Mexico’s Oil Dilemma

For decades, Mexico has been the world’s leading producer of oil from shallow waters, thanks to its Cantarell field in the Gulf of Mexico. Cantarell is the world’s second-largest “super-giant” field. Since it was discovered in the mid 1970s, after a local fisherman complained to authorities about oil slicks ruining his nets, Cantarell has provided two-thirds of Mexico’s oil production. While a well drilled onshore might typically yield a few hundred barrels per day, some Cantarell wells in the past would serve up gushers of as much as 50,000 barrels a day. That’s one reason it costs just $4.20 a barrel to “lift,” or pump, a barrel of oil in Mexico.

Today, though, the days of super-cheap, super-easy oil are over.
Cantarell is near the end of its useful life, its production dropping 15% per year over the past few years. Today, a typical Cantarell well might produce around 8,000 barrels a day, Morales says, and the reservoir provides just 45% of Mexico’s oil. The country’s crude oil production peaked at 3.38 million barrels per day in 2004, but by March of this year had fallen to just 2.8 million. Mexico, which in 1999 had 25 billion barrels of proven oil reserves, neglected its exploration duties when oil was easy. Much of the country’s drilling equipment became obsolete during years of low investment, Morales says. As a result, the country has just 14.7 billion proven barrels today.

At current rates of consumption, that oil will last only 9.2 years, which means Mexico could stop exporting oil within a decade. “Unless something is done quickly to allow Pemex to operate more as a real oil company, and not as a bureaucratic state-run firm, it will become a marginal exporter in the very short run,” says David Shields, a Mexico City-based energy analyst and author of two books on Pemex.

That would be a national disaster. The country’s treasury relies on Pemex for nearly 40% of overall tax revenues, and oil exports, which in 2007 were worth $44.4 billion, account for around 10% of the country’s export revenue. The government has known for years that Cantarell would start declining around now, but Finance Ministry officials ignored the entreaties of Pemex engineers to reduce the oil giant’s tax burden so that it would have more funds for investment in exploration. Finally, in 2003, the message was heard.

Business Week