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Mexican oilfield crucial to U.S. facing decline

MEXICO CITY—Mexico's giant Cantarell oilfield, which has financed government spending and held down U.S. gasoline prices for 20 years, is facing a production decline, a prospect that could heighten U.S. dependence on Middle East oil.

An internal report from Mexico's state-owned oil company, leaked last month, said water and gas were seeping into the massive offshore oil field in the southern Gulf of Mexico. That development would reduce Mexican oil output, which would be bad news for U.S. consumers. Mexico is the second-largest supplier of oil to the U.S. market.

The timing's bad. Global oil supplies are tight, and there's growing concern about several other important suppliers of oil to the United States. Unrest grows in Nigeria, conventional oil production is dropping in Canada and Venezuela is taking an increasingly belligerent anti-American tone.

In his State of the Union address Jan. 31, President Bush vowed to wean Americans from Middle East oil. But the threat of accelerated decline in Mexican oil output means other suppliers will have to pick up the slack, and the world's largest oil reserves remain in the Middle East.

Cantarell is one of the world's great oil fields; only Saudi Arabia's Ghawar field is larger. It was discovered in 1976 and has been a workhorse ever since.

"It's a supergiant field, so when you have a supergiant field declining, it's very difficult to compensate for that," said Adrian Lajous, a veteran oilman and the director of state-owned Petroleos Mexicanos (Pemex) from 1995 to 1999. "Cantarell has peaked and has started its decline."

Cantarell's output of 2 million barrels per day last year accounted for about 60 percent of Mexico's output of 3.3 million barrels daily. It's been pushed hard in recent years to take advantage of high global oil prices. Cantarell's production rose from 1 million barrels per day in 1994 to a peak of 2.13 million in 2004.

Until this year, 70.8 percent of Pemex's earnings went to Mexico's federal government.

Pemex management downplays the report, saying it was a low-level document whose worst-case scenarios reflected a "do-nothing curve," scenarios in which Pemex didn't respond to changing conditions. Those worst-case outlooks suggested that by 2008, Cantarell's output could fall to barely more than 500,000 barrels per day, more than halving Mexican crude exports.

Rolando Galindo, a top Pemex financial adviser, told Knight Ridder this week that Pemex won't let that happen. "We are not sitting on our hands," he said during an interview in Pemex's huge glass building, which towers over the hemisphere's largest metropolis.

In a conference call for investors Thursday, Pemex's production manager, Carlos Morales, lowered Cantarell's production outlook to 1.9 million barrels per day this year, a 6 percent decline, and said production would be 1.43 million barrels per day by 2008. That's a return to 2000 production levels.

Total Mexican oil output, he said, would hover between 3.3 million barrels per day and 3.5 million in coming years, remaining steady or growing slightly as output grows in other fields.

Mexican President Vicente Fox announced on Wednesday that Pemex would spend $37.5 billion over the next two decades to develop the Chicontepec oil field in southern Veracruz and Puebla states. The field, estimated to contain 18 billion barrels of crude, produces 26,000 barrels per day but could produce as many as 1 million a day within eight years, Fox said.

The saving grace for Mexican oil output, and the U.S. consumers who depend on it, is that much may still be undiscovered.

"In Mexico, just 13 percent of explorable territory has been explored," said Sergio Rosado, the associate director in Mexico City for Cambridge Energy Research Associates, a global oil consultancy. "There are many areas to develop."

However, Pemex's Galindo, like many outside experts, thinks the era of easy, cheaply produced oil in Mexico appears to be over.

"With the decline of Cantarell, Pemex will no longer be Cantarell. For many years, we depended almost 100 percent, or in great measure, on Cantarell," Galindo said. "Now Pemex will have to work fields, not supergiant fields like Cantarell, but ... more complex fields. Our operations will have to become more efficient, because these are fields that cannot absorb inefficiencies like Cantarell at one time could."

The cost to develop new fields such as Chicontepec comes at a difficult time for Pemex, which reported losses of $3.75 billion in 2005.

It can't turn to the private sector to help finance the development of new fields; Mexico's Constitution bars private companies from much of the oil sector.

Pemex also is spending billions to reconfigure its refineries so they can handle heavier crude oils. Pemex is a net importer of U.S.-refined gasoline.

It also can't produce enough natural gas to meet the demand from steel-makers and world-class manufacturers such as Mexican glassmaker Vitro. That forces manufacturers to import natural gas from the United States at sky-high prices.

"Vitro paid $58 million more in 2005 compared to 2004 due to the severe increase in the price of natural gas," spokesman Antonio Ocaranza Fernandez said. "While we've managed to face these prices, there are many smaller companies that have been unable to do so and have closed."

Yet suggesting opening up Pemex is political suicide. Ever since President Lazaro Cardenas nationalized the oil sector in 1938, Pemex has been synonymous with Mexican sovereignty.

Presidential front-runner Andres Manuel Lopez Obrador, a left-leaning populist former mayor of Mexico City, calls the lack of new refineries in Mexico "criminal," but he's against amending the constitution to allow private and foreign investment in the oil sector.

Felipe Calderon, the candidate from the ruling National Action Party, told Knight Ridder that he'd allow private investment in downstream activities such as refining and petrochemicals but not in the production of crude.

"In terms of crude oil, I believe that must be exclusively the area of Pemex, and I'd take greater care with complementary investment, preferring that it come from institutional investors in Mexico," he said.

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(c) 2006, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): MEXICO-OIL

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