Pemex Oil Output Declines at Fastest Rate Since World War II

By Andres R. Martinez

Jan. 20 (Bloomberg) -- Petroleos Mexicanos, Mexico’s state oil company, will probably report its fastest drop in production since 1942, eroding revenue as plunging crude prices limit the amount of cash available to drill for new reserves.

Pemex last year likely extracted 2.8 million barrels a day, down about 9 percent from the 3.08 million a day pumped in 2007, representing a total of $20 billion in lost sales, according to data compiled by the government and Bloomberg. The Mexico City- based company, which had revenue of $104 billion in 2007, plans to report annual production figures tomorrow.

Falling output is leading Pemex into deepwater exploration as state-run peers Petroleo Brasileiro SA in Rio de Janeiro and Ecopetrol SA in Bogota invest billions to boost production. Costs are rising at Cantarell, Pemex’s largest field, after declining pressure reduced output in the past five years. Oil tumbled 77 percent from its July record to $34.08 a barrel in New York.

Pemex’s “biggest problems have yet to come,” said Alejandro Schtulmann, head of research at Empra, a political- risk consulting firm in Mexico City, in an interview. “The fall in oil prices and lower production is going to make expensive exploration projects less attractive now.”

Mexico relies on Pemex for 40 percent of its budget. Falling sales may cut into funding for a 570 billion-peso ($41 billion)-a-year infrastructure plan President Felipe Calderon is counting on to keep the country out of recession this year, Schtulmann said.

Sliding Output

Sliding Pemex output risks cutting supply to the U.S., which gets more oil from Mexico than all countries except Canada and Saudi Arabia. Lower production also comes as Venezuelan President Hugo Chavez, who has threatened to end oil shipments to the U.S. and opposes U.S. influence in Latin America, holds a referendum that would end term limits on his presidency.

Crude touched a record $147.27 a barrel on July 11.

To offset declines at aging fields, Pemex is focusing on tapping oil under seas deeper than 500 meters (1,640 feet), where the government estimates it has 30 billion barrels of crude oil equivalent. That would be enough to supply the U.S. for four years, according to BP Plc.

Deepwater discoveries or finds at the onshore Chicontepec field may help counter a decline at the Cantarell field, the world’s third largest. Pemex is betting it can produce about 500,000 barrels a day from Chicontepec, a series of small, connected deposits spread across Veracruz and Puebla states, by 2021. The first deepwater well is due to come on line by 2015.

Cantarell Declines

By then, Cantarell may be producing less than 500,000 barrels a day of oil, Chief Executive Officer Jesus Reyes Heroles said last year. Output at the field, falling more than twice as fast as government estimates, dropped to 862,060 barrels a day in November from a year earlier, according to Mexican energy ministry data.

Cantarell, struck in 1976, was the biggest oil find in the Americas until last year, when Petroleo Brasileiro, known as Petrobras, discovered the Tupi field. Pemex estimates that Cantarell had 17 billion barrels of crude oil equivalent in reserves when it was found, compared with Tupi’s 8 billion barrels. Cantarell represents about one-third of Pemex’s output today, down from 65 percent at its peak in December 2003.

Petrobras may spend $112 billion through 2013 to explore the so-called pre-salt fields that lie offshore Brazil and which include Tupi. Colombia’s Ecopetrol is planning to increase spending by 35 percent to $6.22 billion this year to meet a goal of almost doubling output to 1 million barrels a day.

“Lazy´´

Pemex became “lazy” after Cantarell´s discovery, relying on the field instead of focusing on further exploration during the next 30 years, Carlos Morales, the company’s exploration and production director, said in a November interview.

Mexico’s finance ministry hedged against Pemex’s drop in production and the slump in prices by purchasing an option to sell all its oil for export at $70 a barrel this year, securing short-term financing for the government’s budget.

The country hasn’t allowed foreign companies to explore or produce oil in the country since Pemex was formed from the expropriated assets of Chevron Corp. and Exxon Mobil Corp. in 1938. That may now change after Congress approved legislative changes to the industry in October to help boost output.

To contact the reporter on this story: Andres R. Martinez in Mexico City at amartinez28@bloomberg.net.