The Weekly Reader

Link: http://www.eluniversal.com.mx/miami/23061.html

Pemex predicts production drop

The progressive decline in Mexico´s capacity to produce oil is rapidly becoming more worrisome than the slump in global crude prices

El Universal
Viernes 19 de enero de 2007
The progressive decline in Mexico´s capacity to produce oil is rapidly becoming more worrisome than the slump in global crude prices.

According to estimates by the state oil company, Pemex, petroleum exports will decline dramatically during the Calderón administration.

ED NOTE: Mexico's Cantarell field is the second largest in the world. It reached peak in 2005 and is now declining at astounding rates, approaching 15% for 2007.

Follow up:

Pemex is anticipating a 13 percent drop in its crude exports over the next six years as Mexico´s proven reserves continue shrinking.

Analysts contacted by EL UNIVERSAL agree that Pemex´s inability to increase production is due to waning reserves - particularly the Cantarell field in Campeche Bay which is the source of roughly 60 percent of the nation´s proven reserves - and incapacity to access potential deep-water wells.

The first symptoms of a genuine oil crisis are becoming more and more evident.

Documents acquired by EL UNIVERSAL indicate Pemex will be forced to cut back on exports to the United States. The reduction could reach 150,000 barrels per day in the next four years. In the final two years of the Calderón administration, the reduction could reach 500,000 barrels per day.

Currently, around 1.5 million barrels of oil go to the United States daily.

The potential for long-term damage lies in the fact that such a reduction could allow other suppliers - among them, Brazil, Venezuela and Canada - to permanently steal some of Mexico´s market share.

Furthermore, Pemex has already canceled shipments of crude to the Deer Park (Texas) refinery it owns along with Shell for the next 12 months. That means prices of imported gasoline and diesel may rise.

According to Raúl Muñoz Leos, a former Pemex director, the primary problem lies in the rapid decline of Cantarell reserves and the failure to develop other fields.

Muñoz said production levels rose steadily from 2002 to 2004, encouraging company directors to predict a continuation of this trend.

"We established a production goal of 4 million barrels a day by 2006, but by mid-2005 production levels began to decline," he said.

Although Pemex´s exploration budget was boosted to US$4 billion last year, the investment has yet to bear fruit.

"Since this sizeable investment has brought little in return, it might be time for us to learn from the experience of other international producers and redouble our exploration efforts," he said. "It is impossible to ignore the fact that our reserves are rapidly shrinking."

The latest official projection shows Pemex will be able to produce only 3.3 million barrels per day over the next 10 years.

George Baker, an oil industry consultant, told EL UNIVERSAL the situation is further complicated by the fact that the price for Mexico´s basket of crude - which is heavy and therefore less attractive - is so low.

"It is very dangerous to lose market share," Baker said. "Especially if your share is taken by someone who can supply lighter crude."

PMI Comercio Internacional, Pemex´s export management company, has already begun to notify some clients in the United States that it will have to cancel some contracts because production levels are declining.

Rosendo Zambrano, the director of PMI, explained that the contracts affected at present are short-term, renewable contracts that will be sacrificed due to the 150,000 barrel-a-day cutback planned for 2007-2010.

However, Pemex is also notifying clients with long-term contracts that production levels may force adjustments in contracts beginning in 2010.

"We are facing a very complicated situation that could result in the loss of more and more clients," said a Pemex official who asked to remain anonymous.