States, with estimations of typical wells demanding 10 million liters of water in the Barnett
Shale, 12 million liters of water in the Fayetteville Shale and 15 million liters of water in theMarcellus Shale (Jenner & Lamadrid, 2013).

3.2 Economic
In addition to the technological breakthroughs allowing the extraction of shale gas, the capabilities
of a competitive industry reacting to the forces of the market have been fundamental to drive thegrowth of production. As shale gas entails different requirements in comparison to conventional
gas production, the plethora of producers, site builders and service providers in the market has
been decisive to sustain the dynamism of the industry.
Competitive market structure. Unlike other countries with monopolistic or oligopolistic structures,
decades of development and straightforward regulation have shaped a flexible and competitive gas
industry in the United States that is predominantly made up by numerous small and medium
independent firms. To provide an approximate idea of this level of atomization, as seen in Figure 2,
nearly all of the 16,122 oil and gas producing firms in 2009 were considered small (less than 100
employees) and medium (more than 100 and less than 499 employees), and jointly accounted for
44% of the total employment in the oil and gas production, drilling and supporting activities (DOC,
2009). The role played by these independent firms was fundamental to take off output on acommercial scale, as they refined technology, established new practices, endured the market risks
and performed intensive drilling across large areas with diverging geological characteristics.
Furthermore, as these smaller independent operators became first-movers, it was until production
was climbing that the largest oil and gas companies –the majors– started to get attracted to thebusiness in spite of their initial lack of interest (Kaiser, 2012; Gény, 2010).

7

This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

Figure 2
Oil and gas producing firms’ structure and employment in the United States, 2009
100%
31%

Small
14%

96%

Medium
Large
56%

2%

2%

0%

Share of firms

Share of employment

Note: Includes firms in oil and gas extraction, drilling and support activities
Source: DOC (2009)

Competitive price setting. The competitiveness of the gas market industry is extensive to prices,which are deregulated and promote a more efficient transmission of information among producers
and customers. Since the late 1970s and 1980s when policies were implemented to decontrol gas
prices and with the eventual establishment of the Henry Hub as a reference for spot and futuretransactions, producers are highly responsive to the gas price. In consequence, shale gas
production was able to prosper in response to the steady growth in gas prices from 2000, even inspite of the fall of prices from 2009, as shown in Figure 3.
Figure 3
Shale gas production in the United States and Henry Hub price, 2000-201110
Shale gas production

Trillion cubic feet per year

9

8.9

8.7

8
Henry Hub (USD/MMBTU)

7

7.0

5.9

6
5

6.7

5.5
4.3

4

4.4
4.0

3.9

3.4

4.0

3
2
1
0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: EIA (2013b)

Production economics. In general, shale gas is more complex to produce than conventional gas andsince shale gas wells decline more rapidly, not only wells need to produce at profitable levels, but alarger number of them is required to sustain output levels and recover the capital costs associatedwhich are mainly exerted on well drilling and completion (Kaiser, 2012). Additionally, since the8This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

properties of shale reservoirs are very heterogeneous, accurate geological information andadvanced technology conducive to the location of sweet spots to increase productivity are
essential, adding up to the costs of production. Moreover, in an effort to make production costeffective and minimize the land disturbance from the intensive drilling required, shale gas
producers have devised a manufacturing-like process in which numerous shales are drilled from asingle well pad, requiring an adequate provision of oilfield services, equipment and infrastructure.
As explained above, the availability of water is fundamental to shale gas production, which not only
increases costs, but requires appropriate road infrastructure for the numerous trucks carrying
water and equipment to the production site. It is estimated that to surmount the lack ofunderground aquifers to source water for fracturing, producers may require between 350 and 1,000
truck tips to carry water to each well pad (European Parliament, 2011).
Owing to these costs, shale gas is profitable above certain price levels. As shown in Figure 4,
in step with the ascending price environment from 2002 to 2008 shale gas production grewconsiderably, but due to the economic recession and the rising domestic gas supply that madeprices fall, producers have gradually shifted their efforts towards wetter shale reservoirs in order tomaintain the profitability of their operations and overcome the falling gas prices, underscoring theprice sensitivity of shale gas economics and the flexibility of the industry in adapting to market
conditions.
Figure 4
Rotary rigs in operation by production type and oil/gas price ratio in the United States, 2000-2011
1,800

