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Mexico's oil bonanza starts to dry up
Robert Collier, Chronicle Staff Writer
Friday, June 30, 2006
(06-30) 04:00 PDT Cardenas, Mexico -- Gonzalo Rodriguez has an unenviable task as the boss of a major oil field -- ripping out a large part of the pumping and compressing machinery that collects the output from scores of wells.
"Unfortunately, we don't need this capacity anymore," he said. "This isn't like the old days, and they aren't coming back."
Like much of Mexico's giant oil production apparatus, this area, known as the Bellota oil field, is in an apparently unstoppable decline. At current extraction rates, the nation has only 10 years of proven oil reserves remaining. And as Mexico prepares to vote in Sunday's presidential election, the leading candidates disagree bitterly about what, if anything, can be done to halt the impending collapse of the industry that forms the backbone of the national economy.
Left-of-center candidate Andres Lopez Obrador wants to de-emphasize production of crude oil and focus instead on refined products such as gasoline and plastics, while his main challenger, conservative Felipe Calderon, proposes opening the industry to foreign oil corporations to help increase crude exports.
Because Mexico is the second-largest source of U.S. oil imports, the outcome of this struggle will have a huge effect on U.S. energy security in the coming decades. Oil income accounts for more than 40 percent of the Mexican federal government's annual revenues, so the decline of oil output could leave the country's next president with a nightmarish budget crisis.
Oil industry experts say that whoever wins Sunday's election will be forced to play an increasingly weak hand of economic cards.
"There is no question that it will be very difficult to maintain (Mexico's) production levels under any institutional arrangement, no matter who wins the election," said Adrian Lajous, who was chief executive of Petroleos Mexicanos, or Pemex, the state-owned monopoly, from 1994 to 1999 and now is chairman of Oxford Institute for Energy Studies, a British think tank. "It will be a major fiscal problem over the foreseeable future."
At stake is one of the most sacred cows of Mexican politics: government ownership and control of the oil industry, which was nationalized in 1938 and remains in the tight grip of Pemex. Even now, despite the free-market rules adopted by Mexico under the North American Free Trade Agreement, the oil sector is a bastion of old-style socialism, with tighter restrictions on foreign investment than any other major petroleum-producing nation.
Calderon, candidate of the pro-business National Action Party (PAN), says that foreign companies, which are allowed only as contractors providing oil-field services such as drilling, seismic work and infrastructure construction, should be allowed to enter into joint-production agreements with Pemex.
"Pemex should be given the freedom to buy the technology or put together the contracts necessary to be able to increase reserves and produce oil," he said Monday.
Yet Calderon has repeatedly denied that he would privatize Pemex, as outgoing PAN President Vicente Fox has tried to do since he took office in December 2000. Such a step, which would require amending the Mexican Constitution, has been crushed repeatedly in Congress by lawmakers from Lopez Obrador's Party of the Democratic Revolution (PRD) and the centrist Institutional Revolutionary Party (PRI).
Lopez Obrador defends the ban on most foreign investment and has pledged to build three gasoline refineries and boost petrochemical production. He notes that Mexico annually spends $4.5 billion in gasoline imports and nearly $10 billion in petrochemical imports, mainly from the United States. Pemex has made no significant refining investments in 20 years, and none in petrochemicals in 15 years.
"All this has brought us to an extremely grave situation of dependency," he said in a recent speech.
Situated in the hot, swampy lowlands of southeast Mexico's Tabasco state, the Bellota complex was built in 1992 and remains one of the country's most modern petroleum facilities. But daily output from surrounding fields has fallen to only 35,000 barrels of oil, about one-quarter of the average during the 1990s, said Rodriguez, the oil-field boss.
The nation's largest producing area, the Cantarell offshore oil field in the Gulf of Mexico, is facing a similar decline, though on a much larger scale. Its current production of 2.1 million barrels per day -- which makes it the second-largest single oil field in the world, after the Ghawar field in Saudi Arabia -- is expected to fall to anywhere between 1.4 million and 520,000 barrels per day by 2008, according to government estimates.
If the worst-case projections turn out to be correct, Mexico's oil exports to the United States could decline by as much as 1 million barrels a day from its current 1.5 million.
Pemex predicts that the declines will be offset by new wells coming online in deepwater Gulf of Mexico and in the Chicontepec field in Veracruz state. However, many experts say both areas would require at least a decade of exploration and development before significant production begins.
"There is no quick fix for the Mexican oil industry, and it's very unclear where enough new output is going to come from," said David Shields, an energy industry consultant in Mexico City.
