Insight: Clouds gather over Mexico's proclamation of new oil dawn

CIUDAD DEL CARMEN, Mexico Wed Jun 5, 2013 12:43pm EDT

1 of 4. Employees walk up a staircase in the production area at the Mexico's state-run oil monopoly Pemex platform 'Ku Maloob Zaap' in the Northeast Marine Region of Pemex Exploration and Production in the Bay of Campeche April 19, 2013.

Credit: Reuters/Victor Ruiz Garcia

CIUDAD DEL CARMEN, Mexico (Reuters) - The vast Ku Maloob Zaap oil field is the jewel in the crown of Mexico's oil industry, pumping one in every three barrels of crude the country produces, at some of the lowest costs in the world.

But behind the luster, state oil monopoly Pemex quietly expects a gloomier future for the aging field, leaving a big gap in supply and casting serious doubt on its public proclamations of a new era of oil growth.

In the main control center on the KU-S platform, a 12,500-tonne tangle of tanks and pipes at the heart of Ku Maloob Zaap, monitors flash real-time data showing how much crude is being sucked up from deposits two-thirds of a mile below the ocean floor in the 58-square-mile (150-sq-km) field.

Workers beam when talking about the platform, the hub for a network of 173 shallow water wells that produces crude for the equivalent of only about $6 a barrel.

They tout a five-year streak without an accident; a hotel for visitors; even a gym for the 116 workers who live here above the glittering waters of the Bay of Campeche.

What they don't discuss - and what Pemex would rather avoid talking about - is that in a few years, production here is expected to begin a precipitous decline.

In February, Pemex said it expected Ku Maloob Zaap's output to hold steady at 850,000 barrels per day (bpd) through 2017. Since then, Pemex CEO Emilio Lozoya has repeatedly declared that Mexico, the world's seventh-largest oil producer, is making a comeback.

"Production is not declining. It is actually beginning to rally," he said recently, referring to total national output. "This is big news for our country, and something that is not necessarily known to the public."

But many analysts question that scenario. A closer look at Ku Maloob Zaap helps explain why.

In a presentation at Rice University in Houston, Texas, early last year, Lozoya's predecessor, Juan Jose Suarez Coppel, estimated production at the giant offshore oilfield, whose Maya name means "good nest of coals," will fall 60 percent by 2023.

Pemex officials initially declined to comment on the estimate until Reuters showed them the Rice presentation. At that point they confirmed that the forecast still stands.

Even a cursory examination of Pemex's own figures underlines why oil analysts do not share Lozoya's confidence.

Mexico's average annual crude production has been edging down for years. At the outset of 2013, average first-quarter oil output sank to 2.54 million bpd, its lowest level since 1990.

The data and the forecasts highlight a disconnect between Pemex's optimism and the reality at fields like Ku Maloob Zaap.

Two-thirds of fields are already in decline, and Lozoya's latest forecast for a 20 percent rise in output to 3 million bpd over the next five years is premised on production from some that have yet to be developed, analysts say.

For many, it sounds all too familiar. Just a few years ago the giant Cantarell field was thought to be a stalwart; output has now plunged to one-tenth of 2004 levels, a shockingly abrupt decline that caught world oil markets off guard.

"Production is going to fall and there's nothing obvious that will replace it," said Dave Pursell, an oil analyst with Houston-based energy development bank Tudor Pickering Holt, who worked on reservoir studies in Mexico in the 1990s.

"If a public company in the U.S. told me that, the stock would be a short," he added. "You'd sell it."

The Mexican government hopes a landmark energy reform aimed at luring private oil major investment will help boost output.

Next month, Pemex will auction six blocks in Mexico's Chicontepec basin, home to the country's largest hydrocarbon reserve, in a more immediate push for additional capital.

EXPORTS, PRODUCTION DOWN

Renewed optimism has emerged with the election of President Enrique Peña Nieto, who has pledged to revitalize Pemex.

Yet developing the country's newest discoveries to replace behemoths like Ku Maloob Zaap will take years, even if Peña Nieto's energy reform attracts new investment. Since pumping its first barrel of oil in 1980, Ku Maloob Zaap output has risen to a record 847,000 bpd last year.