35
Crude oil rotary rigs

30

Gas rotary rigs

1,400
WTI/Henry Hub ratio

25

1,200
1,000

20

800

15

600
10
400

WTI/Henry Hub raio

Number of rotary rigs in operation

1,600

5

200
0

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: EIA (2013b)

3.3 Institutional
Within the context of the United States shale gas boom, other elements embedded are less salient
but equally relevant as they have favored a suitable framework for the technical and economic
factors to evolve. Specifically, a land regime that extends the private ownership to the resources inthe subsoil; a well-established regulatory framework and the governmental support in diverse
forms, have collaborated to bring certainty and stability to the industry and the different
stakeholders involved.
Land and subsoil property rights. In contrast to most countries, where the State is the absolute
owner of all the hydrocarbons on the territory, in the United States the private property of land isextensive to the mineral and hydrocarbons deposited in the subsoil, which allows landowners to

9This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

lease or sell their land directly to producers. This foundation has been central to the rapid shale gas
development, as producers are able to access land and resources with less difficulty. Furthermore,
the economic retributions perceived by landowners foster less social opposition in comparison toplaces like Europe. The role of land access is so critical to the development of shale gas that evenin the United States the influence of use patterns and local regulations on land access diminishes
significantly the potential production, with approximately 31% of each county’s land in
Pennsylvania and up to 84% of each county’s land in New York not being accessible to commercial
production at the Marcellus shale formation (Blohm, et al., 2012).
Stable regulatory framework. The existence of a well-established and stable regulatory framework as
a result of decades of evolution of the gas industry has reduced the uncertainty associated to thedevelopment of hydrocarbons, including shale gas. The deregulation of the gas industry
commenced in the 1970s has allowed a more intensive use of natural gas for power generation
purposes as well as the introduction of market-based prices and intense competition to drive
production efforts. Currently, regulations applicable are mostly enforced by each State’s legislation,with the federal authority in charge of the federal lands and transmission through interstate
pipelines. As mentioned by Gény (2010), in spite of the divergent criteria from each state, these
institutional arrangements have allowed the regulatory framework to adapt to local conditions,creating adequate conditions for shale gas development.
In terms of environmental regulation, shale gas production produces less greenhouse gas
emissions and a smaller land surface impact than coal, but it still poses a larger threat in terms ofwater management and greenhouse gas emissions when compared to conventional gas (Jenner &Lamadrid, 2013). While it is up to the legislation of each State whether to allow shale gas
development, the federal regulatory framework on environmental matters has been generally
favorable, and particularly for the case of water, the exemption of hydraulic fracturing from the Safe
Drinking Water Act has fostered a less stringent environment for water use that has sped up shalegas production.
Governmental support. Shale gas production would not have been possible without the participationfrom the government over decades, fostering the necessary technological development andproviding incentives for producers when shale gas was still unfeasible to produce. The context ofrising energy demand and shortages produced from relying on foreign energy suppliers during the1970s draw the interest on exploiting unconventional resource bases that at the time were notcommercially accessible. In consequence, the Eastern Gas Shales Project was a federal programthat run up from 1975 to 1992 with the aim of finding technologies to make shale gas production
economical. The program had a fundamental role in providing the technological basis that waslater implemented and refined by producers, and as stressed in Soeder (2012, p. 10), it wascomposed by resource characterization, development of production technology and their transfer
to the industry. In addition to these technological advances and borne from the Crude Oil Windfall
Profit Act of 1980, the Alternative Fuel Production Credit, –known as Section 29 Credit– was atransitory subsidy set to promote domestic energy from unconventional sources. By providing USD
0.50 per thousand cubic feet of natural gas obtained from certain unconventional sources
including shale, the Section 29 Credit allowed commercial shale gas production to sustain after its
expiration in 2002.

