August 10, 2009 / 5:47 PM / 10 years ago

Mexico gov't doubts mount on Chicontepec oil project

* Some senior officials question huge investment

* Pemex counting on Chicontepec to stop oil decline

* Output from the area falling short of target

By Robert Campbell

MEXICO CITY, Aug 10 (Reuters) - The multibillion-dollar megaproject that Mexico hopes will turn around its slumping oil industry is being questioned by some officials as results fall short, according to a source familiar with the issue.

State oil monopoly Pemex [PEMX.UL] has banked on an $11 billion plan to tap the unconventional Chicontepec crude deposit to shore up output as yields at other fields plummet, sending Mexican oil production to near 20-year lows.

However, Chicontepec was producing only 30,800 barrels per day in June, a modest rise from December. After years of missed targets and with $3.4 billion already sunk into the project by the end of last year, grumbling about its cost is growing.

“They are coming under a lot of pressure because some people in the government are unhappy with the results. They have spent a lot of money and people are wondering why there is not more oil,” the source said, echoing private remarks made recently by several government officials.

The source declined to be identified due to an ongoing working relationship with Pemex.

Pemex executives have publicly acknowledged that production at Chicontepec has risen more slowly than expected but have said the picture will improve in the second half of the year.

“Any oil project with medium- and long-term production goals requires time to mature,” a Pemex spokesman said on Monday.

“A new business unit focused exclusively on Chicontepec is helping lead and coordinate efforts to increase execution capacity, accelerate the introduction of new technology and assure economic and volumetric results.”

Mexico is one of the world’s largest oil exporters and one of the United States’ main sources of imported oil. The slide in crude output comes at a difficult time for Mexico as it wrestles with what may be its worst economic downturn since the Great Depression.

Mexican oil output has fallen by more than a quarter since peaking in 2004 as output from the aging Cantarell field slumps.

The fall in production poses a serious threat to the federal budget, which relies on revenues from crude exports to pay for more than a third of spending, and has prompted warnings from credit rating agencies that Mexico’s debt rating could soon be cut.


Years of underinvestment in exploration mean Pemex does not have enough new discoveries awaiting development to replace Cantarell.

A major offshore exploration program is not expected to yield finds that can be developed until the middle of the next decade, leaving the technically daunting Chicontepec deposit as Mexico’s only hope for forestalling a further decline in national oil output.

The oil at Chicontepec is tightly locked in small, low-pressure pockets of rock and Pemex officials acknowledge that the company is still working on new technologies to improve productivity.

But, despite the lack of an established solution to the technical challenges, Pemex is spending more than $2.3 billion this year building pipelines, clearing well locations and hiring contractors to drill hundreds of wells.

Official government estimates call for Chicontepec to produce 72,000 bpd this year and 737,000 bpd by 2017, but independent experts are skeptical of that goal and question whether the investment will ever be profitable.

The criticism of Chicontepec comes at a critical time in Mexico as the government wrestles with tumbling tax revenues amid a deep recession, and calls from investors for a deep reform of government finances.

Analysts have suggested Pemex could be forced by politicians to curtail spending on Chicontepec, if results continue to be poor.

Abandoning or scaling back the project would force a revision of official oil production forecasts, which currently project oil output rising from 2.518 million bpd today to 2.881 million bpd by 2012. (Editing by Walter Bagley)

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