NUEVO LAREDO, Mexico, June 12 To grasp the difficulties Mexico faces in capitalizing on a North American shale boom, just wander into the dusty landscape due south of the U.S. border.
On one side of the fence, thousands of wells work around the clock in Texas to produce record volumes of shale oil and gas, transforming towns like Carrizo Springs in a modern-day gold rush.
On the other side, violent drug cartels roam above untapped shale riches, leaving behind a trail of blood. The relatively few conventional wells operated by state oil giant Pemex and its contractors close down overnight as a security precaution.
But surging crime, while dramatic, is just one of many obstacles thwarting a Mexican shale boom that is seen as years off at best.
"Organized crime is an additional operating cost companies will be keeping a close eye on," said Alberto Islas, head of Mexico City-based consultancy firm Risk Evaluation.
Bullet-riddled corpses are piling up in and around the city of Reynosa in the heart of one of Mexico's richest shale deposits, a major flashpoint of gang wars where hundreds of troops have deployed in recent weeks.
Since April, there have been dozens of murders in Reynosa, a city of 600,000, as the Gulf Cartel battles the infamous Zetas. The dead include a top Tamaulipas state intelligence officer. The head bodyguard to the state governor has been implicated in the crime.
"We must reinvent ourselves or die," said Federico Alanis, owner of a family-owned aluminum business in Reynosa.
He and others are hoping transformation will come from a major energy reform passed late last year that ended state oil giant Pemex's 75-year-old monopoly and promises billions in new investment. The reform is "a blessing from God," Alanis said.
The U.S. Energy Information Administration says Mexico's total combined shale oil and gas potential is the world's seventh-largest at 117 billion barrels of oil equivalent, far more than the 60 billion Pemex estimates.
While Pemex has limited shale expertise and has focused on more profitable oil and gas projects further south, the company believes Mexico holds 32 billion barrels of oil equivalent (boe) in shale oil alone.
That exceeds the deepwater potential Pemex sees in the Gulf of Mexico. That area is often seen as the main advantage of energy reform, whose fine print is still being debated in Congress.
But when it comes to shale development, Mexico is just getting started.
In the last few years, Pemex has drilled fewer than 20 test shale wells in the shale-rich Burgos basin, an extension of the Eagle Ford Formation in southern Texas.
"It's all brand new to us," said Alberto de Leon, president of the local chapter of employers' federation Coparmex in the Mexican border city Nuevo Laredo, right on the edge of Eagle Ford.
By contrast, thousands of wells sunk in Eagle Ford churn out more than 1.2 million barrels each day, up from just a few hundred barrels in 2008.
Although Nuevo Laredo is the busiest border transit point for trucks to and from the United States, not one oil company has set up an office there, de Leon said.
That is not quite the response the government was hoping for from investors when it revamped the energy sector in December.
BIG POTENTIAL, MANY OBSTACLES
With barely any processing plants or pipelines to move oil and gas in the far north, a near-absence of specialized workers, and scant supplies of water needed for shale development, Mexico is decades behind its northern neighbor.
And citing environmental concerns, the country's center-left political parties are pushing to ban hydraulic fracturing, or fracking, which is used to unlock oil and gas from dense shale rock.
Meanwhile, Pemex's shale program currently focuses on its existing 19 test wells in Burgos and two test blocks: its Galaxia area northwest of Nuevo Laredo by the border and the Limonaria area further south. The test areas, plus other shale exploration will get investments of $800 million over the next 12 months, said Gustavo Hernandez, head of Pemex's exploration and production arm.
Limonaria's geology is not an extension of Eagle Ford, but part of Mexico's Tampico-Misantla basin, the country's biggest shale basin at nearly 35 billion boe, according to Pemex data.
Through its Newpek unit, Mexican industrial conglomerate Alfa operates more than 200 wells in Eagle Ford. But it has yet to announce any plans to venture into shale in its homeland.
"What we're trying to figure out is exactly what kind of formation and what kind of area will be available in Mexico to be the best one in which we can participate," Raul Mijares, Alfa's energy director, said recently.
Pemex is awaiting the September outcome of a so-called Round Zero allocation in which it has asked for rights to 9 billion boe in shale resources, but specific blocks are unknown.
While energy ministry officials say the first exploration and production contracts to go up for grabs next year will include shale gas blocks, they may prove to be a victim of the reform's success at attracting investments to lower-cost deposits first.
Energy consultancy Wood Mackenzie estimates 109 mature oil fields, accounting for less than 2 percent of current output of about 2.5 million bpd, are likely to lure investment before costlier shale fields.
While most other sector analysts are also downbeat on Mexico's near-term shale prospects, a notable exception is Edward Morse, global head of commodities research for U.S. bank Citigroup.
Although he says security is a concern in parts of Mexico, he cites recent output gains in Argentina's massive Vaca Muerta shale play, despite fierce resource nationalism and other obstacles.
"Barriers are very high," he said, "but barriers in Argentina were at least as high as barriers in Mexico." (Additional reporting by Dave Graham; Editing by Simon Gardner and Lisa Von Ahn)