10

This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

4. Shale gas development in Mexico
Mexico started to push shale gas development more actively in the light of the initial assessment fromEIA (2011) that suggested a resource base of 681 trillion cubic feet, a volume approximately 57 times
larger than the country’s proved reserves of natural gas in 2010. On the basis of these estimations
alone, Mexico’s energy authorities were enthusiastic about the outlook of shale gas for their country.
With the United States as a reference and assuming this potential for granted, the Mexican Minister ofEnergy at the time stressed the role of shale gas to ensure gas supply in the long-term and touted it
as a game changer, with significant economic effects entailed for job creation, attraction of
investments and the competitiveness of the energy sector (Secretaría de Energía, 2011).
However, in comparing the factors leading to shale gas production, the United States and Mexico
are worlds apart. On an institutional dimension, under the Mexican law, the State is the exclusive ownerof all hydrocarbons deposited in the subsoil, including private lands. Accordingly, oil and gas activities
are undertaken by the state-owned company Pemex, which is the exclusive operator of the oil and gas
industry and is spread across the entire value chain. Nonetheless, Pemex’s operations are very complex,
as the company is driven in two directions: on one hand, as any other major oil and gas company, itaims to maximize the value of the hydrocarbons produced and meet the domestic fast-growing
demand under increasing economic, environmental and technical constraints. On the other hand, withthe current tax regime skimming off most of Pemex’s profits to provide nearly one third of thegovernment’s revenue, the company must struggle with budgets that are increasingly insufficient toimprove its economic efficiency.
These issues in combination with the power of the oil workers union –one of the most powerful in
Mexico, if not the most powerful– and the historical political interference in Pemex’s management have
weakened its operational capacity and flexibility to meet all its challenges effectively.
In terms of the regulatory framework, the law forbids Pemex from associating with private
operators in any scheme different to the payment of services, such as joint-ventures or production
sharing agreements. In such an environment, investment is mainly restricted to subcontractors ofservices and equipment under Pemex’s guidance. In the natural gas market, a major legal reform in1995 strived for deregulation and the abolition of the vertical integration of Pemex and allowed more
activities open to private participation, including distribution, transmission, storage –as LNG– and more
recently, limited upstream activities in the form of a multiple services scheme. However, international
experience shows that instead of paid contracts, operators prefer to share the risk with national oil
companies in order to access and book reserves for the benefit of their shareholders. Stojanovski (2012)
notes that when these blocks were opened, interest from operators was scarce, given the unattractive
rates of return offered by Pemex. Regarding the government’s role, its interest has been high as
explained in Section 2, and its efforts are focused on supporting initiatives favorable to shale gas
development.
From an economic perspective, in order to match Pemex’s limited budget and operational capacitywith its objective of value maximization, the company favors the more profitable oil projects over nonassociated gas –not to mention unconventional gas which entails higher risks. Moreover, unlike theUnited States where private operators make their economic decisions depending on the prices andmarket dynamics, in Mexico, the oil and gas projects are centralized at the federal government throughPemex, and are afterwards subject to the approval of the Ministry of Finance. According to Stojanovski(2012) this situation has caused a higher concern with short-term performance and objectives at the
Ministry of Finance, to the expense of investments on efficiency or technology with longer maturation
timeframes but which ultimately are more important to the long-term viability an oil and gas company.
This short-sighted vision might be also explained in terms of the preference for projects occurring within
the presidential term of 6 years so to reap political advantages.

