Analysis: Pemex reform a sticky issue

By CARMEN GENTILE, UPI Energy Correspondent  |  April 8, 2008 at 12:50 PM
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MIAMI, April 8 (UPI) -- Mexican President Felipe Calderon is facing growing pressure to present to Congress his reform proposal for the country's energy sector, experts say.

Calderon is expected to make his formal presentation to Mexican lawmakers this week, a proposal that will presumably call for state-run Pemex to team up with foreign firms to explore the country's deepwater oil potential off the coast of the Gulf of Mexico.

Opposition lawmakers are expected, however, to oppose partnerships with outside companies, noting the Mexican government's strict guidelines against ventures with private, foreign firms.

Mexican law prohibits Pemex from entering into profit-sharing ventures with other companies, a law that is expected to come under review in the coming weeks and could be subjected to a congressional vote by the end of the month. Calderon wants to open up the Mexican energy sector to outside investment but faces stiff opposition despite assertions from experts output would most certainly increase with the help of foreign energy giants.

Coupled with production shortfalls, reserves in Mexico -- a leading supplier of oil to the United States -- are running out, according to experts and Mexican energy officials. And as it stands, Pemex does not have the expertise necessary to drill in deep water for the estimated 30 billion barrels or more believed to be beneath the gulf's ocean floor off the Mexican coast.

That means Calderon must somehow convince opponents that opening up the sector would benefit both Pemex and Mexicans in the long run.

"The Calderon administration proposal is highly likely to include a formula to allow private participation in upstream oil with emphasis in deepwater drilling," wrote Enrique Bravo, an analyst with the New York-based Eurasia Group. "The recently presented Pemex assessment focuses on the need to allow Pemex to establish alliances with other oil companies for deepwater exploration and production, in line with Calderon's ultimate goal with this reform proposal."

Partnership issues regarding Pemex are widely considered the "third rail" of Mexican energy law, as its profits account for a large portion of the country's budget and fund most of its social projects. However, recent reports show Pemex output has peaked in recent years, with 2004 representing the height of production.

Pemex operational output fell 5.3 percent in 2007, according to officials, with daily production down to 3.08 million barrels per day. For three months last year, production actually fell below the 3 million bpd mark.

Last year's production report for the country's largest oil field, Cantarell, was even worse than the national average.

Cantarell's production fell to 1.2 million bpd in December 2007, a 16-percent drop from the previous year.

Jaime Brito, an analyst with the U.S.-based energy consulting firm PFC Energy, told United Press International Pemex "is up to its neck in debt."

Mexico is still holding out hope that a new oil field discovered in 2006 will help Pemex bolster its production levels in the coming years.

Extraction from the new field is unlikely for another decade, Pemex Chief Executive Luis Ramirez said at the time. That would give officials plenty of time to ascertain the viability of the new field and determine whether its production levels could live up to expectations.

Despite some lawmakers' fears of foreign investment in the Mexican energy sector, Pemex is however allowed to enter into some partnerships as long as they are considered production agreements.

In February the company renewed its existing, non-commercial agreement with ExxonMobil for research and development projects.

The deal permits Pemex and ExxonMobil to exchange ideas regarding oil and gas extraction, keeping in mind the letter of the law on foreign partnerships.

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