Wednesday, July 09, 2008

Disappearing Oil

Crude output from Mexico's Cantarell, the world's third-largest oil field, is falling at the fastest pace in 12 years as investment limits keep state-owned Petroleos Mexicanos from fully exploiting deposits and finding new ones.

Production at the Gulf of Mexico development dropped 34 percent in May from a year earlier, the biggest decline since October 1995, according to data compiled by the government and Bloomberg. That was when Hurricane Roxanne's 131 miles-per-hour (114-knot) winds shut down offshore wells for a week.

Seven decades after Mexico banned foreign oil investment, President Felipe Calderon is pressing lawmakers to allow Pemex, as the state energy company is known, to hire outside producers to help find and pump petroleum. Cantarell's decline is costing Pemex $20 billion a year in sales at a time when oil prices have never been higher, and the company lacks the funding to find enough new deposits to keep reserves from dwindling.

``We are at the worst time right now of the decline,'' David Shields, an energy analyst and publisher of Mexican oil magazine Energia, said in a July 1 interview. ``They should have been developing the fields to be sustainable.''

Falling production is curbing exports to the U.S., which buys about 80 percent of the oil Mexico sells abroad. Sales to the U.S. declined to 1.07 million barrels a day in May, the lowest since November 1995.

Exports at Risk

Pemex, Latin America's biggest company by revenue, may need to cut exports this year to meet domestic demand as production falls, Energy Minister Georgina Kessel said last month in an interview. The company reduced the amount of oil it supplies to Texas refineries operated by Royal Dutch Shell Plc and Valero Energy Corp., according to a June 30 regulatory filing.

Mexico nationalized its oil industry in 1938 and enacted a constitutional ban on foreign energy investment to protect the country's resources. Increasing royalties from Pemex, which Mexico relies on for 40 percent of government revenue, have left the company short of exploration and production funding.

Mexico's Congress is in the final month of debate on Calderon's proposal to give Pemex more freedom to hire companies to explore, produce, refine and transport oil. Foreign producers still wouldn't own the oil. Hiring them under service contracts would free Pemex to invest more in other projects.

Pemex is seeking $20 billion in exploration and production funding for next year, up from its 2008 budget of $15 billion. Output at the three-decades-old Cantarell fell 25 percent in 2007, exceeding company projections for a 15 percent drop.

Spending Needs

``Spending on exploration is a relatively low number, compared to other areas of the world,'' Jed Bailey, managing director of Latin American research at Cambridge Energy Research Associates, said in a July 1 interview from Boston.

Irving, Texas-based Exxon Mobil Corp., the world's largest oil company, plans more than $25 billion in capital spending this year. Chevron Corp., the No. 2 U.S. oil company, budgeted almost $23 billion.

Pemex's funding request is too low to meet a goal of boosting oil production back above 3 million barrels a day, Kessel said in the interview. The company needs about $30 billion a year to hit that target, she said. Total crude output in May was 2.8 million barrels a day, down 10 percent from a year earlier, led by Cantarell's plunge.

Pemex spokesman Carlos Ramirez didn't return calls seeking comment.

Reserves Fall

The company replaced 50 percent of the oil it extracted in 2007. At current production rates, Pemex's oil reserves would run out in 9.2 years if it added no new deposits.

Pemex has been unable to take full advantage of record oil prices. Crude-oil futures traded in New York climbed to a record above $145 a barrel this month, the highest since trading began in 1983.

Cantarell's output dropped by more than 540,000 barrels a day in May from a year earlier as the deposit lost pressure, making it more difficult and expensive to extract crude. Pemex has been injecting nitrogen for more than 10 years to stimulate production.

The development peaked at 65 percent of the company's 3.3 million barrels of daily crude output in 2003. In May, it fell to 37 percent of total production.

The world's largest oil field is Ghawar in Saudi Arabia, followed by Burgan in Kuwait and Cantarell.

Source - Bloomberg


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