Pemex declined to make an official from Mexico City headquarters available to talk to The Chronicle.
Despite its troubles, Pemex is still a giant. It is the largest corporation in Mexico and the fifth-largest oil firm in the world, with average daily production in 2005 of about 3.3 million barrels of oil, 4.8 million cubic feet of natural gas and 435,000 barrels of natural gas liquids. It is the second-largest oil source of U.S. imported oil, after Canada, at a daily average of 1.9 million barrels.
The huge rise in international petroleum prices has been a godsend for the nation, if not for Pemex itself.
The price rise -- from about $12 per barrel in 1999 to more than $70 currently -- has injected tens of billions of dollars into the federal government's coffers. Pemex's revenues this year are expected to be about $89 billion, with 59 percent of this amount siphoned off by the government through tax and dividend payments totaling about $52 billion.
This flood of revenue has allowed Fox to opt for a conservative version of economic pump-priming. Instead of boosting spending, he has overseen strengthening government reserves and cutting federal borrowing, thus allowing bank credit to expand by almost 500 percent during his term, according to government data. The result has been an explosion of consumer purchases and home building.
Lopez Obrador hopes to spread around that wealth in a more traditional Mexican way -- slashing Pemex's gasoline pump prices, which average about $2.50 per gallon, and cutting taxes on natural gas and electricity. Many experts say that would make it impossible for Pemex to pay the multibillion-dollar price tags for new refineries and petrochemical plants while the company continues to pay high taxes to help Lopez Obrador pay for campaign promises such as pensions for the elderly poor.
"It's sheer populism to rely on oil revenues to subsidize prices," said Luis Rubio, president of the Center of Research for Development, a free-market think tank in Mexico City. "Lopez Obrador can't spend billions on price subsidies, billions on new infrastructure, and still take billions more from Pemex to help pay for his proposed social welfare programs. Especially after overall production starts to fall."
But earlier this month, as Lopez Obrador took the lead in most opinion polls, Calderon joined in with a promise to cut taxes on cooking gas and electricity, although not gasoline prices -- and only for the poor. "He's stealing my policies," Lopez Obrador complained, "and he's the one calling me a populist."
In recent years, Pemex's professional staff has been rent by protests and purges over the issue of privatization.
"The current management has tried to privatize as much as it could, but the results speak for themselves," said Francisco Garaicochea, a former chief of oil-field technology at Pemex who now leads a left-leaning group of retired company executives, Pemex Engineers Group of the 1917 Constitution. "We have talked with Lopez Obrador's advisers, and we are confident there would be a reversal of Pemex's mistaken strategy, its focus on only exporting raw materials rather than processed petroleum products."
In Tabasco, engineers who have been fired from the company complain that Pemex under the Fox administration has unnecessarily given billions of dollars of service contracts to U.S. companies such as Bechtel, Halliburton and Schlumberger.
"Calderon wants to privatize Pemex, but that's just a recipe for more corruption," said Ricardo Decle, a petroleum engineer who was frog-marched off his workplace by soldiers in 2004 as part of a purge of about 50 dissenting technical staff and is now chief of a group of local Pemex retirees. "In Pemex, there is no transparency, nobody watches over the contracts. For starters, they ask for a 10 percent (bribe) off the top of the price. When anyone complains, they are repressed. This is the way business is done here."
Feeling the criticism, some U.S. companies are mounting a feel-good public-relations counteroffensive. Halliburton, for example, has placed giant billboards along highways that show idyllic jungle wildlife scenes with the slogan, "We work to protect the environment."
"We need to industrialize, to move up the value-added chain," said Gonzalo Rodriguez as he toured the Bellota complex in the midday heat with a team of sweating Pemex engineers. Privatization is unproved, he said, provoking vigorous nods from his colleagues.
"Somebody said this is the era of plastics and chemicals, not oil, and that is true," he added, receiving more mumbles of support. "Mexico must find its own solutions."
-----------------------------------------------------------
And one more country bites the dust. There were two things I thought were interesting about this article. The first, as I mentioned, is that yet another country has officially hit a decline in oil production that has been admitted to the general public. The other is that this situation is one that I really hope Canada is smart enough to avoid. Alberta (and to some extent Newfoundland and Nova Scotia) are really loosing their marbles over this new found oil wealth. Unfortunately, as illustrated time and time again, it does come to an end. If the oil sands are exploited at the rapid rate some would like to, this could come much faster than many people think too. While Canada is a somewhat rational country greed can cloud peoples minds and I really have an uneasy feeling with the road that oil is going to take this country.
