Sunday, March 19, 2006

Key oil supply for U.S. declines

Philadelphia Inquirer

By Kevin G. Hall
Inquirer Washington Bureau

MEXICO CITY - Mexico's giant Cantarell oil field, which has financed government spending here and held down U.S. gasoline prices for 20 years, is facing a production decline - a prospect that could heighten U.S. dependence on Middle East oil.

An internal report from Mexico's state-owned oil company, leaked last month, said water and natural gas were seeping into the massive offshore oil field in the southern Gulf of Mexico. That would reduce Mexican oil output and be bad news for U.S. consumers. Mexico is the second-largest supplier of oil to the United States.

The timing is especially bad because global oil supplies are tight and there's growing concern about several other important suppliers of oil to the United States. Unrest grows in Nigeria, conventional oil production is dropping in Canada, and Venezuela is taking an increasingly belligerent anti-American tone.

In his State of the Union address on Jan. 31, President Bush vowed to wean Americans from Middle East oil. But the threat of accelerated decline in Mexican oil output means other suppliers will have to pick up the slack, and the world's largest oil reserves remain in the Middle East.

Cantarell is one of the world's great oil fields; only Saudi Arabia's Ghawar field is larger. Cantarell was discovered in 1976 and has been a workhorse ever since.

"It's a super-giant field, so when you have a super giant-field declining, it's very difficult to compensate for that," said Adrian Lajous, a veteran oilman who was the director of Petroleos Mexicanos (Pemex), the state-owned oil company that operates Cantarell, from 1995 to 1999.

Cantarell's output of 2.0 million barrels per day last year accounted for about 60 percent of Mexico's output of 3.3 million barrels daily. It's been pushed hard in recent years to take advantage of high global oil prices - with production rising from 1.0 million barrels per day in 1994 to a peak of 2.1 million in 2004.

Until this year, 70.8 percent of Pemex's earnings went to Mexico's federal government.

Pemex management downplays the report about Cantarell, saying it was a low-level document whose worst-case scenarios reflected a "do-nothing curve," scenarios in which Pemex didn't respond to changing conditions.

Those worst-case outlooks suggested that by 2008, Cantarell's output could fall to barely more than 500,000 barrels per day, more than halving Mexican crude exports.

Rolando Galindo, a top Pemex financial adviser, told Knight Ridder News Service this week that Pemex won't let that happen. "We are not sitting on our hands," he said during an interview in Pemex's huge glass building, which towers over the hemisphere's largest metropolis.

In a conference call for investors Thursday, Pemex's production manager, Carlos Morales, lowered Cantarell's production outlook to 1.9 million barrels per day this year, a 6 percent decline, and said production would be 1.4 million barrels per day by 2008. That's a return to 2000 production levels.

Mexican President Vicente Fox announced on Wednesday that Pemex would spend $37.5 billion over the next two decades to develop the Chicontepec oil field in southern Veracruz and Puebla states. The field, estimated to contain 18 billion barrels of crude, produces 26,000 barrels per day but could produce as many as 1 million a day within eight years, Fox said.

The saving grace for Mexican oil output, and the U.S. consumers who depend on it, is that much may still be undiscovered.

"In Mexico, just 13 percent of explorable territory has been explored," said Sergio Rosado, the associate director in Mexico City for Cambridge Energy Research Associates, a global oil consultancy. "There are many areas to develop."

But Pemex's Galindo, like many outside experts, thinks the era of easy, cheaply produced oil in Mexico appears to be over.

"With the decline of Cantarell, Pemex will no longer be Cantarell. For many years, we depended almost 100 percent, or in great measure, on Cantarell," Galindo said. "Now Pemex will have to work fields, not super-giant fields like Cantarell, but... more complex fields. Our operations will have to become more efficient because these are fields that cannot absorb inefficiencies like Cantarell at one time could."

Pemex: At a Glance
Petroleos Mexicanos is the state-owned oil company that operates the Cantarell field.
Nationalized:March 18, 1938.
Business:Oil and natural gas exploration, refining and marketing.
Employees: 138,000.*
Reserves:16 billion barrels of oil, 14.8 trillion cubic feet of natural gas.
Competitors: Exxon Mobil, Petroleos de Venezuela, Royal Dutch Shell.
Net Losses:
2002: $2.9 billion.
2003: $3.6 billion.
2004: $2.3 billion.
2005: $3.8 billion.
*As of December 2004


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