Mexican Cantarell Oil Field in Decline: Prelude to a Larger Crash?

The Wall Street Journal had a frightening story last weekend about the rapidly declining output of Mexico's giant Cantarell oil field.

Mexico's Oil Output Cools
Slowing of Major Field May Pressure Prices,U.S. Import Diversity

Daily output at Mexico's biggest oil field tumbled by half a million barrels last year, according to figures released Friday by the Mexican government. The ongoing decline at the Cantarell field could pressure prices on the global oil market, complicate U.S. efforts to diversify its oil imports away from the Middle East, and threaten Mexico's financial stability.

The virtual collapse at Cantarell -- the world's second-biggest oil field in terms of output at the start of last year -- is unfolding much faster than projections from Mexico's state-run oil giant Petroleos Mexicanos, or Pemex. Cantarell's daily output fell to 1.5 million barrels in December compared to 1.99 million barrels in January, according to figures from the Mexican Energy Ministry.
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Mexico's troubles at Cantarell mirror the larger problems in the global oil market. Many of the world's biggest fields are old and face decline, which can be sharp and sudden. Like other big producers, Mexico is struggling to make up the difference because new big fields are in harder-to-reach places like the deep waters of the Gulf of Mexico.

The field's decline is expected to continue, if not worsen, this year, according to most estimates. That will subtract valuable oil from the world market, which is under pressure from rising demand by growing economies like China and India. It also means less oil headed to the U.S. from Mexico, which has long relied on Mexico as one of its top-three oil suppliers.

"This is bad news for Mexico. The field is declining faster than even the government's pessimistic scenarios," says David Shields, an oil industry consultant in Mexico City who has been warning about Cantarell's collapse for the past two years.
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None of this is welcome news in a country that relies on oil exports for some 37% of government revenue. So far, relatively high oil prices have kept the country from feeling the effects of lower output. But prices could continue a recent drop, adding to Mexico's woes from a production shortfall. This year's Mexican budget is based on Pemex's official production targets as well as a relatively high oil price -- about $50 on the world market.

In many older oil fields, companies inject gas to keep the pressure in the wells high and the oil flowing. In the case of Cantarell, Mexico injected vast quantities of nitrogen in the past few years. But the gas can only do so much, and using it means the decline in production can be sudden and sharp. In the case of Cantarell, which lies in the shallow waters of the Gulf, experts say that seawater is fast invading the wells.

Some would have you believe that the same thing is happening to the giant oil wells in Saudi Arabia and Kuwait.

Not BusinessWeek apparently.

According to this report, last year's high oil prices were an anomaly, not soon to be repeated. Everyone can relax and go back to doing what they've been doing - the speculators are long gone and there's no reason for them to return.

Oil: It's Back To Supply And Demand
The speculators who bid up the market last year are in retreat. So much for the new reality

Last July, when crude oil was surging toward $80 a barrel, the talk of a new reality in the energy markets hit a fever pitch. Some said China and India would so voraciously suck up supplies that we might never see $50 a barrel again. Others noted that the nations that make up OPEC had finally figured out how to put the screws to the West for good, emboldening Iran and Venezuela to send prices higher with a mere rattle of their sabers. The "multi-decade supertrend" mantra echoed through the canyons of Wall Street.

Then oil crashed, touching $50 in January, 35% off its peak. Since July, in fact, crude has underperformed the stock market by 48 percentage points. All this while China's oil-thirsty economy remains white-hot, Iran is barring nuclear inspectors, Venezuela is booting foreign oil investors, and Russia is putting the energy squeeze on neighbors.

So what happened? Call it a return to normalcy. The speculators and latecomers who bought into the new-paradigm argument suddenly turned tail--and traditional drivers of the oil market reemerged in force.
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For all the fast action, O'Grady's statistical research finds that the recent commodities bull market was, contrary to conventional wisdom, very much cyclical--and in fact was a tiny blip within a 100-year trend of falling commodity prices (adjusted for inflation). "The idea that this commodities run would be permanent kept resonating with investors," he says, "until it didn't."
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It's anyone's guess where oil prices will go from here. Not that this is stopping the supply-demand school from enjoying a bit of vindication. "There were times when I felt like the class clown," says Benchmark Co. oil and gas analyst Mark Gilman, of the way his skepticism was received when oil hit $78. "All of a sudden my thoughts aren't so funny.