Robert Collier, Chronicle Staff Writer
Friday, June 30, 2006
(06-30) 04:00 PDT Cardenas, Mexico -- Gonzalo Rodriguez has an unenviable task as the boss of a major oil field -- ripping out a large part of the pumping and compressing machinery that collects the output from scores of wells.
"Unfortunately, we don't need this capacity anymore," he said. "This isn't like the old days, and they aren't coming back."
Like much of Mexico's giant oil production apparatus, this area, known as the Bellota oil field, is in an apparently unstoppable decline. At current extraction rates, the nation has only 10 years of proven oil reserves remaining. And as Mexico prepares to vote in Sunday's presidential election, the leading candidates disagree bitterly about what, if anything, can be done to halt the impending collapse of the industry that forms the backbone of the national economy.
Left-of-center candidate Andres Lopez Obrador wants to de-emphasize production of crude oil and focus instead on refined products such as gasoline and plastics, while his main challenger, conservative Felipe Calderon, proposes opening the industry to foreign oil corporations to help increase crude exports.
Because Mexico is the second-largest source of U.S. oil imports, the outcome of this struggle will have a huge effect on U.S. energy security in the coming decades. Oil income accounts for more than 40 percent of the Mexican federal government's annual revenues, so the decline of oil output could leave the country's next president with a nightmarish budget crisis.
Oil industry experts say that whoever wins Sunday's election will be forced to play an increasingly weak hand of economic cards.
"There is no question that it will be very difficult to maintain (Mexico's) production levels under any institutional arrangement, no matter who wins the election," said Adrian Lajous, who was chief executive of Petroleos Mexicanos, or Pemex, the state-owned monopoly, from 1994 to 1999 and now is chairman of Oxford Institute for Energy Studies, a British think tank. "It will be a major fiscal problem over the foreseeable future."
At stake is one of the most sacred cows of Mexican politics: government ownership and control of the oil industry, which was nationalized in 1938 and remains in the tight grip of Pemex. Even now, despite the free-market rules adopted by Mexico under the North American Free Trade Agreement, the oil sector is a bastion of old-style socialism, with tighter restrictions on foreign investment than any other major petroleum-producing nation.
Calderon, candidate of the pro-business National Action Party (PAN), says that foreign companies, which are allowed only as contractors providing oil-field services such as drilling, seismic work and infrastructure construction, should be allowed to enter into joint-production agreements with Pemex.
"Pemex should be given the freedom to buy the technology or put together the contracts necessary to be able to increase reserves and produce oil," he said Monday.
Yet Calderon has repeatedly denied that he would privatize Pemex, as outgoing PAN President Vicente Fox has tried to do since he took office in December 2000. Such a step, which would require amending the Mexican Constitution, has been crushed repeatedly in Congress by lawmakers from Lopez Obrador's Party of the Democratic Revolution (PRD) and the centrist Institutional Revolutionary Party (PRI).
Lopez Obrador defends the ban on most foreign investment and has pledged to build three gasoline refineries and boost petrochemical production. He notes that Mexico annually spends $4.5 billion in gasoline imports and nearly $10 billion in petrochemical imports, mainly from the United States. Pemex has made no significant refining investments in 20 years, and none in petrochemicals in 15 years.
"All this has brought us to an extremely grave situation of dependency," he said in a recent speech.
Situated in the hot, swampy lowlands of southeast Mexico's Tabasco state, the Bellota complex was built in 1992 and remains one of the country's most modern petroleum facilities. But daily output from surrounding fields has fallen to only 35,000 barrels of oil, about one-quarter of the average during the 1990s, said Rodriguez, the oil-field boss.
The nation's largest producing area, the Cantarell offshore oil field in the Gulf of Mexico, is facing a similar decline, though on a much larger scale. Its current production of 2.1 million barrels per day -- which makes it the second-largest single oil field in the world, after the Ghawar field in Saudi Arabia -- is expected to fall to anywhere between 1.4 million and 520,000 barrels per day by 2008, according to government estimates.
If the worst-case projections turn out to be correct, Mexico's oil exports to the United States could decline by as much as 1 million barrels a day from its current 1.5 million.
Pemex predicts that the declines will be offset by new wells coming online in deepwater Gulf of Mexico and in the Chicontepec field in Veracruz state. However, many experts say both areas would require at least a decade of exploration and development before significant production begins.
"There is no quick fix for the Mexican oil industry, and it's very unclear where enough new output is going to come from," said David Shields, an energy industry consultant in Mexico City.
