Mexico's Woes: Quakes, Flu and Oil Production Collapse

Reluctantly I’m going to briefly cover Mexico today. Your RSS newsreader and your Bloomberg however are already, no doubt, filled up with reports from Mexico’s Flu Zone. Or Quake Zone. Or both. Instead, I lightly suggest you turn your attention away from these acute conditions, to something more chronic: the relentless crash in Mexico’s oil production.

On Tuesday of last week, quarterly production data was released by PEMEX. In the last several years, I cannot actually recall a single forecast by PEMEX that was not undercut later by worse than predicted production data. Last week was no different. But what’s concerning is that PEMEX has truly made an effort, starting last year, to get ahead of the dramatic declines at the Cantarell oil field. They have of course tried to soften the blow by claiming that Mexico could bring production back up again, through the development of newer fields.

As I explained in my early January post on Mexico, that is highly unlikely, despite the best diplomatic efforts by Georgina Kessel, Mexico’s Energy Secretary, to put a good face on a very worrying situation. Essentially, PEMEX–and the Mexican Government–have been trying to allay concerns by forecasting that new production from Ku-Maloob-Zaap (KMZ) would counter the spectacular falls from Cantarell. While KMZ has indeed been producing nicely, it’s simply not enough to negate Mexico’s oil production collapse path. When your largest field peaks, generally, you have peaked. And Mexico is now a testament to this rule.

Mexican oil production fell 7.8 percent in the first quarter of 2009 to 2.667 million barrels per day. This means that production kept on falling right through February and March, as January’s production had already been recorded at 2.685 Mb/day. While it’s not impossible that through an unusual set of circumstances–say economic collapse that shuts production down to very low levels for some time–that Mexican production could rise back up briefly and touch previous high levels, it is unlikely. Besides, an outlier month or two back towards 3 Mb/day is not really what the Energy Ministry has in mind, in their cheery outlook for 2015. They are talking sustained production at 3 Mb/day. That is not going to happen.

In general, it is nothing less than astonishing that Mexico’s oil production collapse is not one of the biggest stories of the decade, especially for the United States. The trajectory here is on pace to take Mexico’s output from 3.4 Mb/day as recently as early 2005, to 2.4 Mb/day perhaps as soon as this Fall. That is not only a huge percentage for Mexico, but it’s a large percentage of total North American supply. If you believe as I do that geography is going to reassert itself in the years ahead, these declines are fated to unleash an even greater impact.

Photo: Hans Li: Olmec Head, Monument Number 1, La Venta Museum, Villahermosa, Mexico, 1992. Iris photographic black and white print, 36 x 48 inches, edition of 5. Copyright Hans Li 1994. See: The Ancient Ones, available for purchase at amazon.com

Comments

[huskerbob]

I agree with Freya - Cantarell is a super concentrated field already exploited by gas injection and will continue its steep decline.
Worse is the decline faced by the people of Mexico. The government recieves up to 40% of its revenues from Pemex, a company $96 billion in debt and soon to have no oil for export. They are already struggling with the drug war, this is just piling on.

2009 Apr 28 04:37 AM

[Larry House]

Can Mexico continue to pay its debt load with the collapse in oil production? It could be the first to default, but it won't be the last.

2009 Apr 28 10:54 AM

[Old Trader]

Cetin,

If it were only that easy. Do yourself a favor, and read up on oil production, specifically, the history and development of fields. May I suggest "Twilight in the Desert" by Matt Simmons and "The Oil Factor" by Stephen Leeb?

Comments like the one you made do nothing to enhance your credibility.

2009 Apr 28 05:33 PM

[a. palmer jr.]

I realize Mexico has many problems and the US is sending them help for some of them...but if we don't start securing our border with them their problems are going to be our problems. I don't think the US with all our problems right now can handle the rest of Mexico's population coming up here with no money, no job skills, no place to live. I just don't think the US can borrow enough money to take care of Mexico. Maybe when Mexico completely empties out I might want to go down there and build a house.

2009 Apr 28 06:20 PM

[Steve in Greensboro]

I remember sitting in a presentation made the president of our Mexico organization in which he showed a satellite photo of the Gulf of Mexico at night. The coastal Gulf waters from Florida through Brownsville were ablaze with the lights of drill rigs. From Brownsville south through the Yucatan, it was comparatively dark.

The president asked sarcastically whether God made it so only the U.S. waters had oil.

His point was that the Mexican government owns and runs Pemex and accordingly the oil fields were less productive than they would have been had they been run by the private sector.

The solution for increasing Mexican oil production is privatization. Actually, the same solution would work for U.S. oil production -- get the government out of the way.

Neither solution will ever happen, because of the Brezhnev rule. What the government has, it keeps. What the private sector has, is negotiable.

2009 Apr 29 03:14 PM

[Tony Petroski]

I agree that Mexico faces daunting problems that will spill over to the States. Suggestion: Instead of attempting to secure a 1900-mile border, offer to patrol the Southern border of Mexico in exchange for a free and open Northern border eventually working south to secure the Panama Canal.

2009 Apr 29 08:18 PM

[rbblum]

Regardless of the US Congress and the current administration making a shameless, cramdown effort in the acceptance of a second amnesty of illegal aliens, the US will still be exposed to future internal weakness due to the lack of border security and Mexico lacking the initiative to turn its weakened economy around. Mexico will also be
weakened further by the continual decrease of Mexico's oil production; thus, losing its status as an oil exporter (and the US #3 oil importer).

2009 Apr 30 03:54 PM

[Freya]

As global economies pick up, Mexican oil production will continue to slide. Mexico is pumping all it can, they haven't cut back. Even as oil was rising last year, production from Mexico's fields was declining.

They are expected to be a net importer within a few years. Years of neglect combined with a lack of exploration and reluctance to "share" Oil profits are biting them in the rear. Even if they change immediately, it will take years before any improvement.

2009 Apr 28 02:53 AM