- The Washington Times - Tuesday, March 17, 2009

MIAMI

Faced with declining oil production at its most reliable source, officials at Mexico’s state oil company Pemex are hopeful that production at new fields on and offshore - bolstered by increased investment - will keep the sector from collapse.

Mexico is now the third-largest supplier of oil to the United States, according to the U.S. Energy Information Administration’s latest figures, a drop from No. 2. The longtime backbone of Mexican energy - the Cantarell oil field - is nearly at the end of its life span, according to Pemex specialists.

Exports from Cantarell in 2008 dropped 16.8 percent from the previous year. The production fall was part of a wider trend among Mexico’s aged oil fields.

With output at slightly less than 2.8 million barrels per day, Mexico’s production in 2008 was the country’s lowest in 14 years. By comparison, Mexico was producing just more than 2.9 million barrels per day in 2007.

”The decline of Cantarell and other mature fields will imply a loss of production with respect to today of 1.1 million barrels per day by 2012 and 1.8 million bpd by 2017,” said Pemex chief Jesus Reyes Heroles during an energy conference in Houston.

Hoping to reverse the trend in 2009, Pemex announced recently that it planned to invest an average of $20 billion a year in the industry.

However, the state firm said it would - in the medium term - shift resources toward exploration activities in order to secure additional supplies of oil to compensate for the shortfalls from Cantarell.

The plan would bring a new focus to Pemex in the coming years. But some people contend that its ability to succeed is entirely dependent on external factors, such as the global price of oil and internal conditions such as maintaining and perhaps increasing production at existing wells while spending company money to search for new sources.

Both conditions for success could hamper Pemex exploration projects over the next several years, wrote Allyson Benton and Enrique Bravo, analysts for the Eurasia Group consulting firm.

“The government’s plan to maintain current investment spending levels and to increasingly shift these resources toward exploration may not be realistic,” they said.

Not to be discouraged, last month Mexican energy officials said the decrease in oil production was already partly offset by increased production at the Ku-Maloob-Zaap field, which produced just more than 700,000 barrels per day. Pemex also predicted that the field would supplant Cantarell as the nation’s top producer in 2009.

Mexican Energy Minister Georgina Kessel told lawmakers last week that the country’s energy fortunes should be back on course by the middle of the next decade.

In the meantime, Mexico won´t contribute to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) because declines at aging fields are already reducing output, a government official said Monday.

Aldo Flores, director-general at the energy department, made the comment in Vienna, Austria, where he is attending the OPEC meeting, Bloomberg News reported.

Whether Mexico can turn around its sagging fortunes remains to be seen. For years, the country’s energy sector has been at the center of an ongoing debate regarding whether foreign investment could help bolster the sagging industry.

Though Mexican law prohibits Pemex from entering into profit-sharing ventures with other companies, the state firm is allowed to enter into some partnerships as long as they are considered production agreements for exploration and drilling.

Mexican President Felipe Calderon would like nothing better than to open up the Mexican energy sector to outside investment but faces stiff opposition - despite assertions from specialists that output most certainly would increase with the help of foreign energy giants.

Coupled with production shortfalls, reserves in Mexico - a leading supplier of oil to the United States - are running out, according to specialists and Mexican energy officials. As it stands, Pemex does not have the expertise necessary to drill in deep water for the estimated 30 billion barrels or more believed to be beneath the floor of the Gulf of Mexico.

That means Mr. Calderon must convince opponents that opening up the sector to foreign companies for exploration would benefit Pemex and Mexicans in the long run.

Partnership issues regarding Pemex are widely considered the “third rail” of Mexican energy law, because its profits account for a large portion of the country’s budget and fund most of its social projects, prompting concerns that foreign oil companies will siphon off much needed revenue.

Meanwhile, Mexico is still holding out hope that a new oil field discovered in 2006 will help Pemex bolster its production levels in the coming years.

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