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Mexico's Fading Oil Output Squeezes Exports, Spending

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Cantarell Field
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MEXICO CITY (Dow Jones Newswires), Sept. 11, 2009

Mexico's oil output is falling faster than expected, increasing the chance that the country will lose its status as a major oil exporter in coming years and face a worsening budget shortfall.

Output at state-owned oil monopoly Petroleos Mexicanos's offshore field Cantarell, once the world's second-largest oil field, has plunged to 500,000 barrels a day from its peak of 2.1 million in 2005.

"I don't recall seeing anything in the industry as dramatic as Cantarell," says Mark Thurber, assistant director for research at the Program on Energy and Sustainable Development at Stanford University.

Cantarell's slide has pushed Mexico's overall oil output down. Shrinking oil exports are costing Mexico roughly $14 billion a year -- bad news for a country that relies on oil exports to pay for nearly 40% of its annual government budget. That shortfall, aggravated by the weaker overall economy, has caused the government to cut spending this year and propose a growing budget deficit for next year.

Ratings agency Standard & Poor's revised its outlook for Mexico's sovereign-credit rating to negative in May, citing the decline in oil output as a factor. "There are several elements that all come together," says Lisa Schineller, an S&P analyst. "A low tax base, a dependence on oil for its budget . . . lower oil output, a limited outlook for economic growth, and a dependence on the U.S. market."

The shortfall has underscored the need for broad tax reform to reduce dependence on oil money, she says. But the solutions -- ending Pemex's monopoly and raising taxes -- are tough for politicians to swallow. Without progress on tax reform, Mexico's credit rating will likely be downgraded a notch before year-end, Ms. Schineller says.

Mexican President Felipe Calderon has called for more energy sector reforms. BP PLC's big oil strike in U.S. waters off the Gulf of Mexico, announced last week, should be a "wake-up call," the president said in a radio interview. "It's very likely we have similar [oil] wealth, but we don't have . . . the technology or the organizational and operational capacity to do it by ourselves."

In a sign of Pemex's woes, Mr. Calderon ousted its chief executive this week and replaced him with Juan Jose Suarez Coppel, a former Pemex chief financial officer and University of Chicago-educated economist.

Mr. Suarez Coppel is seen as someone who can maximize efficiency, helping Pemex through lean times. "Pemex faces not only a shortage of resources for investment and operation, but above all, internal problems," he said on accepting the job.

Carlos Morales, head of Pemex's exploration and production division, says Cantarell is expected to stabilize at 400,000 barrels a day. The company has offset some of Cantarell's decline by raising output at other fields, notably offshore field Ku-Maloob-Zaap -- now Mexico's biggest field -- which produces roughly 800,000 barrels a day. In coming years, "when Ku-Maloob-Zaap goes into decline, we have enough other projects to raise overall output slightly," Mr. Morales says.

David Shields, an independent oil consultant in Mexico City who warned about Cantarell's impending collapse years ago, says he is dismayed at the lack of accountability at Pemex. "Production at Cantarell is almost being allowed to run out without any decent explanation" of the technical reasons, he said.

Mr. Morales says Pemex relied too heavily on Cantarell, but is trying to fix that by stepping up exploration and focusing on a greater number of smaller fields. "Diversification is the name of the game," he says.

One big bet is Chicontepec, a massive onshore field discovered in the 1920s. It has resisted exploitation because it is made up of small pockets of oil spread out over thousands of square miles. So far, though, output at the field has disappointed.

A better long-term bet, say analysts, are oil deposits in the deep waters of the Gulf of Mexico. Pemex, however, lacks the technology to operate in deep water. Last year, Mexico passed a law giving the company greater flexibility to hire foreign oil companies as contractors. But expected legal challenges from nationalist lawmakers have kept Pemex from even publishing the proposed contracts -- a process that could take the rest of this year. Even then, many foreign companies may not bite.

Oil from deep waters takes about seven years to develop, and many analysts say Mexico is doing too little, too late.

For the U.S., the decline in Mexican output means less oil from a politically stable and friendly nation; in the medium term, that will increase dependence on Mideast oil, though Canada and Brazil are ramping up production.

"Some of Mexico's top leadership has some urgency, but it doesn't seem to have permeated the rest of the political class or the general consciousness," says Stanford's Mr. Thurber. "Mexico's political class is busy rearranging deck chairs on the Titanic."  

Copyright (c) 2009 Dow Jones & Company, Inc.

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