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COLUMN-Quietly now: Mexico is no longer an oil basketcase: Campbell
May 22, 2012 / 4:00 PM / 6 years ago

COLUMN-Quietly now: Mexico is no longer an oil basketcase: Campbell

By Robert Campbell

NEW YORK, May 22 (Reuters) - 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 since mid-2009.

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 2019.

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.


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 oil industry.

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 years ago.

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 would help.

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.

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