February 9, 2006
Mexico's Oil Output
May Decline Sharply
Pemex Study Points to Possible Drop
At Major Field, Which Would Strain Global Supply
By DAVID LUHNOW
Staff Reporter of THE WALL STREET JOURNAL
February 9, 2006; Page A4
MEXICO CITY – Mexico's huge state-owned oil company may be facing a
steep decline in output that would further tighten global oil supply
and add to global woes over high oil prices.
The potential decline faced by Petroleos Mexicanos, or Pemex, also
could undermine U.S. efforts to reduce dependence on Middle East oil,
and complicate Mexican politics and financial stability.
An internal study
reviewed by The Wall Street Journal shows water and
gas are encroaching more quickly than expected in Cantarell
biggest oil field
, and might cause output to drop precipitously over
the next few years. Currently, Cantarell produces 2 million barrels
of oil a day, or 6 of every 10 barrels produced by Mexico
. It is
the world's second-biggest-producing field after Saudi Arabia's
Pemex, Latin America's biggest company by assets and employees, says
it is confident it can make up for any decline at Cantarell by
squeezing more output from other fields, but some analysts outside
the company are far less sanguine.
The study, carried out last year by Pemex experts, offers a rare
glimpse inside the traditionally secretive oil company. It outlines
5 scenarios for a decline at Cantarell, 4 of which are more
pessimistic than the company's current public forecasts.
The worst 2 scenarios suggest a drastic decline in output to
875,000 barrels a day by the end of 2007 and to just 520,000 a day by
the end of 2008. If such projections turn out to be correct, Mexico's
overall oil exports would decline by about 1 million barrels a day
-- equal to about 63% of its daily crude exports to the U.S. -- from
its current 1.8 million.
Pemex says the study's most pessimistic scenarios represent a "do
nothing" approach and are highly unlikely as long as the company
carries out the right maintenance work on the field to work around
the spreading gas and water, which make extracting oil much more
difficult. Pemex officials privately say the report was intended by
senior engineers at the company as a wake-up call to management and
Mexico's Congress, which approves Pemex's budget each year, to act
quickly to prevent a steep decline.
"I am confident in Pemex's portfolio of assets. Other fields will be
able to substitute [Cantarell's output] and increase production,"
Juan Jose Suarez Coppel, the company's chief financial officer, said
in an interview. Pemex predicts Mexico's output will actually grow
this year to 3.42 million barrels a day from 3.33 million barrels
But the study already prompted the company in December to predict a
slightly sharper decline at Cantarell than its previous forecasts --
with output down 6% this year to an average rate of 1.9 million
barrels a day and off to 1.43 million barrels as an average for 2008.
That prediction now roughly matches the study's most optimistic
A significant decline in Mexican output would put further pressure on
global oil prices. A refining bottleneck and surging demand,
especially in China and India, have driven up oil prices
substantially over the past two years; yesterday, the March crude
contract on the New York Mercantile Exchange fell 54 cents to $62.55
A supply shortfall would also be bad news for the U.S.
, which relies
on its southern neighbor as its No. 2 source of oil
, behind Canada.
In his State of the Union address, President Bush said the U.S. must
reduce its imports from the politically volatile Middle East.
In Mexico, an oil decline would have significant political and
economic fallout. Mexico's oil-export earnings as a percentage of
government revenue have risen from 32% to 40% in the past 5 years,
making the country's public finances more vulnerable to a downturn in
production or global oil prices. A shortage in the coming months
could play into this year's presidential race by raising the issue of
whether the country needs to open its traditionally closed oil market
to private investment.
Mexico has been bracing for a decline in Cantarell for years, and
previous predictions of imminent decline have turned out to be wrong.
But the internal study is the most complete look at the field to
date. It says the difference between the layer of gas that sits atop
the oil and the water that is creeping into the rocks below is now
just 825 feet and is diminishing at a rate of between 248 and 363
feet a year. The report, which recommends that Pemex scrap 26 of 30
new wells planned for the northern part of the field due to gas
encroachment, concludes that the "window of exploiting the reserve is
"In my mind, this report suggests a collapse scenario is the most
says David Shields, an energy consultant in Mexico who first
published the study's findings. Mr. Shields doubts Pemex can make up
for lost output at Cantarell because it only discovers one new barrel
of oil for every 14 it extracts at the moment, leading to falling
Other analysts agree with Pemex's official assessment, however.
Matthew Shaw, head of Latin America research for Scotland-based oil
consultancy Wood MacKenzie, says he has never heard of a major field
declining as fast as the worst-case outcomes outlined in the study.
Even if Cantarell declines as gradually as Pemex says, the best-case
outlook for the company is a slight increase in production but a
gradual decline in current exports of 1.8 million barrels a day as
domestic demand for gasoline grows. That demand grew nearly 6% last
year, with low interest rates creating a boom in car loans and sales.
Government-controlled gasoline prices are adding fuel to the fire by
keeping prices below international levels.
The study's different scenarios depend on how well Pemex extracts the
oil remaining in the field by getting around the gas and water, with
recovery rates varying from 55% of the remaining oil to just 25%.
Pemex says its official forecast is based on a 52% recovery rate by
investing in water-handling facilities to keep out excess water and
will modify existing wells to make sure they hit oil and not gas.
Write to David Luhnow at email@example.com