Eagle Ford Shale play economics: U.S. versus Mexico

Abstract

The decline of domestic natural gas supply and rising demand requires Mexico to import 1/3 of its annual gas consumption of 2.5 trillion cubic feet (Tcf). Yet, Mexico's estimated resource of technically recoverable shale gas (545 Tcf) is the 6th largest such gas resource in the World. Much of Mexico's shale gas resource is in the Eagle Ford Shale, which is a mature shale gas and oil play in the U.S. To aid in determination of whether development of the Eagle Ford Shale in Mexico could reduce the country's dependency on natural gas imports, we evaluated the potential of Mexican shale acreage by comparing the after-tax net present value (NPV) and internal rate of return (IRR) of Eagle Ford shale wells on either side of the U.S.-Mexico border. The initial development of Mexican acreage occurs with a much larger well-spacing (leading to higher acreage acquisition cost per well), which would require 25% higher development cost as compared to Texas acreage. Consequentially, Texas wells have better net present value (NPV) and higher internal rate of return (IRR) than Mexican wells, in general. The principal explanation is that the signing bonus will be much higher in Mexico than in Texas, partly effectuated by the lower well spacing for unrisked acreage. Results of our study provide potential operators and investors with a preliminary indication of Eagle Ford Shale well economics in Mexico. Our study includes sensitivity analyses for both non-escalated and escalated gas prices, for drilling and completion (D&C) costs, and for leasehold cost. The economic appraisal accounts for both single- and multiple-well development scenarios with P10, P50 and P90 production forecasts.