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In Mexico's shale patch, cartel violence scares off drillers

[September 26, 2018] By Adriana Barrera

REYNOSA, Mexico (Reuters) - The oil and gas fracking boom has lured scores of drillers to the Eagle Ford region of South Texas, the second largest U.S. oil patch, as new production technology opened access to billions more barrels.

The play extends across the Mexican border, where its name changes to the Burgos Basin – an equally fertile shale region where the oil and gas sit mostly idle underground in a region terrorized by criminal gangs.

The violence here threatens to derail the country’s first-ever auction of exploration and production rights to its shale fields in February – one that could prove pivotal to its hopes for reversing a national decline in crude and natural gas output to two-decade lows.

Despite an energy-reform push that has aimed to lure investments from foreign oil firms since 2014, only Mexico’s state-run oil firm Pemex has tried fracking the country’s shale reserves, and only experimentally, even as fields that are accessible with traditional drilling methods are drying up.

The nine shale oil and gas blocks up for auction are all within Burgos, in the northern state of Tamaulipas, where the Gulf and Zeta cartels have waged a war for control of drug and human-trafficking routes since 2010.

As security unraveled, at least two Pemex workers were killed and 16 were kidnapped as gangs demanded protection money from oil firms and blocked work crews from accessing wells and pipelines. A manager with Weatherford International Ltd <WFT.N>, the Switzerland-based oilfield services firm, was also murdered.

In April, a Pemex security worker guarding installations against fuel thieves was killed and another was shot in an ambush in the Tamaulipas city of Matamoros after gunmen fired some 60 rounds into a vehicle.

The Burgos Basin contains about two thirds of the country’s technically recoverable shale reserves, estimated at 545 trillion cubic feet (TCF) of gas and 13.1 billion barrels of oil and condensate, compared to the 665 TCF of gas and 58 billion barrels of oil and condensate in the United States, according to the U.S. Energy Information Administration.

Companies that are already fracking across the border in Texas would likely expand into Mexico if the government could address the violence, oil executives said.

Mexican government officials often field questions about security in gatherings where they promoted the nation's drilling opportunities to oil firms.

"In every meeting I was able to attend, there were questions about security,” said Jorge Rios, vice president of operations for Latin America with Precision Drilling, a Canadian company that operates in the Eagle Ford and has drilled in Mexico in the past. “The response was not firm."

Mexico’s energy and interior ministries did not respond to requests for comment. Pemex declined to comment.

Repsol <REP.MC>, a Spanish oil major, left the Burgos Basin in 2014 as the violence escalated, ending operations it began in 2004 as the first foreign firm to drill in Mexico since it nationalized the industry in 1938. The company, which has shale operations in Eagle Ford, would require "very big changes" before it considered returning to the Burgos, a Repsol executive told Reuters on condition of anonymity.

"In 2014 the situation was difficult to manage,” the executive said. “Now it's worse."

Repsol declined to comment through its Mexican public relations agency on the executive’s version of events.

GOVERNMENT SILENCE

Mexico’s natural gas output fell for third year in a row to 4,240 million cubic feet per day last year, increasing the need of imported gas - almost entirely from the United States - to 84 percent of the nation’s consumption. The growing dependence on foreign gas prompted the government to hold a conference for energy companies in the city of Reynosa in Tamaulipas to promote the upcoming shale auction.

The cheerfully-colored Parque Cultural Reynosa conference center was guarded by soldiers and police armed with automatic weapons. But inside the conference in February, panelists carefully avoided any mention of murders or kidnappings. One panelist told Reuters he had specifically been asked by Tamaulipas state officials to avoid mentioning violence.

“The government was in promotional mode. They weren’t going to talk about the bad things,” said another conference participant.

Tamaulipas' state energy commission and local officials, which helped organize the conference, did not respond to a request for comment.

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Soldiers keep guard a gas facility of Pemex in Reynosa September 18, 2012. REUTERS/Daniel Becerril/File Photo

Security problems were nonetheless top-of-mind for attendees – who were greeted by the news of crackling shootouts in the crime-infested border city. Delegates stayed at a heavily fortified hotel and waited for rides to the conference in armored vehicles guarded by soldiers.

In the days leading up to the conference, about a dozen bodies were left in the streets as cartel linked to the Gulf and Zeta cartels mounted roadblocks and battled security forces. Two weeks before, in the nearby city of Nuevo Laredo, a gun battle broke out within meters of where the mayor was giving a speech.

Another conference participant – a Houston-area businessman – said the Mexican government had taken a head-in-the-sand approach to the violence, one he compared unfavorably to Colombia, where senior security officials showed up at energy conferences a few years ago to reassure investors of progress in fighting armed rebels.

"If Mexico had a solution,” he said, “they would have talked about it."

‘THAT’S WHAT MADE US LEAVE’

In 2003, Repsol was awarded a service contract by Pemex in the Burgos Basin to develop several conventional natural gas fields along the Reynosa-Monterrey area for 10 years. Repsol increased production at the region after an initial investment of $170 million, but returned the installation to the state-run firm in early 2014.

When Repsol started, the Reynosa region was relatively calm, but within a couple of years it plunged into chaos after President Felipe Calderon went on the offensive against drug cartels. The Repsol executive said oil firms had to guard against kidnappings, extortion and having workers caught in crossfires between rival gangs, along with is now Mexico's fastest-growing organized crime - fuel theft.

The firm invested in private security, the executive said, but it wasn’t enough.

"That's what made us leave," the executive said.

A senior Pemex executive compared the current situation in Tamaulipas to Iraq and Colombia during their years of conflict, saying oil companies could operate with appropriate safety measures.

"You can work, perhaps not as efficiently as we would like, but you don't lose money, either," the executive said.

Other companies including Newpek, a unit of Mexico's Alfa <ALFAA.MX>, and a consortium of Mexico's Jaguar Exploración y Producción with a unit of Canada's Sun God Resources, came to drill in Tamaulipas state after the 2014 government oil reforms.

By the time they arrived, strict protocols had been introduced by operators and service firms in the area, keeping employees inside between 4 p.m. and 8 a.m. and coordinating with the military before moving into the field.

To avoid dangerous misunderstandings, cars are clearly marked with company logos and employees avoid wearing clothes that the criminals could mistake for security forces, two oil workers told Reuters. They practice defensive driving, move in convoys and are told to respond honestly if interrogated by the cartel.

Women are generally not permitted to work beyond the major urban areas.

"I was not allowed to go into the field because there is a high risk I could be raped,” one female worker said.

Liberty Oilfield Services <LBRT.N>, whose operations include the Eagle Ford, has not considered operating in Mexico in part because of safety concerns.

"The safety of our workers in Mexico would be a massive concern,” said Liberty Chief Executive Officer Chris Wright. “We’d take some of our own actions for security and guards, but maybe that’s not enough.”

(Reporting by Adriana Barrera in Reynosa, Mexico; Additional reporting by David Alire Garcia in Mexico City and Marianna Parraga and Liz Hampton in Houston; Editing by Frank Jack Daniel and Brian Thevenot)

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