It's funny how you can write an entire article about the supply /demand fundamentals of oil without saying a word about daily production versus daily consumption.

Stockpiles are important, but only for a few months - something that the world is likely to learn in the not-too-distant future.

Comments

[Malkiel:]

I can well imagine that the trajectory of a declining resource is going to be a series of fits and starts, not a clean line of price increases into the clouds. The rhythm of shortages and oversupply may go on for decades given how the various players react to the market.

I would love to know where they come up with the contention that we're in a "100-year trend of falling commodity prices (adjusted for inflation)". Can this be true, or is it more of the bombast?

2007 Jan 30 05:50 PM

[Saul Sterman:]

Grandiloquence indeed.

2007 Jan 31 05:18 AM

[Sr. Pessimist:]

Oil producers better step up their educational systems and see what markets could emerge. They need entrepreneurs that are competitive in the world markets, because it's only a matter of time before what used to be a lake of oil under a country is now greenhouse gas messing up the global climate.

2007 Jan 31 11:24 AM

[Mmarrkk:]

Brian: do you seriously believe there is a "lake of oil" anywhere in the world, save the few areas where misguided countries allow oil to be pooled on the ground??

Oil and natural gas do not reside in "lakes" or "pools" or anything of the sort. They sit in the pores and fractures of rocks. Take a nice chunk of sandstone, pour a couple of drops of water on it and watch it soak up the water. Then, try and get the water out! That's where a large portion of the oil and gas in the world sits. Now take that rock and bury it 10,000 to 15,000 feet below the ground!! The other portions sits in fractures and cracks no bigger than a hair.

So don't think that the oil is just sitting there and you put a straw in it and out it comes. Its a bit more complicated (and much more expensive) than that!

2007 Jan 31 02:10 PM

[Greg Pinelli:]

Mr. Iacono's comments are the very tip of a most unpleasant iceberg. In a year or two (at the most) we will be receiving more Canaterell type news...the only difference between what you are hearing, forthrightly, from Mexico and other oil suppliers is...well...forthright... When the news gets ugly...and it will...every day will bring more oil field confessions and supply revisions. The oil "producers" is a complete misnomer. If you mean Exxon/Mobil..Total...B... They are becoming less relevant by the day...and they know it.

2007 Feb 01 08:40 PM

[User 344344:]

There were actually lakes of oil under the ground in many countries at one stage. Practically lakes anyway. When oil production first stated it was literally a matter of drilling a hole...........in some cases only 100 feet or so..........and the oil would just burst out.......light sweet crude.........so clean you could literally just put it in a tank and run an engine off it straight out of the ground. All that oil was the first to be found and easiest to extract. In some cases you didn't even have to drill to find it..........it was just pissing out of the ground and forming pools all by itself. We are scrapping the bottom of the barrel now.............all the good stuff that was filtered and cleaned by migrating through kilometers of sedimentary rock is almost gone........now we get high sulphar.......high tar......thick........... to pump.........saturated with water.......hard to refine...........stuff we wouldn't have touched with a barge pole 50 years ago is now becoming the norm............the fact that woof at these crumbs on the floor like desparados......starvi... for our fix........and worse.........moving 4 tonnes of earth to extract a single barrel of crappy Kerogene which has to be turned into oil by expensive processing.......other... known as Tar Sands...........pretty much proves that there is not enough "real" oil to go around.

The Cantarel oil field in Mexico was discovered by a fisherman who reported oil slicks floating on the sea......it's the second biggest oil field ever discovered in the world based on it's peak production rates. Cantarel is in steep decline. Last year it's production fell by nearly 25% after years of using high tech extraction techniques like water injection.......gas injection...........ho... wells.........it's on the way out and there is nothing anybody can do now to restore it's production capacity. The giant Ghawar field in Saudi Arabia is the worlds biggest oil field by far. It's been pumping since the 50s. It also employs massive water injection projects that pump between 7 and 9 million barrels of water a day into the field. Horizontal wells...........gas injection........you name it. Last year when prices maxed out at $147 per barrel.......the saudies also drilled over 150 new wells...........and failed to produce one drop of extra oil.........in fact.........productio... fell by a couple of hundred thousand barrels a day........now........... do you think Saudi Arabias production cuts are.......really......... think they are failing to keep production up rather then making voluntary cuts........either way............I bet they couldn't maintain production if they wanted too............and it will all come out when demand rises again.

Jan 25 10:35 PM