Mexico's Oil Output Cools

MEXICO CITY Jan 29, 2007 (From the Wall Street Journal via Dow Jones Newswires)

Daily output at Mexico's biggest oil field tumbled by half a million barrels last year, according to figures released Friday by the Mexican government. The ongoing decline at the Cantarell field could pressure prices on the global oil market, complicate U.S. efforts to diversify its oil imports away from the Middle East, and threaten Mexico's financial stability.

The virtual collapse at Cantarell -- the world's second-biggest oil field in terms of output at the start of last year -- is unfolding much faster than projections from Mexico's state-run oil giant Petroleos Mexicanos, or Pemex. Cantarell's daily output fell to 1.5 million barrels in December compared to 1.99 million barrels in January, according to figures from the Mexican Energy Ministry.

Mexico made up for some of the field's decline. Mexico's overall oil output fell to just below three million barrels a day in December, down from almost 3.4 million barrels at the start of the year. It marked Mexico's lowest rate of oil output since 2000.

Mexico's troubles at Cantarell mirror the larger problems in the global oil market. Many of the world's biggest fields are old and face decline, which can be sharp and sudden. Like other big producers, Mexico is struggling to make up the difference because new big fields are in harder-to-reach places like the deep waters of the Gulf of Mexico.

The field's decline is expected to continue, if not worsen, this year, according to most estimates. That will subtract valuable oil from the world market, which is under pressure from rising demand by growing economies like China and India. It also means less oil headed to the U.S. from Mexico, which has long relied on Mexico as one of its top-three oil suppliers.

"This is bad news for Mexico. The field is declining faster than even the government's pessimistic scenarios," says David Shields, an oil industry consultant in Mexico City who has been warning about Cantarell's collapse for the past two years.

The decline is especially worrisome for Mexico's new President Felipe Calderon, who won a narrow victory in last year's election that his main opponent didn't accept, causing brief political unrest. Any major decline in output or prices will force him to cut government spending, a politically unpopular move. Growth in Mexico's economy is already expected to slow this year thanks to a U.S. slowdown.

Mexico's declining production also will raise the pressure on Mr. Calderon to crack open the country's closed energy market to allow private investors to help Pemex find new oil deposits. But the former energy minister will have a tough time convincing an opposition-dominated Congress to rewrite Mexico's Constitution. The country's oil expropriation of 1938 is part of Mexico's self-image.

A year ago, The Wall Street Journal published an internal Pemex study that reviewed possible scenarios at Cantarell. The study's best-case scenario forecast Cantarell's production would fall to 1.54 million barrels a day by the end of last year -- almost exactly what happened.

At the time, top Pemex officials disputed the report and said the study's scenario represented a "do-nothing" or "worst-case" approach that didn't take into account maintenance at the field. Pemex predicted that Cantarell production would only drop to 1.87 million barrels a day by December and that overall output at the company would actually grow to 3.42 million barrels a day.

Since then, Pemex has said it can offset declines at Cantarell with new production from other fields.

Mexico's growing economy is demanding more fuel each year, which is expected to translate to even lower oil exports. Last year, Mexico's daily average oil exports fell to 1.79 million barrels a day from 1.82 million the previous year. Pemex says it expects daily exports to fall to an average 1.65 million barrels this year.

But some analysts say that is too optimistic. December's daily exports were a meager 1.53 million barrels. While that figure may have been affected by bad weather that closed some ports, it was already well below Pemex's estimates for this year.

Based on the state company's track record so far at Cantarell, including its current rates of recovering the oil that remains in the field, Mr. Shields expects the field's output to drop another 600,000 barrels a day by the end of this year. He says that Pemex will likely increase output by 200,000 barrels a day at other fields -- leaving the country with a net decline of 400,000 barrels a day by year's end and daily exports of less than 1.4 million barrels.

None of this is welcome news in a country that relies on oil exports for some 37% of government revenue. So far, relatively high oil prices have kept the country from feeling the effects of lower output. But prices could continue a recent drop, adding to Mexico's woes from a production shortfall. This year's Mexican budget is based on Pemex's official production targets as well as a relatively high oil price -- about $50 on the world market.

Copyright (c) 2007 Dow Jones & Company, Inc.

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