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Production decline worsens at Mexico's biggest oil field

Output could be halved in five years, crimping a major source of funding for public services.

February 08, 2007|Marla Dickerson | Times Staff Writer

MEXICO CITY — Production at Mexico's largest oil field is slipping faster than projected and officials see few options for quickly replacing the main source of the nation's oil riches.

The struggles of the world's No. 5 oil producer have implications for an already tight global petroleum market and for the United States, the chief buyer of Mexico's heavy crude. It's also a threat to Mexico's social stability.

Production at Cantarell, the world's second-largest oil complex, which provides about 60% of Mexico's crude, averaged 1.78 million barrels a day in 2006. That's a 13% drop from 2005, said Jesus Reyes Heroles, director of Petroleos Mexicanos, or Pemex, in a news conference Wednesday.

The decline was more than twice as great as the company's published predictions, and the slide will almost surely continue in 2007. Reyes said he expected average daily production at Cantarell to fall to 1.5 million barrels a day this year, a 15% decline. He estimated that within five years the aging field would pump about 700,000 barrels daily, less than half of December's production of 1.439 million barrels a day.

Experts have long forecast the exhaustion of the field, which was discovered in 1976. The question for Mexico, which depends on oil revenue to fund more than one-third of public spending, is just how fast Cantarell will lose its productive capacity, and whether the country can squeeze more oil out of smaller fields to compensate for the decline while it searches for a blockbuster new deposit.

Reyes on Wednesday downplayed the possibility of a sudden collapse and said that Cantarell's output would rebound in early 2007 from the December figure, which was the lowest monthly production in six years.

But some analysts suspect that the situation at Cantarell is worse than Pemex executives are willing to publicly admit.

"They are feeling pressure from the market to say that things are fine ... and that they are doing well in production," said Mexico City energy analyst David Shields, the author of two books on Pemex. "But oil engineers will tell you that when a major field is in decline, it doesn't come back up again unless you do something very radical to change the dynamics.... I don't see that happening."

Mexico's overall crude output was just under 3 million barrels a day in December 2006, a figure Shields predicts could plummet to 2 million barrels within a few years. Mexico last year relied on oil revenue to fund nearly 40% of public spending on essential services such as schools, police, roads and healthcare.

High global oil prices have compensated for Mexico's production slump. So has increased output at some smaller fields.

But with Cantarell sinking, pressure is building on the administration of new President Felipe Calderon to make substantive changes in Mexico's oil monopoly to provide more funding for development of new sources of crude. Experts have advocated opening the nation's state-owned energy sector to private investment and foreign partners, a move embraced even by communist Cuba.

But Reyes said Wednesday that he saw no urgent movement to change Mexico's constitution to allow outsiders to participate in petroleum exploration and extraction, "the heart" of Pemex's business.

Reyes said Pemex had the resources to fund a major expansion in exploration on its own -- if only it could get its hands on the money. The government routinely siphons more than 60% of the company's revenue to pay its bills, a cut so large that it has left Pemex meager funds to invest in basic maintenance, never mind the tens of billions of dollars needed to develop new fields. Reyes said Pemex last year contributed $79 billion to federal coffers.

"Pemex has [money] in the cash register ... but it doesn't stay here," Reyes said in his first major news conference since being appointed by Calderon to head the petroleum monopoly in December. "Pemex needs more financial resources."

Pemex's 2006 financial results won't be available for a few more weeks. It is expected to post record sales topping $100 billion. But its heavy tax burden will ensure that the company will lose money as it did in 2005, when it registered a net deficit of about $7 billion.

With production sliding and oil prices down from their lofty levels of last summer, Reyes said that Pemex won't be delivering the fat tax windfall in 2007 that government officials have enjoyed in recent years.

Calderon has stressed the urgency of getting Mexican citizens and business to pony up more tax money to take the pressure off Pemex, an idea analysts applaud.

"It's a very serious situation for Mexico's public finances," Shields said of falling production. "And it underlies the need to wean the nation off oil revenue."

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marla.dickerson@latimes.com

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