Apr 27 2009

Mexico Woe: Quakes, Flu, and Oil

April 27, 2009

Reluctantly I’m going to briefly cover Mexico today. Your RSS newsreader and your Bloomberg however are already, no doubt, filled up with reports from Mexico’s Flu Zone. Or Quake Zone. Or both. Instead, I lightly suggest you turn your attention away from these acute conditions, to something more chronic: the relentless crash in Mexico’s oil production.

olmec-head-1On Tuesday of last week quarterly production data was released by PEMEX. In the last several years, I cannot actually recall a single forecast by PEMEX that was not undercut later by worse than predicted production data. Last week was no different. But what’s concerning is that PEMEX has truly made an effort, starting last year, to get ahead of the dramatic declines at Cantarell. They have of course tried to soften the blow by claiming that Mexico could bring production back up again, through the development of newer fields. As I explained in my early January post on Mexico, that is highly unlikely. Despite the best diplomatic efforts by Georgina Kessel, Mexico’s Energy Secretary, to put a good face on a very worrying situation. Essentially, PEMEX–and the Mexican Government–have been trying to allay concerns by forecasting that new production from Ku-Maloob-Zaap (KMZ) would counter the spectacular falls from Cantarell. While KMZ has indeed been producing nicely, it’s simply not enough to negate Mexico’s oil production collapse path. When your largest field peaks, generally, you have peaked. And Mexico is now a testament to this rule.

Mexican oil production fell 7.8 percent in the first quarter of 2009 to 2.667 million barrels per day. This means that production kept on falling right through February and March, as January’s production had already been recorded at 2.685 Mb/day. While it’s not impossible that through an unusual set of circumstances–say economic collapse that shuts production down to very low levels for some time–that Mexican production could rise back up briefly and touch previous high levels, it is unlikely. Besides, an outlier month or two back towards 3 Mb/day is not really what the Energy Ministry has in mind, in their cheery outlook for 2015. They are talking sustained production at 3 Mb/day. That is not going to happen.

In general, it is nothing less than astonishing that Mexico’s oil production collapse is not one of the biggest stories of the decade, especially for the United States. The trajectory here is on pace to take Mexico’s output from 3.4 Mb/day as recently as early 2005, to 2.4 Mb/day perhaps as soon as this Fall. That is not only a huge percentage for Mexico, but it’s a large percentage of total North American supply. If you believe as I do that geography is going to reassert itself in the years ahead, these declines are fated to unleash an even greater impact.

-Gregor

Photo: Hans Li: Olmec Head, Monument Number 1, La Venta Museum, Villahermosa, Mexico, 1992. Iris photographic black and white print, 36 x 48 inches, edition of 5. Copyright Hans Li 1994. See: The Ancient Ones, available for purchase at amazon.com

• Comments
Author: Gregor Macdonald   Posted in: Oil   Tagged:    
  • Jeronimo
    Carpet bagger (Oil bagger) Mexico will be fine with its natural resources. In the famous words of Geronimo, the white man is a mad man that is always looking for something to destroy.
  • gregor.us
    I would agree that Mexico could make the decision, if they wanted to, to take the pain of lost export revenues from oil in the short term--to then retain the resource for use over a longer timeframe. By doing so, they would probably raise the price of oil globally, hurt their own economy, cause havoc in the corrupt political structure, and cause a crisis.

    However, it might be worth it and here's why: because in about 2 years Mexico won't have any oil for export anyway.

    G
  • Dmckj
    Astute, if largely unstated, observation that geography will reassert itself.

    I have extensively worked and lived in Mexico. Back in 1995 I said that the only solution to the border issue would be to militarize the border. People thought I was crazy at the time, but now it is, and will continue to, come to pass.

    Mexico is a country that does not work well. Power is slated from the top down, but those in power fear the possibility of a politcal implosion. The country dodged a bullet when Lopez Obrador lost the election. The issue of declining oil production is strongly tinged by populist sentiment and ignorance of free markets with respect to oil production and trade. One can thank the stupendously paralytic stranglehold that PRI had for many decades for that. What do I mean? I mean that Mexico is a country with a HUGE 'victim' complex, and the politcal powers that be have always played this to retain control. For this reason, pretty much nothing is Mexico's own fault, but rather someone elses...always. Along those lines, Mexico is paralyzed on the the energy front, both in terms of oil investments and production and as well electrical production. Both are dominated by hugely corrupt and powerful 'sindicatos' that will stonewall private investments till the day they die. You see, private investment will mean private accounting and accountability, this being a huge risk to the cash cow of corruption government-run production.

    In other words, Mexico's production is bound to tank. Two options are possible: 1) a moderately conservative leader will open up foreign investment in the energy sector, or 2) a left-wing leader will take power and ride the sinking ship of Mexico further down the tubes. I hope for the former, but think there is a fair likelihood of the latter. Problem is, the latter will likely result in extreme political instability in the country and a further flight of foreign capital. In turn this will increase illegal immigration to the U.S. by probably at least 3 fold.

