Mexico Expected to Miss 2008 Oil Target as Output Slips

MEXICO CITY (Dow Jones Newswires), May 27, 2008

Mexico's 2008 oil production target of 3 million barrels a day looks like a fairy tale as output slid for the third straight month in April to a nine-year low.

Waning output at major oil exporters Mexico, Venezuela and Russia have contributed to a meteoric rise in oil prices this year to over $130 a barrel. In Mexico, oil provides around a third of government revenue, leaving the country exposed to a fiscal crisis if exports dry up.

During the first four months of this year average production fell 9% and exports fell 13% compared with the like period of 2007. April output of 2.77 million barrels a day was the lowest since October 1999. In the country's four main production zones output either fell or remained steady compared with March.

Earlier this month, Pemex CEO Jesus Reyes Heroles said the company can still close the year with average output over 3 million barrels a day, but, in private, company officials are much more pessimistic.

"People in Pemex think it will continue to keep falling in the short term," said David Shields, an expert on the state oil firm, who publishes the Energia a Debate magazine.

One Pemex executive, speaking to Dow Jones Newswires on condition of anonymity, admitted the target is unrealistic considering low production during the first quarter.

The statistics are ugly. The last time Mexican output surpassed 3 million barrels a day was September. Furthermore, Mexico's most difficult months are in the third and fourth quarters when the hurricane season regularly forces the company to shut in oil fields in the Campeche Sound, which pumps around 80% of the country's oil.

Weather forecasters are predicting an active hurricane season this year.

Some relief is coming. Pemex officials expect marine production to increase in May and June. Carlos Morales Gil, Pemex's exploration and production chief, has said the company repaired an 80,000 barrel-a-day marine pipeline in May in the Southeast marine region. In that area, production slipped by an average of 52,066 barrels a day in April versus March.

But with average production during the first four months of this year at 2.88 million barrels a day, the repaired pipeline by itself will not lift production to 3 million barrels a day.

Pemex has also failed to halt a steady decline at Cantarell, one of the largest oil fields on the planet, where output peaked at 2.2 million barrels a day in 2004. It has fallen by half to 1.1 million barrels a day last month.

Pemex hoped to see Cantarell average 1.3 million barrels a day this year, but has been unable to halt the decline. Since January, Cantarell production has slid by 159,000 barrels a day to the lowest levels seen since 1996.

Pemex officials admit that Cantarell has declined to the point where some former oil wells are now producing natural gas because the oil layer of the reservoir is much narrower. The additional gas will be injected into other parts of the reservoir to help maintain underground pressure.

Of the country's active oil fields, 83% are currently in decline or about to reach peak production. This will force Pemex to tap deepwater oil, new fields in the southeast of the country and the Chicontepec basin in the north to replace diminishing production elsewhere.

But none of these projects are expected to make significant advances this year. The country is only beginning to explore deep waters of the Gulf of Mexico, where it takes years to turn an oil find into a producing asset.

Facing a production crunch, Mexican President Felipe Calderon delivered an energy reform to Congress last month that would give Pemex more cash and introduce performance-based oil service contracts.

But left-wing parties in Congress are calling the reform a privatization, and it is expected to be challenged in the Supreme Court even if Calderon manages to get it approved. Mexico was the first country in Latin America to nationalize its oil industry, and public stewardship of the industry is a source of national pride.

The reform is also limited in scope - Pemex remains the only player in town, unlike oil regions in the U.S., Canada, North Africa and parts of Latin America where hoards of oil firms vie for exploration blocks, allowing for a more rapid development of oil provinces.

"Nothing that gets passed in Congress will help reverse oil output in the short to medium term," said Shields.

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