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Woes mount for Mexico's state oil titan

Output is declining rapidly, but national pride and politics may block possible fixes.

January 02, 2008|Marla Dickerson | Times Staff Writer

MEXICO CITY — With crude oil topping $95 a barrel, these should be heady days for Petroleos Mexicanos. Mexico's state-owned oil monopoly, known as Pemex, generated record revenue of about $100 billion in 2007.

But at a ceremony marking the 69th anniversary of the nationalization of Mexico's oil industry last year, Pemex General Director Jesus Reyes Heroles wasn't in a celebratory mood.

"The situation of Petroleos Mexicanos is critical and merits immediate attention," the company's top executive said.

Indeed, 2007 tapped a gusher of concerns for the world's sixth-largest oil producer.

Pemex managed to lose $1.2 billion in the third quarter. Output is declining, as are exports and proven reserves. Mexican Energy Secretary Georgina Kessel said last month that Mexico's crude production, which averaged about 3.1 million barrels a day in 2007, could fall as much as one-third in less than a decade if the nation didn't move fast to reverse the slide.

The consequences could be painful, not only for Mexico, which relies on oil revenue to fund about 40% of its federal spending, but also for world markets, which are feeling the pinch of tight supplies. Mexico is the No. 2 provider of petroleum to the United States, behind Canada.

The bad news isn't confined to the financial pages. An emblem of national pride and the nation's most important company, Pemex lurched from one humiliating episode to another in 2007. Among them:

* Leftist guerrillas pulled off a series of pipeline bombings that sent the government scrambling to deploy troops to protect company installations.

* An accident at an offshore oil platform killed 22 workers in October and crippled a major well. Public outcry forced Pemex to take the unprecedented step of appointing an independent commission to investigate the incident, reflecting lack of trust in the institution.

* A federal watchdog fined a former head of Pemex for using company funds to pay for his wife's liposuction and illegally funneling more than $150 million to the oil workers' union as part of a murky contract settlement. Separately, government audits turned up lucrative supplier contracts awarded to former company insiders.

* The national daily newspaper Excelsior reported in November that 11,500 oil workers, about 10% of Pemex's unionized workforce, get paid for sitting idle.

* Mexico imported nearly 40% of its gasoline in 2007 -- a record amount -- because Pemex lacks sufficient refining capacity to meet domestic demand. This is an embarrassment akin to Idaho importing potatoes.

"Definitely, Pemex is in a vulnerable situation, a delicate situation," said Ruben Camarillo, a senator with President Felipe Calderon's conservative National Action Party, or PAN, which is working to introduce legislation early this year to loosen state control of Mexico's energy sector. "A profound change is required."

Much of the trouble stems from Cantarell, Mexico's largest oil field. Located in shallow waters off Campeche state in the Gulf of Mexico, Cantarell supplied about 60% of Mexico's output until recently. The field's production peaked in 2004, when it averaged more than 2 million barrels a day. Output has tumbled since then, down about 30% to an average of 1.46 million barrels a day through the first 10 months of 2007.

Analysts for years have predicted the decline of this aging workhorse, which has been pumping for nearly three decades. The real shocker, they say, is that Mexico's government did so little to prepare for its inevitable demise. Geologists believe there is plenty more oil to be found in the deep waters of the gulf. Pemex simply doesn't have the tools to go after it.

That's because deep-water drilling requires specialized knowledge, advanced technology and piles of money -- none of which Pemex has. Cantarell's oil was so plentiful and so easy to extract for so long that spending big bucks on tough drilling elsewhere wasn't a priority.

The lawmakers who approve Pemex's budget instead channeled oil wealth into roads, schools and social programs. Pemex is far and away the nation's biggest taxpayer, turning over more than half its revenue to the government.

How big a burden is that compared with industry peers? Consider this. In 2006, Pemex and state-owned Venezuelan oil company Petroleos de Venezuela, known as PDVSA, posted nearly identical sales of just under $100 billion. Pemex paid nearly $54 billion in taxes. That's one-third more than the $36 billion that Venezuelan President Hugo Chavez extracted from PDVSA to pay for his "socialist revolution," which critics complain is crippling the oil company.

Mexicans remain fiercely proud that their country wrested its petroleum assets from foreign companies such as Standard Oil decades ago and committed them to social development.

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