Pemex Requires US$130bn Investment 2004-2012

Mexico's state oil company Pemex will need to invest US$130bn in 2004-2012 to meet domestic oil and gas demand and reduce dependence on fuel imports, the country's energy secretary Felipe Calderón told a conference in La Jolla, California.

The investment is needed in the following areas: exploration and production (US$117bn), refining (US$10.1bn), gas and basic petrochemicals (US$1.6bn), petrochemicals (US$1.4bn) and corporate (US$600mn), Calderón said.

"We don't have this amount of money so we will have to carry out some reforms to get some complementary investment from the private sector," he admitted.

Pemex currently has deficits in natural gas and fuel supplies, which the government aims to reverse in the next decade, he said.

Despite its 66 trillion cubic feet natural gas reserves, Mexico imports about 750-1,000 million cubic feet a day (mcf/d) from the US because its domestic production cannot cover domestic demand. Demand in Mexico grew 19.5% to 4,847mcf/d in 2003, from 4,057mcf/d in 1998, but production only increased 10.6% to 4,615mcf/d from 4,174mcf/d in the same period, gas and basic petrochemicals director Marcos Ramírez said at the conference. "We need to diversify our alternatives for gas supply and increase our domestic production to reverse our deficit in natural gas," Calderón said.

The country can either import liquefied natural gas (LNG) through terminals on the Gulf of Mexico and Pacific coasts and/or allow foreign companies to participate in natural gas exploration and production contracts in Mexico, Calderón said.

One LNG terminal is planned for Altamira on the Gulf of Mexico and "we want to promote several LNG projects on the Pacific coast," Calderón said. However, it remains to be seen how many of these projects will finally be built.

As for domestic gas exploration and production, Pemex's Multiple Service Contracts (MSCs) are designed to attract private investment in the northeastern Burgos basin but are being legally challenged by opposition parties who say they are unconstitutional.

The first round of MSCs, held in late 2003 and early 2004, included seven blocks in Burgos, of which five were awarded to local and foreign companies. Pemex now plans to auction the remaining two, along with an additional block in a second MSC round scheduled for the second half of this year. Pemex plans to double 2003 gas production on the Burgos fields to 2 billion cubic feet a day by 2009.

Mexico's oil production has shifted in the last few years from light oil to heavy Maya oil, which is becoming the country's core export, Calderón said.

He explained that successful new exploration projects could increase the proportion of light oil output again, allowing Mexico to benefit from a higher margin because light oil requires less refining. The problem is that there is a growing gap between Pemex's fuel supply and Mexican demand.

The domestic gasoline production deficit is currently about 154,600 barrels a day (b/d) and the LPG deficit is about 81,200b/d, Calderón said.

"We are reaching the production capacity limit at the moment and Pemex is making a really big effort to increase production," he said. Pemex's oil and gas reserves have declined from 57,741 million barrels of oil equivalent (mboe) in 1999 to 48,041mboe in 2004. To reverse this trend, the company must invest more in exploration.

"In the past we didn't make enough effort to explore new oil fields," Calderón said.

Pemex's rate of recovery of hydrocarbons reserves was about 45% in 2003, which the company wants to lift to 100% by 2010 through more exploration, Calderón said. "That implies a lot of investment for Pemex.

The budget for exploration in the last few years has been increased constantly by President Vicente Fox and Pemex's administration, but it is not enough," he said.

Although the country could allocate more public resources to energy to increase financing, it would still face the challenge of improving the technology and operational capability of the company, Calderón said.

"We need to think how to find ways to open up or to combine Pemex's efforts with private companies to face this important challenge," he said. "There is a contradiction in our country, because we can produce a lot of oil but we don't have the capability to produce enough gasoline." The problem is compounded by rising gasoline prices due to record high international oil prices, he added.

Calderón admits that obtaining the US$130bn that Pemex requires by 2012 will not be easy. Financing alternatives include a higher federal budget, relying more on non-budgetary government resources through the Pidiregas financing system, and taking on more debt. However there are problems with all of these options, Calderón admitted.

Pemex's budget for 2004 is already 22bn pesos (US$1.9bn), which is double the national education budget, and the country simply cannot afford to allocate more resources to Pemex at the cost of social programs, he said.

Moreover, the Pidiregas funds are reaching their limit, making the system more inefficient to finance the sector. Taking on more private loans would further increase Mexico's foreign debt burden, bringing back echoes of the 1980s debt crisis, when the country was not able to finance its US$90bn debt, partially due to declining international oil prices, a risk the government does not want to take again, Calderón said.

Also, more debt further limits Pemex's access to financial markets. "It's clear that the alternative of more debt is possible, but it's limited," he said. With limited public financing options, the solution is to attract more private investment in the sector and for Pemex to do more with less by increasing its efficiency, Calderón said.

Fox's government has been working to pass energy reforms in congress, which is controlled by the opposition PRD party and has so far blocked the reforms. The next congressional session in September-December may be the "last opportunity" for Fox's administration to pass legislative reforms to open the sector to more private investment, Calderón said. However, "with or without the reforms" the government's agenda includes improving corporate government in Pemex, modifying Pemex's tax regime, reviewing the energy price policy and strengthening the energy regulatory commission, he added.

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