Miles of underwater pipelines connect the shallow water field's platforms, located on the southern rim of the Gulf of Mexico. The pipelines converge underneath Pemex's $1 billion Floating Production, Storage and Offloading (FPSO) vessel, a 360,000-tonne ship nearly four football fields long.

The FPSO mixes heavy and light crude on its deck and, like a massive gas station, fills up visiting oil tankers for direct export via a hose that gently bobs up and down on the water.

Ten hours after docking, most tankers disconnect and begin their short voyage north to U.S. Gulf coast refineries.

But the tankers are making fewer trips: oil exports are down by over a third since 2004. And over the same period, oil output has fallen by a quarter since peaking at 3.4 million bpd.

Meanwhile, the United States, Mexico's main oil export market, is experiencing an energy boom thanks to revolutionary advances in extracting hydrocarbons from shale rock formations.

As thousands of shale wells pump away just north of the border in Texas, Pemex is still studying its shale potential with just 10 test wells scheduled to be drilled this year.

HOPES ON CHICONTEPEC

Rather than turning to shale, Mexico is counting on a pick up in aging fields, gains from two new shallow ones near Ku Maloob Zaap and higher output at the onshore Chicontepec basin to add 530,000 bpd by 2018, according to Carlos Morales, head of Pemex's exploration and production arm since 2004.

Chicontepec holds about 40 percent of Mexico's oil reserves, but output at the geologically complicated basin has repeatedly failed to meet targets. Pemex's former CEO Suarez Coppel in 2011 pledged Chicontepec oil output would reach 100,000 bpd by the end of last year. Instead, it stalled at 74,800 bpd in December.

A lack of drilling rigs industry-wide is also expected to dent Pemex's short-term expectations for Chicontepec, which sits in the east-central states of Veracruz and Puebla.

Pemex devotes about 80 percent of its 195 billion peso ($15.4 billion) exploration and production budget to shallow water deposits such as Ku Maloob Zaap and Cantarell.

Ku Maloob Zaap remains lucrative: crude exports bring in about $100 per barrel, more than 16 times the production costs. But future supplies will be much riskier and more expensive - once they actually come online.

"The bulk of Mexico's oil production in the next 15 years is going to come from fields that have not been developed or have not been discovered," said Luis Miguel Labardini, partner with Mexico City-based energy consultancy Marcos and Associates.

Even at the country's most promising shallow water oil fields such as Ayatsil-Tekel and Tsmin-Xux, only test wells have been drilled. But Pemex says it's expecting 270,000 bpd by 2016.

REFORM PRESSURE

After watching the revival of other aging oil patches in countries such as Norway in recent years, Mexico is in the midst of its boldest efforts yet to rejuvenate the sector.

Due by September, the reform aims to boost production by luring investment from multinational oil majors, but the government has not given away details of how it will do so.

It is also fraught with political risks.

Mexico has jealously guarded its oil since nationalizing the industry in 1938, and a plan that gave foreigners any ownership of the crude would meet trenchant opposition in Congress.

The hope is to become a global success story like Colombia, whose output nearly doubled from 530,000 bpd to 944,000 bpd last year since it opened the oil industry to foreigners in 2007.

Failure could cast Mexico into the same group of diminishing petro-powers as Venezuela, accentuating the growing divide with the United States, which will vie with Saudi Arabia as the world's No. 1 oil producer by 2020, according to U.S. Energy Information Agency estimates.

"If current production and consumption trends continue, Mexico could become a country with a structural deficit in energy," Mexico's president, Peña Nieto, said recently.

The latent potential is still there.

Mexico has only tapped about 15 percent of total estimated oil resources, leaving as much as 200 billion barrels yet to pump beyond its proven reserves, according to Edgar Rangel, a member of Mexico's independent hydrocarbons commission.

Pemex's Morales said the firm had defied its critics before.

"Analysts have been telling us since 2010 we'd be producing 2.3 million barrels a day, 2.2 million, 2 million," he said. "I don't know who has more credibility, those of us who made sure it didn't happen, or those who said it would and were wrong."

(Editing by Dave Graham, Jonathan Leff and Kieran Murray)