    It ain't pretty, and it won't be getting better anytime soon.
  • gregor.us
    I am now moving quickly to the view that MX should almost immediately cut oil exports by 80% and take the pain. But watch what would happen to the price of oil after such a move. Especially if they said it was necessary to conserve the resource. It would also, in my view, trigger responses from other global oil producers who have gone into production decline.

    Thanks so much for your thoughtful remarks.

    G
  • Another excellent post Gregor. In the wake of the earthquake, drug cartels, swine flu, and oil production collapse, how does Mexico survive and what are the implications for North America?

    (BTW, nice to see The Ancient Ones recognized; I edited that book for Hans many years ago; nice to be reminded of it and his impressive work.)

    SEA
  • gregor.us
    Ha!. You are everywhere.

    Yes my new interest is in North America, actually. It's so obvious and familiar, I think we've forgotten and failed to pay attention to what's coming for N.A.

    I am thinking alot these days about a resurrection of geography. In my March newsletter, I suggest that Washington, Ottawa, and DC will have to help each other more than ever before. North America's abundant inheritance of energy has been spent down quite a ways. Of course, the good news is we have ton of NG. (But it won't be cheap).

    I think the future will be quite challenging, as early as 2012 and no later than 2015. I am trying to plan for it in my personal life. If tons of utility grade solar is built in the SW, and lots of commuter and light rail gets built, then I feel more optimistic.

    At the moment, those who remain unconcerned about Mexican or US oil supply in a way are ignoring the looming problem of Mexico. Mexico should be getting advice *right now* from Washington and help to diversify.

    Oy.

    G
  • mjanousak
    It's not all geography and field peaking in Mexico. It's also about PEMEX and its corruption and incompetence
  • gregor.us
    True. But at least PEMEX is no PDVSA-VZ Gov operation. At least PEMEX has made a good effort and used technology.

    PEMEX can't change geology. But the MX govt could be building Solar. Alas, they are not. And I would also note that MX has been increasingly importing NG from the US.

    G
  • mjanousak
    Let's face it, Venezuela is a special case. They've got more than adequate reserves, their supposed largest not yet developed, but between the corruption, incompetence and purging of virtually all capable foreign technical personnel, their production is going to drop even further than it already has. Chavez is cutting his own throat in that regard.



    But Mexico's production losses bode ill for the Mexican government AND for supplies to the US. Alternative energy is only affordable in Mexico when money is made available by the government -- and a government strapped for export income can't accommodate that demand.



    People in this country don't appreciate the value of Canada as our largest (and most reliable) oil supplier.
  • gregor.us

    People in this country don't appreciate the value of Canada as our largest (and most reliable) oil supplier.


    As I am sure you are aware, your average person has no idea how much oil we import, or where it comes from. I would truly love to know how much time if any they are spending in DC actually thinking about what's coming in Mexico. Perhaps they imagine MX will simply import oil from the same magical sources of supply when they themselves become an oil importer.


    G

  • mjanousak
    To too many folks in DC (and across the entire country, for that matter), oil just magically arrives at our refineries courtesy of the "oil fairies". It was really funny watching the reaction to Obama's friendly gestures to Chavez recently. In certain right-wing quarters, the knee-jerk response was a howl of anguish. Yet Venezuela, despite Chavez's rhetoric during the Bush years, has always been another of our main sources of oil. And whether they like it or not, Chavez and PDVSA are going to need engineering and technology from the US oil majors to develop and figure out a way to refine the heavy sour crude Venezuela is sitting on top of in the Orinoco belt. Mexico hasn't run out of oil yet --- but its declining production isn't going to hurt Venezuela's feelings any.
  • gregor.us
    Yes there are many sedimentary levels here. I would note that Chavez has nearly destroyed PDVSA, replaced technical experts with hacks, and run foreign oil firms out of the country. I frankly see VZ, MX, and the US as bogged down messes of a varying kind. It's almost impossible to know what Caracas or Washington for that matter will do next to make the situation even worse.

    G
  • mjanousak
    Perhaps that's why Chavez was so willing to shake Obama's hand -- and vice versa. At some point, PDVSA is going to have to step back and bring in the gringos to run the show (well, actually to make it operable first, and then run it long enough to fund Hugo's socialist wet dreams). And let's face it, it is in the USA's interests to provide that guidance and technical expertise. It sure beats the hell out of losing oil supplies and watching VZ descend into anarchy.
  • Rob Levinson
    I would like to see you expand on your comment "that geography is going to reassert itself in the years ahead". I understand the concept, but I'm curious how you see it playing out on the ground.
  • gregor.us
    Hi Rob,

    Simply put, while I disagree with those who forecast the end of globalization, I hold the view that depletion in liquid energy will end the age of cheap global travel, and thus usher in regionalism. I see air travel nearly disappearing. And the return of Rail.

    Here's a thought: when air travel is no longer affordable to anyone but the super-rich, we will no longer see viruses jump and leap forward, as they have done the past 30+ years.

    G
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