Pemex declined to make an official from Mexico City headquarters available to talk to The Chronicle.
Despite its troubles, Pemex is still a giant. It is the largest corporation in Mexico and the fifth-largest oil firm in the world, with average daily production in 2005 of about 3.3 million barrels of oil, 4.8 million cubic feet of natural gas and 435,000 barrels of natural gas liquids. It is the second-largest oil source of U.S. imported oil, after Canada, at a daily average of 1.9 million barrels.
The huge rise in international petroleum prices has been a godsend for the nation, if not for Pemex itself.
The price rise -- from about $12 per barrel in 1999 to more than $70 currently -- has injected tens of billions of dollars into the federal government's coffers. Pemex's revenues this year are expected to be about $89 billion, with 59 percent of this amount siphoned off by the government through tax and dividend payments totaling about $52 billion.
This flood of revenue has allowed Fox to opt for a conservative version of economic pump-priming. Instead of boosting spending, he has overseen strengthening government reserves and cutting federal borrowing, thus allowing bank credit to expand by almost 500 percent during his term, according to government data. The result has been an explosion of consumer purchases and home building.
Lopez Obrador hopes to spread around that wealth in a more traditional Mexican way -- slashing Pemex's gasoline pump prices, which average about $2.50 per gallon, and cutting taxes on natural gas and electricity. Many experts say that would make it impossible for Pemex to pay the multibillion-dollar price tags for new refineries and petrochemical plants while the company continues to pay high taxes to help Lopez Obrador pay for campaign promises such as pensions for the elderly poor.
"It's sheer populism to rely on oil revenues to subsidize prices," said Luis Rubio, president of the Center of Research for Development, a free-market think tank in Mexico City. "Lopez Obrador can't spend billions on price subsidies, billions on new infrastructure, and still take billions more from Pemex to help pay for his proposed social welfare programs. Especially after overall production starts to fall."
But earlier this month, as Lopez Obrador took the lead in most opinion polls, Calderon joined in with a promise to cut taxes on cooking gas and electricity, although not gasoline prices -- and only for the poor. "He's stealing my policies," Lopez Obrador complained, "and he's the one calling me a populist."
In recent years, Pemex's professional staff has been rent by protests and purges over the issue of privatization.
"The current management has tried to privatize as much as it could, but the results speak for themselves," said Francisco Garaicochea, a former chief of oil-field technology at Pemex who now leads a left-leaning group of retired company executives, Pemex Engineers Group of the 1917 Constitution. "We have talked with Lopez Obrador's advisers, and we are confident there would be a reversal of Pemex's mistaken strategy, its focus on only exporting raw materials rather than processed petroleum products."
In Tabasco, engineers who have been fired from the company complain that Pemex under the Fox administration has unnecessarily given billions of dollars of service contracts to U.S. companies such as Bechtel, Halliburton and Schlumberger.
"Calderon wants to privatize Pemex, but that's just a recipe for more corruption," said Ricardo Decle, a petroleum engineer who was frog-marched off his workplace by soldiers in 2004 as part of a purge of about 50 dissenting technical staff and is now chief of a group of local Pemex retirees. "In Pemex, there is no transparency, nobody watches over the contracts. For starters, they ask for a 10 percent (bribe) off the top of the price. When anyone complains, they are repressed. This is the way business is done here."
Feeling the criticism, some U.S. companies are mounting a feel-good public-relations counteroffensive. Halliburton, for example, has placed giant billboards along highways that show idyllic jungle wildlife scenes with the slogan, "We work to protect the environment."
"We need to industrialize, to move up the value-added chain," said Gonzalo Rodriguez as he toured the Bellota complex in the midday heat with a team of sweating Pemex engineers. Privatization is unproved, he said, provoking vigorous nods from his colleagues.
"Somebody said this is the era of plastics and chemicals, not oil, and that is true," he added, receiving more mumbles of support. "Mexico must find its own solutions."
-----------------------------------------------------------
And one more country bites the dust. There were two things I thought were interesting about this article. The first, as I mentioned, is that yet another country has officially hit a decline in oil production that has been admitted to the general public. The other is that this situation is one that I really hope Canada is smart enough to avoid. Alberta (and to some extent Newfoundland and Nova Scotia) are really loosing their marbles over this new found oil wealth. Unfortunately, as illustrated time and time again, it does come to an end. If the oil sands are exploited at the rapid rate some would like to, this could come much faster than many people think too. While Canada is a somewhat rational country greed can cloud peoples minds and I really have an uneasy feeling with the road that oil is going to take this country.