Oil Exploration Is Bright Spot for Mexico's Struggling Pemex

MEXICO CITY (Dow Jones Newswires), Mar. 20, 2009

Mexico's state-run oil monopoly has a horrid track record on production, but this week Petroleos Mexicanos is toasting strong results from its exploration campaign.

In 2008, proven oil reserves only fell 2.7% to 14.3 billion barrels of oil equivalent, thanks to discoveries and success at mapping out additional oil supplies at the company's active fields. In 2007, proven reserves, or oil that can be recovered with existing technology, fell 5.2%.

During a Friday conference call, Pemex's head of exploration and production, Carlos Morales, said the company is on target to replace all the oil it produces by 2012. For 2008, the replacement rate stood at 72%, up from 50% in 2007.

"We will continue to increase that number," said Morales.

This means Mexico still has a vast treasure chest of oil and natural gas fields, even though output is currently in free fall. Last year, crude production slipped 9.2% to less than 2.8 million barrels a day, and oil experts expect it to fall at a similar rate this year.

The problem is that Pemex relied on one field, Cantarell, for years. Now Cantarell, which provided 62% of total production in 2004, is suffering from old age and Pemex is struggling to bring new fields on line to compensate. Last year, average Cantarell production fell by a third to 1 million barrels a day.

This means Pemex will have to work a lot harder to get the same volumes of crude production from less prolific reservoirs.

"Our discoveries are smaller than in the past; we are not finding fields like Cantarell or Ku Maloob Zaap," said Morales.

In January, Ku Maloob Zaap surpassed Cantarell as Mexico's largest producing field with 787,000 barrels a day. Recent discoveries do not come close. The biggest in 2008, the Ayatsil field, is only expected to produce 150,000 barrels a day at its peak.

Just the same, observers are impressed with the reserve figures.

"An increase in Pemex's reserve replacement rate to 72% is remarkable considering crude oil production has been continuously declining," said Gianna Bern, the president of Brookshire Advisory and Research Inc., an energy economics research and consulting firm in Flossmoor, Ill.

The 72% figure is somewhat misleading because Pemex is replacing a smaller volume of oil output. Morales said Pemex's replacement rate would have been 64% if output had remained stable last year, still an improvement on 2007.

It will take years for Pemex's discoveries to translate into incremental oil production. This week, the U.S. Energy Information Administration predicted Mexican output will fall 10% in 2009 and 7.4% in 2010.  

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