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Miami Herald (Mexico Edition): Private funds needed to bolster output

Petroleos Mexicanos, the world´s third-largest oil producer, risks declining output for the first time in seven years unless lawmakers allow for private investment, cutting supplies on the world market as demand increases.
Pemex Chief Executive Officer Luis Ramírez Corzo said Mexico will leave billions of barrels untapped in deep Gulf of Mexico waters and in a costly onshore field without partners to provide technology and share risks. Mexican law allows only Pemex to extract oil and gas and to refine crude, barring companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc from investing in the industry.
The country since 1979 has pumped the majority of its oil from Cantarell, the world´s second-biggest field by production, and reinvested little on other deposits, Ramírez said. With Cantarell supply declining for the first time this year, Pemex must emulate state-controlled companies such as Norway´s Statoil ASA to drill in more remote areas.
“We´re worried,” Ramírez said in an interview from the 44th floor of Pemex´s Mexico City headquarters. “The problem is that today we have to begin making decisions that affect us 10 years from now.”
Congress has rejected calls by President Vicente Fox to amend the constitution to permit foreign companies to join with Pemex on concern the law change would be a step toward selling the state company to private investors.
PRESIDENTIAL HEADACHE
Mexico´s next president, who takes office following July 2 elections, and Congress will grapple with one of Pemex´s biggest challenges since it was cobbled together 68 years ago from expropriated U.S. and U.K. oil companies, Ramírez said.
Crude oil today gained 53 cents, or 0.8 percent, to US$66.98 a barrel on Thursday. Prices have jumped 24 percent in the past year.
The country can choose to keep its oil industry closed and struggle to maintain supplies, or it can allow Pemex to take on partners and double oil output to 6 million barrels a day in 15 years, he said. Production now is about 3.3 million barrels a day.
“Hopefully we will not get to the point where we start seeing the effects of a reduction in production to react,” Ramírez said.
FALLING RESERVES
Proven reserves have fallen every year for more than a decade, leaving the country with less than 10 years worth of oil reserves at current production levels.
Pemex is now seeking to replace output at Cantarell, which contained 35 billion barrels of oil when discovered in 1976.
The field peaked in production at more than 2 million barrels a day in 2005 and will decline by 30 percent to 1.43 million barrels per day by the end of 2008, Pemex has forecast. Only Saudi Arabia´s Ghawar field is larger.
“It´s hard to compensate for a super giant field with something much less than a super giant field,” said David Shields, an independent energy industry analyst in Mexico City who published a book in October on Pemex.
Mexico´s last year of declining oil production was in 1999, after a plunge in prices the year before hurt investment.
LOW-GRADE CRUDE
Pemex plans to compensate for Cantarell´s decline in the next few years by developing periphery offshore fields in the Gulf of Mexico, which requires a minimum investment of US$12 billion a year, Ramírez said. The company has found that oil in the new offshore fields, such as Ku-Maloob-Zaap, isn´t as abundant and is a heavier grade than markets will purchase. Pemex´s production cost per barrel will rise to US$7.20 in 2009 from US$4.30 now as Cantarell declines, Ramírez said.
Since Fox took office in December 2000, Pemex has doubled the rate of investment in exploration and production. The effort also more than doubled Pemex´s debt to US$49 billion at the end of last year from US$22 billion.
The government takes more than 60 percent of Pemex´s revenue in taxes, leading to a net loss in 2005, a year of record profits for Exxon Mobil and Chevron Corp. In 2005, Pemex paid the government a record US$54 billion of taxes and duties on sales of US$86 billion.
Congress approved a law last year to reduce Pemex´s taxes by about US$2 billion in 2006 and by as much as US$5 billion by 2010, enabling the company to meet its investment target and keep its debt at current levels, Ramírez said.
NOT ENOUGH
The tax reduction is not enough, said Alexandra Parker, an analyst with the credit rating company Moody´s Investors Service in New York. The company´s liabilities are larger than its assets under U.S. accounting methods and it continues to record net losses, Parker said.
Moody´s rates Pemex at Baa1, or two levels above its lowest investment-grade rating. The ranking is the same as Mexico´s sovereign rating on the assumption the government won´t allow the company to default. On a stand-alone rating, Pemex is assigned a five on a scale of one to six, with six being the riskiest.
“It´s a weak credit quality,” Parker said. “The two major issues we see are a declining reserve base, and the liabilities continue to rise.”
LACKING TECHNOLOGY
The long-term solution to replace Cantarell will require investment of US$17 billion a year to tap deep-water deposits and an onshore field called Chicontepec, which now contains 40 percent of Pemex´s proven, probable and possible oil reserves, Ramírez said.
Chicontepec has remained untapped since it was discovered in 1926 because the small pockets of oil tucked in fractured rock require drilling technology that Pemex lacks. Pemex needs to spend US$38 billion over 20 years in Chicontepec to drill 20,000 wells, more than during its nearly seven-decade history, Ramírez has said. Production cost per barrel in Chicontepec will be US$12 a barrel, he said.
Pemex has drilled its first exploratory wells in deep water and announced this month it may have discovered a field with 10 billion barrels of oil. It will take up to a decade to develop the deposit, Ramírez said.
“To tackle Chicontepec and deep water, we need to have a legal framework in which we can work with other companies in strategic alliances,” Ramírez said. “To insist that Pemex alone can develop a project of this nature isn´t realistic.”

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