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Analysts watch, wince as Mexico's oil supply dwindles

They warn of an irreversible output decline.

By DAVID ADAMS, Times Latin America Correspondent
Published September 24, 2007

A ship passes near part of the Cantarell oil platform of Mexico's state oil company Pemex, near the city of Ciudad del Carmen, Campeche.
	[AP photo (2001)]

MIAMI - When left-wing guerrillas in Mexico bombed several pipelines in simultaneous attacks this month, it sent a shudder through that country's large oil and gas industry.

The threat of economic sabotage by a shady group known as the Revolutionary Popular Army EPR poses a major new headache for the Mexican government. But Mexico's energy industry problems run far deeper than terrorist attacks on its infrastructure, analysts say, and have major implications for U.S. oil supply.

"Mexico's oil production is in decline. There's probably no way to stop it," said Mike Rodgers, an expert at one of the top oil industry consulting firms, PFC Energy in Houston.

Mexico is the second largest supplier of oil to the United States (about 1.5-million barrels a day). But output from its major fields is dwindling fast, according to official figures from the state-owned oil giant Petroleos Mexicanos (Pemex). The country's known oil reserves will run out in nine years, the government says, potentially undermining the nation's oil-dependent budget.

Mexico's decline only adds more pressure to prices in a tight global oil market, which hit $83 a barrel Thursday. Worse still, its emptying wells are only a reflection of a global decline in aging oil fields around the world.

With no major oil fields left to discover, analysts say the world is approaching "peak oil," the moment at which oil production hits its maximum capacity and slowly starts to fall.

Mexican output peaked at just over 3.4-million barrels a day in 2004. "I don't believe we'll ever see it that high again, no matter how much is invested," said David Shields, an oil industry consultant in Mexico City.

Daily output at Mexico's biggest oil field, Cantarell, highlights the problem. Production there dropped by a staggering half a million barrels in the last 18 months, to 1.5-million barrels from 2-million. Once the world's second-biggest oil field, it is expected to continue losing production, down to as little as 600,000 barrels a day by 2013.

In Mexico, geology and politics go hand in hand.

The oil industry was nationalized in 1938. State control of oil and gas is protected under Mexico's constitution, which strictly limits foreign investment in the extraction of the nation's energy resources.

The Cantarell field, which lies offshore in the Gulf of Mexico, takes its name from a Mexican fisherman named Rudesindo Cantarell who discovered it accidentally in the 1960s after noticing his nets were coming up smeared in tar.

It turned out to be a dream find. Unlike most fields which are spread out over a large area, Cantarell is highly concentrated, spanning only 70 square miles of ocean floor. As a result, Cantarell's 200 wells do a job that would normally require thousands more drillings.

Geologists attribute this possibly to an asteroid that hit the Yucatan peninsula some 65-million years ago. Its impact may have caused subterranean cracks that allowed oil to run into a vast underground chasm. The same asteroid is believed to have led to the extinction of the dinosaurs.

But instead of reinvesting profits in new wells to sustain production once Cantarell runs out, Mexican governments used the oil revenue to pad their budgets. Taxes and dividends from Pemex's production last year amounted to $52-billion, 40 percent of government revenue.

Pemex's lack of access to foreign financing and technology has left it hamstrung as it looks around for new fields. Pemex has said it can offset declines at Cantarell with new production from other fields. While several sites, onshore and offshore, have potential, it would take a decade of massive investment to bring them on stream, analysts say.

"They really don't have a way to fix the problem," says Rodgers. "They could have if they had used some foresight. Now it's virtually impossible."

In his recent state of the union speech, Mexican President Felipe Calderon mentioned the nation's dwindling reserves.

"Our petroleum reserves have been reducing constantly. It has to be said," he said, as if broaching a taboo subject.

Rather than proposing ways to increase production, Calderon seemed to accept there was no way for Mexico to drill its way out of the problem. Instead, he called for "an urgent reduction in public spending to reduce the enormous dependence on oil revenue."

The fact that Mexico may be running out of oil should not alarm U.S. consumers in the short term, analysts say. The United States will most likely buy more from Canada, which is the nation's number one supplier.

New technology and high prices are helping tap vast new sources of so-called unconventional crude oil, such as Canada's tar sands. Global oil production (currently 85-million barrels a day) could reach as high as 100-million barrels per day in the next few years, analysts say.

But that may not be enough to keep pace with demand from growing economies such as China and India. In the long term, Mexico's problems are likely to be everyone's.

David Adams can be reached at dadams@sptimes.com.

[Last modified September 23, 2007, 22:28:28]