Mexico to Benefit from OPEC Oil Cuts without Chipping in

Chicontepec and Cantarell
(Click to Enlarge)

MEXICO CITY (Dow Jones Newswires), Dec. 17, 2008

Oil-exporting Mexico stands to benefit from the Organization of Petroleum Exporting Countries' 2.2-million-barrels-a-day oil cut without turning off its own spigots.

Mexico, along with other non-OPEC exporters Russia and Norway, worked closely with OPEC during the 1998-1999 price crash. But this time the world's sixth-largest producer has made clear it won't shut in any producing wells.

"Pemex and Mexico will, undoubtedly, benefit from OPEC production cuts as Pemex maintains a strategy of production independence," said Gianna Bern, president of Brookshire Advisory and Research Inc., a Chicago-based management consulting and energy-economics research firm.

On Tuesday, Mexico's Energy Ministry said it has already shed 600,000 barrels a day in production since 2004 because its prized Cantarell oil field is running dry.

The new cut announced Wednesday is effective from January 2009, and it brings OPEC's total announced supply reductions to 4.2 million barrels a day from September levels.

OPEC repeatedly has asked other exporters outside of the group to join in on the cuts. Non-OPEC Russia, unlike Mexico, has said it will coordinate production cuts with OPEC to stabilize prices.

Mexican production is down 200,000 barrels a day since the start of this year to under 2.8 million barrels a day, bringing the total loss since 2004 to more than 600,000 barrels a day. This curbed exports to U.S. and European refineries and contributed to record crude prices this summer.

"No other main oil producer has experienced such a [large] fall during the period," the Energy Ministry said Tuesday in a statement.

Mexico Not As Desperate As Other Exporters

Unlike other top exporters such as Russia, Venezuela and Iran, Mexico took steps during the oil boom earlier this year to protect itself against a price crash.

When prices were still at peak levels in July, the Finance Ministry started buying put options that would guarantee 330 million barrels, or 904,000 barrels a day, in oil sales, at $70 a barrel. This will keep oil revenue roughly in line with the national budget, allowing the country to avert a fiscal crisis next year.

Mexico, which gets around a third of its revenue from oil, will also tap $5 billion that it stashed in a windfall savings fund for infrastructure investments to help keep the economy afloat next year.

"The put options that the Finance Ministry bought protects public finances," said local bank Banamex in a research report, adding that Pemex's 2009 investment program won't suffer cutbacks.

Even though Pemex can ride out low prices in 2009, the state company will still benefit if prices rebound. Pemex, which has a monopoly on Mexican oil production and sales, recently took steps to expand the role of private investment under service-based contracts. Outside players will be more eager to invest in high-cost Mexican projects under a better price outlook.

On Tuesday, Pemex announced a major tender to drill 500 wells in the geologically difficult Chicontepec basin. A similar contract signed in 2007 cost $1.4 billion.

"Increases in WTI will help the economics of the Chicontepec tender to attract bidders," said Bern, of Brookshire Advisory and Research.  

Copyright (c) 2008 Dow Jones & Company, Inc.


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