11This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

Given the higher capital investments required in comparison to conventional gas production andthe current market environment of low gas prices in North America, profitability is more complex toachieve for shale gas projects. In any case, Pemex would need to find and develop wetter shale gas
reservoirs to increase the value of the output and the return of its investments. Nonetheless, the slow
pace of Pemex’s exploratory activities and its operational and financial hurdles complicate the allocationof adequate funding to step-up its shale gas activities. As mentioned in Shields (2012), for shale gas
production to be feasible there must be a minimal price to allow for cost recovery or a larger content ofliquids at the reservoir, which raises the question as to whether oil or gas prices should drive shale gas
development in Mexico and whether Pemex should maintain its efforts in pursuing shale gas or leavethem once and for all to private operators, assuming this alternative is allowed through legal changes tothe regulatory framework.
Adding to this complexity, the linkage to the Henry Hub in Mexico’s natural gas rates in combination
with the country’s limited infrastructure, led to serious bottlenecks in the gas supply during 2012.
Mexico is a natural gas net importer; with its natural gas demand growing 78% from 2000 to 2010,equivalent to an annual rate of 5.9% and with almost 20% being met by imports in the form of pipeline
flows from the United States and as LNG (Secretaría de Energía, 2012c). As combined-cycle technology
has been favored due to its environmental and efficiency advantages, In consequence, power
generation has become the main driver for natural gas demand and the anchor of many infrastructure
projects. Yet, in response to the descending Henry Hub prices in the United States, natural gas demandin Mexico surged during 2011 and 2012 especially from industrial consumers, that were unable to get
more gas imported from the United States due to the limited range of the existing pipeline systems andtheir capacity saturation, bringing about major shortages of gas and the discontent of the customers,
who were unable to rise their gas consumption in spite of the low prices. Just as with the mainargument of this paper on the incompatibility of assuming other situations as replicable, the market
failure on prices may be largely attributed to the use of a price reference with a context opposite to thatembedded in Mexico. As pointed out in Michot Foss (2012, p. 119), the “static organization” prevalent in
Mexico’s energy sector has neither been able to design an internal price mechanism to replace thevolatility of Henry Hub or to bypass the market power of Pemex and the power sector.
These issues reveal the natural gas market failures of Mexico and the technical limitations to be
overcome if shale gas production is going to take off. Moreover, this issue evidences the chronic
underinvestment of Pemex across the value chain of the oil and gas industry given its historical financialpressures and vertical integration (Tordo, et al., 2011). More specific, the legal restrictions to partner withother companies and the historical allocation of upstream investments on current production projects
over exploration activities have eroded Pemex’s expertise, technological capacity (Stojanovski, 2012;
Tordo et al., 2011) and infrastructure.
In addition, Mexico lacks of accurate geological information to assess the volume of shale gas
resources that can be economically recoverable to reduce the risks associated to their production. In
late 2012 it was announced that a geological assessment of shale gas resources would be carried out
by Mexico’s Petroleum Institute, in a project worth 244 million dollars drawn from a public trusting fund(Secretaría de Energía, 2012a) but given the nature and scale of this effort, the results will still take years
to manifest. In comparison to the United States, where competition and attraction of talent provide
competitive advantages to independent firms and shorten their learning curves, the lack of humancapital has hindered Pemex’s efficiency and access to technology, and as underscored in Stojanovski(2012, p. 318), “not only inadequate investment but also lack of human capital” represents the mostcritical constraint faced by the company. The lack of skilled workforce is the result of Pemex reaching its
peak of employment (Tordo, et al., 2011), relying more on external services companies and contractors(Stojanovski, 2012) and having to pay bulky pension obligations.

12This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

Moreover, in terms of the supportive service industry required to carry out shale gas production
efficiently, while Pemex has long had contracted diverse services for its own conventional gas
operations and with an energy reform passed in 2008, to grant a little more flexibility for its contracting
schemes, it is yet uncertain if specialized oilfield services and equipment would be fully available for
Mexico’s shale gas production due to the lack of incentives and sharing schemes. Furthermore, toperform the necessary hydraulic fracturing, there is considerable scarcity of water in the northeast partof Mexico, where the first exploratory shale gas wells have been drilled and prospective shale gas areas
have been identified. Official sources (Conagua, 2012) deem the hydrological capacity as unavailable
and rank the underlying hydrological region as the second lowest in Mexico in terms of its mean
availability of water per capita.
On the basis of the contextual divergences and structural deficiencies in the gas industry in Mexico
in comparison to the United States it is proposed that in order to use effectively the latter’s experience
as a benchmark for shale gas development, an examination of its processes and factors should be
carried out to generate knowledge that can be ultimately applied to devise a shale gas strategy adapted
to the Mexican context.
Although the discussion of the most suitable strategy for Mexico’s shale gas development isbeyond this paper’s scope, while in a preliminary stage the benchmark of the United States shale gas
experience has been used for aspirational purposes or performance monitoring, a further transition
oriented to learning its particular factors and processes underlying could lead eventually to thedevelopment of a knowledge capable of differentiating its structural and transitory elements to assess
what can be transplanted and must be changed in order to obtain the objectives desired for Mexico. Forgraphical purposes, the ideal result is shown is depicted graphically in Figure 5, with a different color anda more diffuse shape compared to the benchmark, to suggest that at the end is not replication what issought –in terms of a same shape with the same color–, but rather an own policy stemmed from theknowledge gained with the benchmark selected, allowing the implementation of policies adapted toparticular settings to obtain results more effectively. As an example, China has devised a holistic
strategy reminiscent of the background presented in the United States and although commercial
production has still not been achieved, China’s growing energy needs and vast shale gas resources haveelicited the government’s support, deploying a multifaceted strategy adapted to its own context, ofwhich results will take some years to come. The strategy encompasses resources assessment, appliedresearch and development, fostering of international cooperation, improved regulation, promotion of
investments and the establishment of joint ventures abroad to gain expertise and resources; altogether
these efforts profile China as the most promising candidate for shale gas production after the UnitedStates (Lozano Maya, 2012).

