Mexico Looks To Buck Global Oil Trend By Raising '09 Spending

MEXICO CITY (Dow Jones Newswires), December 22, 2008

Oil firms from offshore Louisiana to Middle Eastern deserts are cutting back during the price collapse, but oil-hungry Mexico is spending as if the boom is just starting.

In Mexico, oil exports will run out in less than seven years at current decline rates, and the urgency to reverse the sharp fall has created a flurry of activity in Mexico's oil patch.

If Mexico manages to buck the low-investment trend hitting the global oil industry, output will stabilize or at least fall at a slower rate over the next few years. This would guarantee fiscal revenue at home and a stable source of U.S. oil imports when demand picks up again.

State oil monopoly Petroleos Mexicanos is already adding rigs, and it plans to double drilling activity next year. This month the company rolled out two tenders for a total of 1,000 wells, and plans to offer at least as many wells in a series of tenders to come out before the end of January.

Cash On Hand
Thanks to wise risk management and a political consensus to revamp the troubled industry, Pemex will not have to scrounge for funding. This month, the Energy Ministry said 2009 Pemex investments will rise 24% from 2008 to 209 billion pesos ($15.5 billion).

Back in July, Mexico used a series of put options to hedge the equivalent of two-thirds of its 2009 exports at $70 a barrel. The Finance Ministry says the institutions on the other end of these contracts are well established and will pay up, shielding Pemex's budget from spending cuts.

"The funding the (Finance Ministry) sends the state oil company for capital investment is protected," said local bank Banamex in a recent research report.

Pemex didn't reply to a request for an update on its 2009 spending plans.

The government also plans to spend up to $5 billion it had stashed during the oil boom on new infrastructure, including an oil refinery, to help keep the economy afloat during the global slowdown.

Furthermore, Pemex's tax rate declines as oil prices do, easing the blow of the price collapse. The company actually posted quarterly losses in 2008, partially due to expensive gasoline imports and a higher tax rate amid the price rally.

With cash on hand, Pemex is swinging into action as an administrator of massive oil-service contracts. The new drilling at the geologically complex Chicontepec basin will start in June, and last around three years.

"The fact that prices have fallen should not impede us from making these investments," said Carlos Morales Gil, Pemex's head of exploration and production, speaking on local radio last week.

In 2009, Pemex plans to drill 61% of new wells at Chicontepec, a major part of its strategy to get production back to 3 million barrels a day by 2015.
Drillers Happy
The new contracts at Chicontepec and elsewhere come as a relief to drillers, who have watched privately traded companies in such other markets as Canada trim spending to shore up balance sheets.

State oil firms in profligate countries, including Russia and Venezuela, also face spending cuts as export revenues dwindle.

"Pemex needs that production desperately. They are far behind in terms of production from what they had hoped to get to," said Weatherford International (WFT) CEO Andrew Bacnel during a recent conference call with investors.

In May, Weatherford won $870 million in contracts to drill 600 wells at Chicontepec. During the same call, Bacnel expressed concern about the company's projects in Venezuela and Russia, also top oil producers, but said the Mexican operations don't face any cuts.

Mexico stands to benefit from waning demand for the services and materials needed to get oil from the subsoil to export terminals. Many small- to mid-sized privately traded firms are cutting back amid low prices to calm nervous shareholders. This has pushed down day rates for the rig operators that Pemex hires.

Weatherford's 2008 drilling contract, for example, was much cheaper than a $1.4 billion contract for 500 Chicontepec wells that Schlumberger Ltd. (SLB) had signed with Pemex in 2007.
Politicians Back Pemex Budget

The risk of going from oil exporter to oil importer within a decade has shaken Mexico's lawmakers out of complacency. This fall, the country's three main parties agreed to give Pemex more money and autonomy under an energy reform led by President Felipe Calderon.

Over the past four years, Mexico lost a huge opportunity because exports slid while oil prices marched higher, robbing the government of more than $10 billion in potential revenue. Mexico has lost 600,000 barrels a day in output since 2004, with overall output now below 2.8 million barrels.

The reform protects Pemex's monopoly status but it also lowered some tax rates, gave Pemex more autonomy in hiring outside contractors and streamlined bureaucracy at the state firm. More important, all major parties agree that restoring oil output is a priority that demands more spending.

"There (is) more and more political pressure, based on the realities of what is happening with Cantarell" oil field, said Tom Medvedic, the CFO of Calfrac Well Services Ltd. (CFW.T), according to a transcript of a Dec. 10 energy conference.

The Cantarell field, the crown jewel of Mexico's oil industry, is producing at less than half of peak production at under 1 million barrels a day. The faster-than-expected decline at Cantarell has cut exports by 17% over the past year.

Calfrac, which won a $75 million contract with Pemex in 2007 to develop an onshore field of natural gas, expects to see more land contracts as Mexico struggles to boost production.

"We are positioning ourselves to share in that growth and expect that 2009 will be a leap forward for us in that particular area," CFO Medvedic said.

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