Mexico Oil Experts Differ on Virtues of Deepwater Spending

MEXICO CITY (Dow Jones Newswires), Jun 04, 2008

Petroleos Mexicanos says its future hinges on deepwater oil, while some independent experts call it a huge waste of money and resources.

The debate is unfolding in Mexico's Senate, where oil geologists and engineers exchange views with lawmakers on an energy reform bill. The bill includes lower taxes and more flexible, incentive-based contracts for deepwater projects.

Mexico's oil production is falling fast after peaking at 3.4 million barrels a day in 2004, and the country needs to bring new production on line. If the current trend continues, Mexico, the third largest supplier of U.S. crude imports, will be importing oil in less than a decade.

All major political parties agree Pemex needs to act fast to reverse the troubling production trend, but diverge over where to focus spending.

"Moving into deep water is not a matter of choice, its an obligation, a responsibility to future generations," said Carlos Morales Gil, the head of exploration and production at Pemex.

Pemex says it needs 500,000 barrels a day of deepwater production by 2021 to maintain total crude output above 3 million barrels a day. Projects can take nearly a decade to get off the ground, and Pemex is eager to expand into unexplored regions.

Other experts at the forum say not so fast.

Mexican oil engineer Ricardo Prian Caletti said Pemex should focus on the shallow waters of the Gulf of Mexico and new areas on land, "not in deep water, where the investments are large and the risks very high."

He said that even if Pemex starts producing in deep areas of the Gulf, the projects will be more vulnerable to hurricanes. "It's not logical," he said. "We have so much in shallow waters."

Mexican oil engineer Eduardo Barrueta Zenteno echoed this view, saying the company should focus on 40 potential oil finds in shallow waters, where it's cheaper to get the oil out of the ground, before moving further out into the Gulf.

"Deep water needs to be studied more," he told the Congressional forum on Tuesday.

Pemex said it has 53.8 billion barrels of potential oil reserves, of which 54.8% are in waters deeper than 500 meters. The rest is in shallow waters of the Gulf and on land.

Pemex found support from Gustavo Bonilla Perez, a Mexican oil engineer who advises private firms. He said Mexico has no choice but to tackle deepwater projects.

"Deepwater development in the Gulf of Mexico is a huge challenge for Pemex, but under no circumstances should it be abandoned," he told lawmakers.

Reservoir engineer Gustavo Padilla went even further, saying Pemex needs to be able to team up with outside firms to successfully tackle the Gulf of Mexico.

"Pemex can't do it alone in deep waters, nobody does," he said.

He noted that oil and gas naturally seeps out of the ocean floor on Mexico's side of the Gulf of Mexico, underscoring the tremendous potential in the region.

The defenders of deep water have their work cut out. Of the country's three main parties, only the ruling National Action Party, or PAN, was openly defending deepwater development on Tuesday.

The left-wing Democratic Revolutionary Party, or PRD, is firmly against the incentive-based oil service contracts included in the reform proposal. Pemex says these are necessary to lure outside firms into risky and expensive deepwater projects, while the PRD calls it a masked privatization of the industry.

The Institutional Revolutionary Party, or PRI, is riding the fence. PRI lawmaker Alberto Amador Leal questioned the logic of deepwater development when a large portion of Mexico's oil reserves are still on land and in shallow waters. "Shouldn't this be a priority, before entering into deep waters?" he asked.

With the PRD firmly against Calderon's bill, the PAN needs help from the PRI to push it through Congress. The government hopes to have the bill approved before the end of this year.

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