July 20, 2007 / 3:22 PM / 10 years ago

Mexico, Venezuela oil slumps could hit U.S. supply

<p>An aerial view shows the Puerto La Cruz refinery Complex in Anzoategui, Venezuela, April 30, 2007. REUTERS/Jorge Silva (VENEZUELA)</p>

CARACAS/MEXICO CITY (Reuters) - Falling oil production in Venezuela and Mexico, Latin America’s biggest suppliers of crude to the United States, could deepen U.S. reliance on shipments from the Middle East and Africa.

The outlook comes as a setback to the White House, which is hoping to reduce U.S. oil dependence on unstable regions.

“The best Mexico and Venezuela can hope for right now is to keep their production flat, but the more likely scenario is that we will see a decline,” said Fadel Gheit, an analyst with Oppenheimer and Co. “Someone has to fill that gap, whether it is Russia, the Middle East or West Africa.”

The two countries currently provide some 25 percent of U.S. oil imports, but analysts say the region will be unlikely to boost exports to meet growing U.S. energy demand.

The self-styled socialist revolution led by Venezuelan President Hugo Chavez, and the strict prohibition on private energy investment in Mexico, have created harsh investment climates that experts believe will crimp future production.

U.S. Department of Energy data shows Venezuela’s oil and liquids production remaining steady between 2005 and 2015, with Mexico’s production falling 21 percent in the same period.

Total Latin American oil exports could still eke out a 2 percent increase by 2012, on rising production by Brazil, according to the International Energy Agency, but it will not be enough to keep up with rising U.S. consumption.

FALLING OFF THE MAP

Problems in Mexico and Venezuela would extend an existing trend of stagnant energy production in Latin America.

Ecuador’s small oil industry produces around 530,000 barrels per day and oil exports to the United States were down 31 percent as of April, as leftist President Rafael Correa tightens terms for foreign oil companies.

Colombia’s oil production peaked near 800,000 bpd in 1999, and has slumped to around 520,000 bpd, with exports to the U.S. down more than 50 percent in the first four months of 2007.

Petrobras (PBR.N) of Brazil has steadily boosted domestic production and last year made that country energy self-sufficient, but the booming growth of South America’s largest economy could leave it without a significant energy surplus.

“If you look at most long-term forecasts, they do not show Latin America as a major source of growth,” said Michelle Billig, an analyst with PIRA Energy in New York.

“This is part of the bigger story keeping prices up. If you look around the world, where can you go for supply growth?”

HOSTILE INVESTMENT ENVIRONMENT

Meanwhile, analysts say Venezuela and Mexico suffer from a lack of investment needed to keep oil fields productive and to finance expansion into new areas.

Venezuela on May 1 took over from foreign companies four projects in its Orinoco belt that can turn tar-like oil into around 570,000 bpd of lighter oil, sparking concerns that state oil company PDVSA may not be able to maintain the complex operations.

Official production figures show Venezuela producing around 3 million bpd, but global energy agencies, including the Organization of Petroleum Exporting Countries, say production has been only around 2.5 million bpd, after PDVSA sacked nearly half its work force in 2003.

Mexico’s market-friendly president, Felipe Calderon, has played good cop to Chavez’s bad, but the nation’s strict prohibition on private investment in oil and gas has left it with faltering production and shrinking reserves.

Mexican crude exports to the United States are down 13 percent in the first four months of this year, with production down 15 percent at the Canterell field, which has for years provided more than half of Mexico’s crude oil.

State-run Pemex is struggling to find reserves through technically challenging deep-water exploration, but it has few resources to do so alone as it loses half its revenues to taxation each year.

Calderon is more focused on battling drug gangs than reforming the constitution to usher in much-needed private investment.

“The window to make investments and develop either the potential in shallow fields or deep water is long overdue,” said Jaime Brito, a former Pemex employee who is now an analyst at PFC Energy.

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