PEMEX Plans Spending Spree

Jim Brown
 
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Petroleos Mexicanos, Mexico's state owned energy company, plans to invest $269 billion over the next eight years to increase production. Considering their production is dropping like a rock that is probably a good idea.

Oil output by PEMEX in August declined slightly to 2.556 million barrels per day. That was down from July's 2.573 mbpd. That decline is not nearly as drastic as what we have seen over the last four years but it is just one more data point on a long-term decline.

PEMEX is struggling to increase output and its goal is to beat last year's average of 2.6 mbpd and increase output in 2011 and 2012. To do this they are planning on spending an average of $27 billion per year for the next eight years.

Energy Minister, Georgina Kessel, said the eventual target is output of 3.3 mbpd by 2024. About 80% of the $31 billion PEMEX budget in 2011 will be allocated to exploration and production.

PEMEX has been suffering from a sharp decline in production from what used to be their largest field, Cantarell. This field has declined to 495,000 bpd after peaking at 2.1 mbpd in 2003. The rate of depletion over the last two years has been dramatic. As of November 2006 PEMEX said the Cantarell field had produced over 11.5 billion barrels of oil.

The field was discovered by a fisherman, Rudesindo Cantarell, in 1976 50 miles offshore. He complained natural oil seeping from the ocean floor was fouling his nets.

The rapid decline of the Cantarell field is typical of a field that is past its prime. Once terminal depletion begins the rate of decline increases. Cantarell was put on nitrogen injection in 2000 and required so much nitrogen the largest plant in the world was constructed to feed the field.

The decline of Cantarell has elevated the Ku-Maloob-Zaap field in the southern gulf of Mexico to the status of Mexico's largest producing field. It is currently producing 832,000 bpd.

Mexico passed new laws in 2008 to allow outside oil companies like Exxon, Shell and Chevron to explore and produce oil on a contract basis. Prior to this change in the laws foreign companies were not permitted to explore in Mexico. The decline in oil prices in 2008 and the rapid decline of Cantarell was causing a serious budget problem for Mexico. More than half of their revenue comes from oil and that revenue was cut by more than two thirds when prices fell from $147 to $40 in 2008. The rebound in prices to $75 has given PEMEX enough breathing room that they can afford to now spend money on exploration to support their declining production.

We should be grateful that they are taking this step. We are the largest consumer of Mexican oil and there is no danger of supply outages or embargoes by countries that don't like us. Let's wish Mexico good luck in its search for new supplies.

Jim Brown

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