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 Business News | July 2006 
Will Mexico Soon Be Tapped Out?
 Marla Dickerson - LATimes
| | A rapid demise of Cantarell, the country's chief oil field, could pose a serious economic threat. |
Output at Mexico's most important oil field has fallen steeply this year, raising fears that wells there that generate 60% of the country's petroleum are in the throes of a major decline.
Production at Cantarell, the world's second-largest oil complex, in the shallow gulf waters off the shore of Mexico's southern Campeche state, averaged just over 1.8 million barrels a day in May, according to the most recent government figures. That's a 7% drop from the first of the year and the lowest monthly output since July 2005, when Hurricane Emily forced the evacuation of thousands of oil workers from the region.
Though analysts have long forecast the withering of this mature field, a rapid demise would pose serious challenges for the world's No. 5 oil producer. The oil field has supplied the bulk of Mexico's oil riches for the last quarter of a century, and petroleum revenue funds more than a third of federal spending.
"Cantarell is going to fall a lot, and quickly," said independent consultant Guillermo Cruz Dominguez Vargas, a former executive with Mexico's state-owned oil monopoly, Petroleos Mexicanos, known as Pemex. "I can't imagine the strain on this society if there is nothing to replace it."
It would also be bad news for the United States, for which Mexico is the No. 2 petroleum supplier, behind Canada. And it could exacerbate tight global supplies that have kept oil at record prices.
The world's "elephantine" fields have already been bagged, forcing companies to hunt in ever-more-remote areas for smaller amounts of oil to feed burgeoning demand, according to Houston energy analyst William Herbert.
"Unfortunately, the era of low-hanging fruit … has really run its course," said Herbert, co-head of research at Simmons & Co. International, a Houston-based energy investment bank. He put the odds of finding another field the size of Cantarell in Mexico or anywhere else at "slim and none."
Exceeded in size only by Saudi Arabia's leviathan Ghawar field, Cantarell is a prolific giant that is past its prime. Monthly production peaked in late 2004 at just over 2.1 million barrels a day and has fallen more than 15% since then. Experts agree it has nowhere to go but down.
The multibillion-dollar question is just how quickly Cantarell will lose its productive capacity, and whether Pemex will be able to coax more oil out of existing fields to take up the slack while it searches for new deposits.
Pemex did not respond to requests for an interview. But officials publicly have downplayed prospects of a swoon in the media and in official releases. In fact, the company has projected that its overall oil output will increase slightly in 2006 to an average of 3.4 million barrels a day from 3.3 million daily last year.
The firm has done extensive maintenance on Cantarell to keep the oil flowing. In a December 2005 news release, Pemex predicted that the field will produce an average of 1.9 million barrels a day in 2006, a modest 6% drop from 2005, followed by double-digit annual declines that would reduce average production to 1.4 million barrels daily in 2008.
Other studies aren't so optimistic. Seawater is threatening to swamp the wells of Cantarell as the field's pressure diminishes, a debilitating symptom of old age that makes it tougher to extract the remaining oil. Leaked internal reports of Pemex's own worst-case scenarios published in Mexican newspapers show production plummeting to about 520,000 barrels a day by the end of 2008 — a 71% free-fall from May levels in less than three years.
Mexico City energy analyst David Shields said the swift drop over the first five months of 2006, and conversations with Pemex insiders have convinced him that prospects at Cantarell are worse than officials will admit publicly. June figures for the field won't be available until later this month. But Mexico's overall crude production fell in June, the third straight monthly decline, making it unlikely that Cantarell staged a revival.
"It's doing very badly," said Shields, general manager of Energia a Debate, an industry trade publication, and the author of two books on Pemex. "My reading of the situation is that it's dire."
Whether Cantarell's slide prompts changes in Mexico's oil sector remains to be seen. Critics have long lambasted state-owned Pemex as a hotbed of inefficiency and corruption that officials have treated more like an ATM than Latin America's largest company. But record oil prices have lessened the urgency to overhaul the company.
One would never suspect that trouble might be bubbling in Mexico's oil patch from the glut of petrodollars flooding its treasury. Federal officials last year siphoned $54 billion from Pemex to fund government spending that included a baseball stadium in Chihuahua and a gigantic flagpole in Nuevo Leon.
The trouble, analysts say, is that the government's take is so large that it has left little to reinvest in Pemex to keep the black gold flowing.
