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Financial Times: Energy: Oil monopoly in finance trap

EXTRACT: Moreover, George Baker, an energy consultant in Houston and an expert on Mexico’s oil sector, says such schemes will never solve the problem because the world’s leading oil companies such as Exxon, Shell and BP only work with joint-association contracts in which they share both the risks and rewards of oil exploration.

THE ARTICLE

By Adam Thomson
Published: May 9 2007 06:02 | Last updated: May 9 2007 06:02

For decades, Lázaro Cárdenas’ decision to nationalise the country’s oil industry has been hailed by Mexicans as one of the most courageous and daring acts of patriotism since independence in 1821.

Statues of the moustachioed former leader, president of Mexico from 1934 to 1940, abound in cities and towns throughout the country, and in the imposing offices of Pemex, the country’s state-run oil monopoly, there is a bronze of him so big that it dwarfs the thousands of Pemex employees who bustle past every day.

Yet for all the pride that the country’s oil regime represents, experts say that it is now jeopardising Mexico’s place as one of the world’s leading oil-exporting nations. According to several studies, Mexico stands to become a net importer of crude within a decade unless production – and the level of proven reserves – improves rapidly.

The main problem is that the federal administration has increasingly used Pemex as its principal source of revenue – it now accounts for almost 40 per cent of total government income. This has left the company without sufficient financial resources to carry out new exploration and develop fields.

Even though fiscal changes in 2005 increased Pemex’s budget, the company’s proven reserves continue to fall. Pemex officials say they need an additional $8bn-$10bn a year to bring exploration up to the required levels to maintain, and eventually increase, reserves.

At the same time, Mexico’s constitution prevents Pemex from entering into joint-association contracts with private companies, which have both the money and technical expertise that Pemex lacks.

Many analysts have pointed out that there is a certain irony in all this given that Pemex already works hand-in-hand with private oil companies, which provide the state monopoly with a wide range of services. These companies include such well-known names as Houston-based Halliburton, which has been working with Pemex for more than 25 years, and Schlumberger. Noble Drilling, the drilling contractor, has 10 drilling rigs off the Mexican coast working with Pemex.

In fact, there are so many of these service contracts in Mexico that David Shields, an energy consultant in Mexico City, describes the country as “a paradise for contractors . . . They don’t share the risk and don’t have the possibility of losing their money because all contracts are guaranteed by the government”. The result is that Pemex is left taking on all the risk and having to foot the bill when it has no cash.

The government of Felipe Calderón, the centre-right Harvard-trained technocrat, is all too aware of the problem. Yet most experts believe it is unlikely to act quickly because opening up the oil industry is such a politically charged issue.

Indeed, in a recent interview with the Financial Times, Mr Calderón admitted that being president meant having to be even more cautious when talking about oil than the armour-plated prudence he employed on the campaign trail last year.

Instead, most observers believe Mr Calderón will first try to liberalise the downstream side of the business, in which much private investment is also restricted but by laws that are easier to change than by the constitution – as is the case with exploration.

Eduardo Andrade, until recently president of the Mexican Association of Electrical Energy, which represents private energy companies in Mexico, says such a tack could take lessons from Mexico’s electricity sector. Following changes in the early 1990s to laws on foreign investment in electricity, the state managed to attract about $10bn of investment in new generation plants.

The problem, he says, is that while that sort of approach may improve efficiency and increase flexibililty for Pemex in the mid- and downstream parts of the industry, it would do little to boost exploration levels. “The bottom line is that our natural resources are running out and we have not done enough to look for replacements,” he says. “To try to do that without private investment is a big risk and, in any case, Pemex has no money.”

Recently, Mr Calderón travelled to the Gulf of Mexico, where Pemex has most of its oil fields, and announced a plan to boost production at Ku-Maloob-Zaap, the country’s second-biggest oil complex.

In its simplest form, the plan involves raising investment and extending Pemex’s collaboration with Petrobras, the partly state-owned Brazilian company. According to Mr Calderón, the result will increase production at the complex to 800,000 barrels per day (bpd) by 2010, from a little under 500,000 today.

If successful, that would raise the contribution of Ku-Maloob-Zaap to the country’s total production from about 15 per cent to 20 per cent. But experts say that is insufficient and certainly not enough to make up for the rapidly declining production at Cantarell, Mexico’s biggest oil complex. Cantarell accounts for about 60 per cent of total production, yet its output fell almost 20 per cent between January 2006 and January 2007.

Moreover, George Baker, an energy consultant in Houston and an expert on Mexico’s oil sector, says such schemes will never solve the problem because the world’s leading oil companies such as Exxon, Shell and BP only work with joint-association contracts in which they share both the risks and rewards of oil exploration.

“These companies are looking to book reserves to maintain their value and if you don’t sign joint-risk contracts you can’t book the reserves,” he says. “So if at the end of the day you don’t let them book the reserves then you can talk and go to dinner as much as you want but that is all that is going to happen.”

Copyright The Financial Times Limited 2007

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