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Mexico: Pemex under pressure to reform as Canterell declines

The country's new government should relax the financing constraints on state-owned Pemex, the International Monetary Fund (IMF) says in a new country report. Under the existing financing arrangements, in which raising oil-sector investment requires either fiscal-policy tightening or the issuance of public debt, too much strain is being put on the public-sector balance sheet, the report says.

At the same time, Pemex is denied access to technologies and advantages that other oil companies obtain through joint ventures, because foreign ownership of hydrocarbons resources is prohibited in Mexico. In addition, argues the IMF, unlike international oil companies, Pemex is unable to adjust its annual capital budget at short notice to reflect changes in international crude and products prices.

Proposals to reform Pemex's governance and to allow risk-sharing with the private sector deserve new consideration, says the report. Risk-sharing with private-sector investors would ease the pressure on the public-sector balance sheet, help reduce national debt and would mean that the state would have a lower share of its assets invested in the oil sector.

Mexico could emulate other countries that have put national oil companies (NOCs) on a more commercial footing. The IMF points to the example of Brazil's NOC, Petrobras, as an illustration of how an NOC can use private-equity finance to underpin rising capital expenditure.

The urgency of reform is underscored by growing doubts about Pemex's capacity to orchestrate a sustained increase in oil output, as its main fields continue their irreversible decline. The IMF says Pemex will find it difficult to develop sufficient oil to compensate for losses from the Cantarell field. Cantarell is the world's second-largest producing field and accounted for 60% of Mexico's oil production last year.

Pemex expects Cantarell's output to fall by 50% by 2010 from the present level of 1.86m barrels a day (b/d). However, the problem is not restricted to Cantarell: 23 of Mexico's 32 most important fields are in decline. Mexico's oil production is expected to average 3.25m b/d in 2006 – down from 3.31m b/d in 2005. Proved oil reserves declined to 14bn barrels in 2005 from about 17bn barrels in 2002.

Enhanced oil-recovery (EOR) programmes should boost output at mature fields. For example, Pemex says EOR at the Jugo-Tecominoacan field in southern Mexico will boost production from 22,000 b/d to a peak of 88,000 b/d by 2008. However, gains on this scale will not deliver production increases on the scale of Cantarell.

Significant investment and new technology will, therefore, be required to exploit complex geological structures and deep-water resources, the IMF says. Some estimates suggest the deep waters of Mexico's segment of the Gulf of Mexico could hold as much as 53bn barrels of oil. Yet Pemex has little experience in deep-water exploration and production, and lacks the necessary technology and funds. From 2000, Pemex boosted annual investment to over $10bn, from less than $1bn a year during the 1990s. But the extra spending has failed to staunch sliding output, adding weight to calls for reform.

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