Despite record sales of $86.2 billion last year, the company lost $7.1 billion after taxes. It's the most indebted oil firm in the world, carrying a staggering $50 billion in loans on its books. Pipeline leaks and explosions are commonplace, in part because the monopoly lacks sufficient funds for basic maintenance of equipment. Proven reserves have tumbled by more than a third since 2000. Mexico buys a quarter of its gasoline from foreigners for want of refining capacity, the equivalent of Hawaiians importing pineapple.
Yet Pemex was not an overriding theme of the recent presidential contest. In fact, the three major candidates usually prefaced remarks about their energy plans with the assertion that the state-owned oil firm must never be privatized. Like Social Security in the United States, Mexico's government-controlled oil industry is the third rail of Mexican politics.
"No Mexican candidate ever earned a single vote by talking about reform in the energy sector," said analyst George Baker, a Mexico expert with Energia.com, a Houston-based consulting firm.
Mexico nationalized its industry in 1938 in response to decades of perceived exploitation by foreign oil interests. The belief that "el petroleo es nuestro" or "the oil is ours" is deeply embedded in the national psyche.
Cantarell is a particular source of pride. Named for a Yucatan Peninsula fisherman, Rudecindo Cantarell, who first noticed crude bubbling to the surface of the Campeche Sound in 1976, the field vaulted the nation into one of the world's oil powers and affirmed the ability of Mexicans to manage their own energy resources.
"We haven't had many successes in our history, but petroleum is one of them," said consultant Cruz.
But he and other experts say Mexico's go-it-alone strategy has become a liability at a time when the nation desperately needs billions in fresh capital to develop new fields. Mexico's constitution currently forbids outsiders from investing in the energy sector in exchange for a share of production, a global practice that has been embraced even by communist Cuba.
Mexico's Deep-Water Wells May Double Costs
Mark Stevenson - Associated Press
Mexico may have to spend twice as much to find and extract oil in coming years as the country is forced to turn to smaller deposits and searching in deep water, energy officials said Tuesday.
The changes are due to the decline of the huge Cantarell field in the southern Gulf of Mexico, where production has started falling by an average annual rate of 5 to 6 percent, officials said.
"The era of easy oil is over in our country," Energy Secretary Fernando Canales told a news conference.
Canales noted the Mexican Constitution bars the state-owned oil monopoly Petroleos Mexicanos, or Pemex, from forming strategic alliances with foreign companies with more deep-water experience, limiting "the speed with which we can drill these exploratory wells."
Officials said Mexico needs to drill 30 to 50 such exploratory wells.
Mexico's three existing deep-water wells have so far produced more natural gas than crude oil, but Canales added "we need gas as well as oil, so it's not a waste."
Assistant Energy Secretary Hector Moreira said "I think the (production) costs will probably double" for Mexico's crude mix. But he added that "even if the cost reaches 15 or 16 dollars (a barrel) ... it continues to be very, very profitable" with current high oil prices.
Crude was trading Tuesday at around $74 a barrel on international markets.
Canales said Saudi Arabian officials recently told their Mexican counterparts that some of the current boom in prices is due to international conflicts and the uncertainty they create.
"They estimate that oil is overvalued by 20 dollars (per barrel) due to geopolitical concerns," Canales said.
High oil prices "benefit us in the short term," Canales said, "but in the medium and long term, this is not something that benefits Mexico, because very high oil prices could result in a reduction in the growth of the world's economies."
While Mexico faces a problem in replacing production with the discovery of new oil reserves, Canales said the country had reached a 59 percent replacement rate, up from around 21 percent in 2000.
He also said studies suggested Mexico has 54 billion barrels in unproven reserves.
In the meantime, he said Mexico was studying adding more nuclear power capacity, including a possible second reactor next to Mexico's only existing plant, at Laguna Verde in the Gulf coast state of Veracruz.
Canales also sought to reassure Central American nations that an ambitious regional energy project would go ahead regardless of who is declared the winner of Mexico's still-disputed presidential elections.
Some of the most promising potential reserves lie in the deep waters of the Gulf of Mexico. But that's an expensive undertaking for which Pemex lacks the technical expertise, funding and, perhaps most important — time — to bring new production along fast enough to offset Cantarell's descent.
"Once Cantarell rolls, conventional wisdom has it that it would roll hard and that the declines would be steep," analyst Herbert said. "It looks like that may be what we're seeing." |
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