By Robert Campbell
NEW YORK May 22 The following may be taken as
heresy by oil perma-bulls but let's get it out in the open: it's
time to scrap, or at the very least rigorously question, the
assumption that Mexican oil production will dramatically fall
sometime this decade.
A predicted sharp fall in Mexican oil output has long
underpinned part of one of the bullish theses behind strong oil
prices: non-OPEC crude oil output is weak and getting weaker.
Of course, Mexico is not the only part of the non-OPEC
supply picture. But it is a big player. The country remains one
of the world's biggest oil producers and exporters.
The decline of nearly 25 percent in Mexican crude oil
production capacity between 2004 and 2008 was a watershed event
for oil supplies.
But the problem is that analysts still assume that similar
declines must inevitably come in the future.
A glance at market balances uniformly assume sharp declines
in Mexican oil output over the next decade, projecting forward a
rerun of the dramatic fall in production experienced by Mexico
between 2006-08 onto the future.
Consider the facts. Mexican crude oil production, while
still a far cry from its peak, has been fairly stable,
oscillating between 2.5 million and 2.6 million barrels per day
Total liquids production, which adds condensates and natural
gas liquids to crude output, has edged down, to just over 2.9
million bpd, but is off only 40,000 bpd from 2010 levels.
Yet forecasters still assume steep drops in Mexican output.
For instance, the 2010 Annual Energy Outlook published by
the U.S. Energy Information Administration forecast Mexican
liquids production would be only 2.31 million bpd in 2012.
The EIA's 2011 forecast revised these views, but still
assumes a decline in Mexican liquids output. The reference case
calls for 2012 production to fall to 2.7 million bpd, or 2.8
million bpd in the high oil price scenario.
Yet looking forward in the 2011 EIA forecast, steep declines
are still projected, with output falling below 2 million bpd by
The 2012 forecast again revises its view of Mexican output
higher, in some cases sharply, but the medium-term forecast
still calls for steep declines.
The EIA is not alone. Similar forecasts have been made (and
revised) in recent years by the International Energy Agency and
private oil market analysts.
OUT OF INTENSIVE CARE
At least for now, the narrative on Mexico remains the same.
Whatever state oil monopoly Pemex has done to keep
production flat for the last three years is really just a pause
in the inevitable decline.
Of course this is not to say that all is well in Mexico's
Pemex remains grossly overstaffed, inefficient, bureaucratic
and subject to political interference. Proven oil reserves
continue to decline, albeit at a far slower pace than a few
The forthcoming electoral period could well prove difficult,
particularly if it holds up decision making as upper management
ranks are shuffled.
Pemex also relies too heavily on oil output from a single
complex -- Ku Maloob Zaap. Exploration results, while improving,
are not yet turning up major new finds.
So 2013 will probably be a critical year. Following this
summer's presidential elections, a new management team will
likely be installed, either spurring reform or stiflingly what
has been put in place.
That may open the door to fresh reform, either by letting
more private capital into the oil sector or at least deepening
the overhaul of procedures now underway at Pemex.
Next year may also show if the current trend to stable
output has depended mainly on unsustainable techniques that
sacrificed the long-term recovery factor at large oil fields in
favor of short term production gains.
More evidence that recent stability is due to better
management may well be enough to get analysts to take Mexico off
their critical lists.
There are already reasons to do so. Pemex has started to
deliver on its promises, at least in the upstream realm.
Analysts stifled laughs when Pemex promised a few years ago
to keep oil output above 2.5 million bpd. Yet so far the company
has done that.
Next year may provide the opportunity for a clearer view of
Mexico's long-term prospects. Greater transparency from Pemex
But the company has clearly broken with the last, more
dramatic, short-term trend that still underlies the story
analysts tell about the Mexican oil sector.