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ANALYSIS - Mexico oil decline to resume, target looks shaky

MEXICO CITY (Reuters) - Mexican crude oil output, which has been stable since September, will soon resume its fall and the medium-term outlook is increasingly cloudy due to doubts surrounding two major projects.

Fire boat response crews battle the blazing remnants of the off shore oil rig Deepwater Horizon, off Louisiana, in this handout photograph taken on April 21, 2010 and obtained on April 22. REUTERS/U.S. Coast Guard/Handout

State oil monopoly Pemex has kept production around 2.6 million barrels per day for six of the last seven months, prompting officials to forecast Mexico has overcome the worst of its five-year slide in oil output.

In recent months, Pemex has slowed the rate of decline at its Cantarell field, largely by stepping up drilling at smaller satellite deposits, while boosting production at its Ku Maloob Zaap (KMZ) complex faster than previously planned, helping it offset poor results at its Chicontepec project.

However, the underlying problems at Cantarell persist and Pemex does not think it will be able to squeeze much more crude from KMZ, which is currently pumping near 850,000 bpd, putting an increasing burden onto the troubled Chicontepec project to sustain Mexican production capacity.

“At best, the recent stabilization will last throughout the year; at worst, it could end in the coming months,” said Eurasia Group’s Allyson Benton in a recent research note.

Sliding Mexican crude production is one element in the bull case for oil. The prospect of a country that is currently one of the United States’ top four suppliers of crude becoming a net oil importer itself within the current decade underscores the shifting supply and demand dynamics of the market.

Similarly, bond investors are concerned by Mexico’s output problems due to its reliance on dwindling oil export volumes to fund the budget amid political gridlock.


Production forecasts for Chicontepec have recently been slashed amid scathing criticism of the project by Mexico’s new oil regulator, the National Hydrocarbons Commission, known as the CNH, which could turn up political pressure on the project.

Chicontepec was previously expected to pump 176,000 bpd this year but Pemex now sees output averaging only 47,700 bpd and has not yet provided a revised long term outlook.

Mexican officials say they are still committed to Chicontepec despite auditors urging Pemex chop its broadest estimate of reserves by 7.5 billion barrels of oil equivalent due its poor performance.

But Pemex observers say its focus on production volumes is hurting the company’s financial performance and may also be risking the long-term productivity of its oil fields.

“The attitude is ‘produce it now,’ which is a short-term mentality. There’s little focus on the negative long-term complications that come from operating this way,” said a Pemex consultant, who declined to be identified due to an ongoing working relationship.

Some production practices at Cantarell, particularly the flaring of huge volumes of natural gas as a way to maintain crude output, are cited by analysts as prime examples of Pemex sacrificing an oil field’s long-term health to achieve short-term volume goals.

While flaring gas allows Pemex to produce more oil in the short term, it reduces the pressure within the reservoir, making it more difficult, if not impossible, to extract the maximum amount of oil from the field over its life, analysts say.

Already some observers are warning that the more than two-thirds leap in production at KMZ over the last two years may have compromised its long-term future.

“We assume that the Mexican decline of the last few years will continue,” said PFC Energy analyst Jaime Brito.

“We don’t see a short-term solution to Mexico’s problems and with ... what little money they have being put into the wrong places, it is even more evidence of that.”

Reporting by Robert Campbell; Editing by Marguerita Choy