Mexico's oil output falls, Pemex needs cash infusion

Oil output in Mexico, the third-biggest supplier to the US, is declining, and the state company Petroleos Mexicanos (Pemex) lacks the technology to explore for new reserves. For many the answer seems simple: more capital.

But now that senators have begun debating ways to attain that capital – a top priority of President Felipe Calderón – resistance has mounted, particularly to the idea to allowing in private enterprise.

In no place is there more opposition than along the industrial corridor in this resource-rich, steamy stretch of Veracruz State. "This oil is from here, and it belongs to us," says Francisco Lopez Martinez, who inspected oil barges at Pemex for 36 years before retiring this year.

The attitudes of residents in the neighborhood Oct. 24 in Coatzacoalcos, where lines of homes are almost entirely occupied by the engineers, mechanics, and computer repair personnel employed by Pemex's plentiful plants here, underscore President Calderón's biggest conundrum: Pemex is flagging, but the country is unlikely to do anything significant about it.

It matters to the US because Mexico is a top supplier at a time when global demand is high. It matters to Mexico because Pemex funds 40 percent of the country's national budget. But as the 70th anniversary of nationalization of the industry nears (March 18), political infighting could lead to an impasse.

There are several ways to prepare Pemex to drill for the reserves of oil believed to lie deep in the Gulf of Mexico, say analysts across the political spectrum. Forming private strategic alliances is just one.

But talk of energy reform causes an almost knee-jerk reaction here, and the word "private" takes center stage, electrifying a population whose perception is that Mexico loses if foreigners are let in. On Sunday, Andrés Manuel López Obrador – Calderón's leftist opponent who lost the 2006 presidential election by a whisker and dubs himself the "legitimate" president of Mexico – led thousands in protest to proposals to open Pemex to private investment.

"We are facing a big challenge in front of us. Mexico has been a big oil producer for the last 30 years, but the lifetime of the reservoir [Cantarell] is coming to an end," says Ruben Camarillo, a member of Calderón's center-right National Action Party (PAN) and secretary of the energy commission debating the reform in the senate. "At this point in time, PEMEX does not have the [needed] technology."

Mexico's crude production has fallen since 2004, a record year with 3.38 million barrels per day (b.p.d), according to the US Department of Energy. Production fell to 3.25 million in 2006, and the DOE predicts that it will decline by another 130,000 b.p.d in 2008 and 110,000 b.p.d in 2009. The decline parallels dramatically depleting reserves at Cantarell, which for 30 years was Mexico's biggest source of oil. At the same time, the number of Mexico's proven reserves fell from 49.3 billion barrels in 1986 to 12.4 billion last year.

Last year Mexico's Energy Secretary, Georgina Kessel, said that crude production could fall by a third in less than 10 years if reform is not implemented.

Pemex has been Mexico's sacred cow since foreign companies were kicked out in 1938. Since then the Constitution has barred private ownership. Pemex is a source of national pride, but it's been crippled by inadequate funding, corruption, and inefficiency.

High oil prices have helped mask the decline, says Amy Myers Jaffe, an energy analyst at the James A. Baker III Institute at Rice University in Houston. Pemex generated revenue of about $100 billion last year. But the situation, under the surface, is dire.

"If they don't push through a major reform package, Mexico is going to become a net-oil importer. That is bottom line," she says. "They need to be making investments, period."

Declining output is not all Pemex has had to contend with recently. A devastating accident at an off-shore platform in October killed nearly two dozen workers. What's more, the company has had to field rampant claims of corruption.

Most scientists agree that there are plentiful reserves in the Gulf of Mexico, but Mexico lacks the technology to head such exploration. Politicians say they are looking at ways to invite private companies into the industry without having to change the Constitution.

But many opposition leaders are suspicious, as are many Mexicans. "It's an illusion to say private investment will make the company better. Foreigners will come and take away our jobs," says Mr. Lopez Martinez.

Critics say they believe that supporters of allowing private alliances are manipulating the severity of the problem. Rogelio Ramirez de la O, founder of the consultancy Ecanal and economic adviser during Lopez Obrador's presidential bid, says that there are ways to channel more money into Pemex so that it can make the needed investments. He says first Pemex should be given the money to increase its technology. In the case of other state companies, he says, their ability to explore in deep waters did not happen overnight.

Right now more than half of Pemex's income is funneled back to the government, accounting for 40 percent of its national budget. Generating more investment could also be done by changing the nature of subsidies offered on product prices, says Ms. Jaffe, or restructuring the company to make it more efficient. All of the parties call for more transparency.

Polls consistently show that the far majority of Mexicans are against private investment in the energy sector. But many also misunderstand the issue. Mr. Camarillo says it's their job to explain it. "It's a very touchy subject."