Much lower oil prices seem to have concentrated the minds of Mexican leaders on their country’s fast approaching fiscal crisis.   As I’ve written many times, roughly 40% the Mexican federal budget is financed by oil exports from the state-owned PEMEX oil company.   But production is falling rapidly, has been doing so for a couple of years, and promises to continue falling even faster after 2010.  Mexico was clever enough to hedge its oil at $70 a barrel through 2009, but leaders are quickly calculating how large the 2010 budget deficits will be if oil production continues to decline and oil prices do not rise substantially after 2009. 

Two recent reports shown below say that the country is taking heroic measures to increase production at their Chicontepec field in order to make up for continuing large declines at Cantarell, its giant field that produces the bulk of Mexican oil.  Mexican crude production is reported down 9.6% in October and exports were down even more steeply, declining 17.6%.

Perhaps of most concern is the Financial Times story about the new Mexican oil law that was supposed to enable PEMEX to develop new fields in the GOM despite Mexico’s constitutional prohibition against foreign interests taking an equity interest in Mexican oil.  This report says the incentives for foreign company to assist Mexico in finding oil allowed by the recently passed legislation are nowhere near as powerful as are needed to get the job done. 

If true, as I suspect these reports are, Mexico could face a fiscal crisis within just a few years.  I’ve been negative on Mexico for some time.  I wish I knew a good way to play the fall of the Mexican economy.   Suggestions are most welcome.  Anyway, here are the two recent reports:

Pemex to Add Nitrogen at Chicontepec to Boost Output (Update1)

By Hugh Collins and Andres R. Martinez

Dec. 9 (Bloomberg) — Petroleos Mexicanos, the state-owned oil company, will inject nitrogen into the Chicontepec field to increase output at the onshore deposit as it seeks to offset a faster-than-expected decline at its largest field.

The nitrogen injection will help the field produce 500,000 to 600,000 barrels a day of crude by 2021, the company, known as Pemex, said today in a statement e-mailed to the Mexico City stock exchange.

Pemex already injects nitrogen and other gases into offshore fields, such as Cantarell, where output has fallen for almost five years at a rate faster than the government anticipated. Nitrogen is used at Cantarell, the world’s third-largest field, to keep up pressure in the deposit, making it easier to extract the oil.

Pemex believes the Chicontepec development may hold 17.7 billion barrels of oil, the company has said. Chicontepec is primarily located in the eastern state of Veracruz.

To contact the reporter on this story: Hugh Collins in Mexico City at hcollins8 [Email address: hcollins8 #AT# bloomberg.net - replace #AT# with @ ]Andres R. Martinez in Mexico City at amartinez28 [Email address: amartinez28 #AT# bloomberg.net - replace #AT# with @ ]

Last Updated: December 9, 2008 16:15 EST

Sudden plunge in oil price puts pressure on Mexican reforms

By Adam Thomson in Mexico City

Published: December 9 2008 02:00 | Last updated: December 9 2008 02:00

While Mexican legislators were discussing legislation to increase oil exploration and production last July, Mexico’s crude oil mix hit a record $132.71 a barrel. The government’s coffers were filling at breakneck speed and, with a few exceptions, there were smiles all round.

This month, with the reforms in place and following a presidential pat on the back to Congress for a job supposedly well done, prices have plummeted; the Mexico mix at the end of last week was down to $30.52 a barrel.

For the world’s sixth biggest oil producer, and for a government that relies on oil to provide about 40 per cent of total revenue, the precipitous fall is a timely reminder that the legislative changes must show quick results.

Pemex, the state oil monopoly, said crude output fell 9.6 per cent in October compared with a year before. Exports, meanwhile, fell an alarming 17.6 per cent over the same period.

The sharper-than-expected tail-off in production from the Cantarell complex, which until recently provided about two-thirds of the country’s total production, has placed Mexico in the once-unimaginable position of becoming a net oil importer within a few years.

Raúl Feliz, an economist at Cide, a Mexico City think-tank, says of the trends: “It is a terrible combination.”

On the administrative side, the legislation has promise. For example, the state company will no longer be subject to government procurement rules, which are complicated, inefficient and, in the case of Pemex, made it almost as difficult to purchase a box of pencils as an entire oil rig.

Corporate governance will be improved, with the addition of four independent board members to compliment the monopoly’s 11 existing members; six from the government and five from Pemex’s powerful union.

The new law requires Jesús Reyes Heroles, Pemex’s director, to come up with a plan to shake up the company based on “principles of administrative rationality and efficiency”.

Where things appear less impressive is in changes to the way Pemex contracts private companies to seek new reserves and to start drilling and produce.

In the build-up to October’s reform, analysts had argued that one of the biggest barriers to reversing the falling trend in production was Mexico’s constitution, which prohibits joint-risk contracts in which Pemex could share both the risks and rewards of oil exploration with third parties.

Rather than opening the sector to investment, the legislation gives Pemex limited scope for making its contracts more attractive to third parties via financial incentives to finish a project ahead of time or pass on technology. “The reforms do almost nothing to modify the old contracts,” says Luis Rubio, president of the Center of Research for Development, a think-tank.

While Pemex’s investment budget has increased from $7.5bn (€5.8bn, £5bn) in 2000 to some $19.6bn this year, it lacks the knowhow and technology to explore in the waters of the Mexican Gulf.

Copyright The Financial Times Limited 2008

Tags: peak oil investments

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