13

This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

Figure 5
Proposal of benchmarking evolution towards shale gas policy making

Factors
underlying

Benchmark(UnitedStates)Technical

Economic

Mexico’spolicies

Institutional

Depth of benchmarking

Performance-based

Learning of processes

Knowledge for adaptive
policies

5. Conclusions
The findings of this paper illustrate the misleading effects in the employment of the rapid shale gas
experience in the United States as a benchmark without accounting for the structural aspects andcircumstances that made it possible. These challenges call for a deeper understanding of thosefactors, so that instead of striving for their imitation, they serve as an input to develop knowledge
from which better policies and strategies are formulated to fit other contexts. Therefore, rather thanusing the United States experience alone as a performance-based benchmark supportive ofpolitical interests, its greater value lies in its use as a guide for the examination of the processes
and factors conducive to those results, to ultimately develop adaptive knowledge oriented towards
policies and strategies to fit other contexts and exploit unique opportunities in other countries.
In this particular case, in spite of Mexico’s inferred shale gas resources and its proximity with
the United States, energy policy makers must first overcome several structural deficiencies in the
Mexican natural gas industry to foster a more favorable environment for production to take off, letalone to the extent of the United States. More important, in supporting shale gas without anadaptive strategy, Mexico jeopardizing its energy security mandate, by depending on resourcesthat might eventually be costlier or take much longer to develop in comparison to the expectations
and initial plans stemmed from a strictly performance-based approach. To avoid such failure, theuse of this benchmark should aim to “look to other political systems for knowledge and ideas about
institutions, programs and policies and about how they work in other jurisdictions” (Dolowitz &Marsh, 2000, p. 7) in order to build knowledge and capabilities adapted to Mexico’s context.
The development of domestic natural resources and shale gas in particular, is a complex taskthat requires appropriate planning, financial and technological capabilities, adequate infrastructure,favorable regulation and governmental support. Although the use of the United States as abenchmark was initially used to hype the potential benefits of shale gas production for Mexico’s

14This is the revised version of a paper currently published in Energy Policy. Please cite as:

Lozano-Maya, J.R., 2013. The United States experience as a reference of success for shale gas
development: The case of Mexico. Energy Policy, Vol. 62, pp. 70-78.

energy security and economy, once the first steps were carried out, the complexity in achieving
similar results was realized, as the context between the two countries is very different. This caseillustrates that the use of a benchmark may mislead policy makers to assume replicable outcomes
without considering the processes involved. On the other hand, the use of a benchmark as a sourceof knowledge and parameter of the costs and timeframes associated in achieving a certain
outcome on another environment might be more helpful.
This paper might be helpful in providing a framework of analysis to the use of such reference
and in presenting evidence on its effects from an actual case. While this paper might be more
relevant for stakeholders related to Mexico’s energy policies or shale gas development, it might aswell offer valuable insight for policy makers and officials in other countries driven by the same
benchmark towards the strategic development of its shale gas resources. Finally, this paper hopes
to strengthen the academic research on the United States shale gas development and its effects inother places.

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