Mexico should tap natural gas to offset U.S. 'supply risk': regulator

MEXICO CITY (Reuters) - Mexico should speed up development of its natural gas reserves, including potentially massive shale deposits, to curb a growing “supply risk” fed by excessive dependence on U.S. supplies, the industry regulator proposed on Thursday.

While the country has long been a major oil and gas producer, an extended output slump forced Mexico last year to turn to foreign supplies for 84 percent of its total natural gas demand, almost all of which came from the United States.

The commodity is increasingly used to fuel the country’s growing manufacturing sector as well as its electricity needs.

“We need to diversify (sources of natural gas) because we are very concentrated,” said Juan Carlos Zepeda, president of the National Hydrocarbons Commission (CNH), Mexico’s oil and gas regulator, in an interview before announcing the proposals.

He pointed to shale gas resources estimated at more than 141 trillion cubic feet that should be developed.

“The priority of our national security related to natural gas does not allow the luxury of turning our back on this potential,” he said.

Mexico’s incoming president, however, has said he will not permit hydraulic fracking, the widely used technique to unlock oil and gas from dense shale rock that critics say harms underground water supplies.

“We will no longer use that method to extract petroleum,” President-elect Andres Manuel Lopez Obrador told reporters just weeks after winning a landslide election victory on July 1.

Set to become Mexico’s first leftist leader in decades in December, Lopez Obrador has said he will focus on strengthening state-owned Petróleos Mexicanos [PEMX.UL], known as Pemex.

So far this year, Pemex has produced an average of 4.83 billion cubic feet per day (bcf/d) of natural gas, down by nearly a third compared to peak production of 7.03 bcf/d in 2009.

“We’ll have to be convincing,” CNH Commissioner Hector Moreira said in an interview, noting that two-thirds of Mexico’s estimated natural gas supplies are in so-called non-conventional shale deposits.

He added that three main gas pipelines on the U.S.-Mexico border make imports vulnerable to disruption.

Both Zepeda and Moreira propose that oil and gas auctions continue under the incoming government, especially in gas-rich areas, and that new fiscal incentives be enacted that allow producers to immediately deduct drilling costs with no required royalty payments.

They also pitch a new state-owned company focused exclusively on producing natural gas, similar to Russia’s Gazprom.

Reporting by David Alire Garcia and Adriana Barrera; Editing by Richard Chang