VZCZCXRO7559
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1174/01 0621859
ZNR UUUUU ZZH
P 031859Z MAR 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9410
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 001174 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/ESC 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW 
DOC FOR ITA/TD/ENERGY DIVISION 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET MX
SUBJECT: IS MEXICO RUNNING OUT OF OIL? 
 
Sensitive but Unclassified, entire text.  Not for 
distribution outside the USG. Not for Internet distribution. 
 
Summary 
------- 
 
¶1.  (SBU) Production from Mexico's Cantarell complex of 
offshore oil fields, responsible for 61 percent of the 
nation's oil production, has begun to decline.  Recent press 
reports suggest the decline rate could be as high as 25 
percent per year.  However, Pemex officials and industry 
analysts place the decline rate closer to 10 percent 
annually.  While Pemex tells us they will be able to maintain 
national production through 2010 near the current 3.3 million 
barrels per day, without significant changes in legislation 
to exploit medium and long term prospects, Mexico will not 
avoid a precipitous decline after that date.  Washington 
officials should consider reinforcing the private message to 
their Mexican counterparts that additional Mexican 
legislative flexibility will be necessary to ensure North 
American energy security.  End Summary. 
 
The Future of Cantarell 
----------------------- 
 
¶2.  (SBU) In December 2005, David Shields, a local 
journalist, reported a leaked Pemex study showing that 
production at Mexico's Cantarell complex would decline much 
more sharply than previously expected.  The story lit off 
widespread debate and provoked a mini-tempest at the state 
oil company.   Commentators have called the release a 
pre-election stunt, engineered by Pemex to ensure 
congressional support for planned Pemex investments.  Others 
in industry have taken the release as confirmation that Pemex 
is mismanaging resources by producing excessive crude volumes 
to take advantage of high prices at the cost of damaging the 
Cantarell reservoirs. 
 
¶3.  (SBU) The study included five cases, the worst of which 
suggested that production from Cantarell, which reached 2.03 
million barrels per day (MMBD) in 2005, would decline at near 
25 percent per year to 520 thousand barrels per day (MBD) in 
¶2008.  Cantarell, called the second largest oil field on 
earth, represented 61 percent of all 2005 Mexican oil 
production.  The study called increased encroachment of water 
into the reservoir's oil layer the primary culprit for the 
reduced volume figure.  Shields told us that Pemex had 
already shut in a much higher than expected number of wells 
due to water encroachment.  He reported publicly in December 
that Pemex had canceled additional wells planned for the 
field. 
 
¶4.  (SBU) Pemex immediately countered, noting that the 
negative report Shields had published was a "do nothing" base 
case, when, in fact, Pemex contemplated significant 
enhancements to maintain production.  Nonetheless, in 
December the company published new Cantarell forecast that 
showed a more significant production decline to 1.905 MMBD in 
2006;  1.683 MMBD in 2007; and 1.430 MMBD in 2008.  The 
company also reported that total proven and probable reserves 
for the field as 6.9 billion barrels as of January 1, 2005. 
Pemex continues to make significant investments at Cantarell, 
continuing with infield drilling in those areas of the field 
that will support it.  Additionally, Pemex will be installing 
water handling facilities in the field beginning in April 
¶2006. 
 
¶5.  (SBU) CFO Juan Jose Suarez Coppel told EMINCouns and 
Econoff February 27 that Pemex was "reasonably comfortable" 
with Pemex Exploration and Production's decline rate of "less 
than ten percent per year" which he called "not trivial, but 
not catastrophic either."  He agreed that the company had 
been "worried" about the decline since 2003.  He added that 
investments made during the Fox Sexenio would permit Pemex to 
maintain production at relatively constant rates through 
¶2010.  Over the next four years, production from the 
Ku-Maloob-Zaap fields located close to the Cantarell complex 
in the Bay of Campeche should largely make up for declines 
from Cantarell.  After 2010, Suarez Coppel said, Mexico's 
situation would require additional legislative flexibility to 
enable Pemex maintain total production volumes near the 
current 3.3 MMBD level.  Without those reforms, production 
 
MEXICO 00001174  002 OF 003 
 
 
would certainly fall.  Given that oil revenue accounted for 
40 percent of Mexico's federal budget in 2005, a decline of 
this magnitude would have serious economic consequences for 
the nation. 
 
¶6.  (SBU) Sergio Guaso, Pemex's Exploration and Production 
Vice President for New Business Models (Nuevos Modelos de 
Ejecucion) provided additional detail.  Pemex's ability in 
the medium to long term to maintain Mexican crude production 
depends on its ability to successfully increase production 
from mature fields; significantly increase production from 
the Chicontepec field; and begin a deep water development 
program.  Nonetheless, without relaxing or working around the 
Constitutional restrictions that reserve oil development 
rights for Pemex, the company will not be able to implement 
the three programs to the degree necessary to make up for the 
post 2010 decline. 
 
Mature Fields 
------------- 
 
¶7.  (SBU) According to Guaso, a fifth to one half of Pemex's 
onshore reserves are in fields with old facilities and low 
production that Pemex overhead makes too expensive to 
produce.  Through new contracting mechanisms, Pemex will 
develop ways to contract operation of the fields to 
outsiders.  Possible first candidate fields for this 
treatment include Cinco Presidentes and Poza Rica in the 
state of Tabasco and Altamira in Tamaulipas.   Guaso was 
beginning to develop a contracting model that would allow an 
outside operator to take on this operational responsibility. 
Current Pemex union employees, now without gainful employment 
because production is shut in, remain on the payroll.  The 
proposed scheme would have those unproductive employees begin 
work on those fields for management firms.  While Pemex was 
not at the point where it could present a formal proposal, 
Guaso expected an initial release of the plan "soon."  He had 
already held exploratory talks with Slumberger on 
participation in the venture. 
 
Chicontepec 
----------- 
 
¶8.  (SBU) Discovered in 1926 and producing since 1952, Pemex 
estimates that the field contains 1/3 of all Mexico's proven 
reserves (approximately 2 billion barrels).  Nonetheless, 
because of the extremely tight reservoir, production now is 
now very low.  Current recovery in the reservoir is 
approximately 4 percent while production costs are 
approximately USD 15 per barrel.  Guaso noted that 
Chicontepec's structure is similar to the West Texas 
Spraberry Field now being developed by Pioneer Natural 
Resources of Irving, Texas.  Without the technology and 
experience of firms like Pioneer, Pemex will not be able to 
develop significant production from the field.  Guaso said 
that Pemex had held initial discussions with Pioneer and 
wanted to move further, but needed a contractual mechanism 
that would provide Pemex the ability to work with a partner. 
This would entail not only a significant change in Pemex's 
operating statutes, but concurrent political buy-in. 
 
¶9.  (SBU) Pemex had depended on "Multiple Service Contracts" 
(MSCs) to attract outside service companies to work on Pemex 
projects on a fee for service basis.  Most foreign companies 
with the necessary expertise, however, were not interested in 
this arrangement because it forced the outside participants 
to risk the same investment but capped the revenue stream an 
outsider could receive to the amount of the contract.  While 
outside firms sought an equity stake with theoretically 
unlimited upside potential, Mexican constitutional 
restrictions prohibited granting of any equity stake in 
production.  Guaso was developing a financial agreement that, 
while it would not allow a company to "book" Mexican reserves 
in the traditional sense, might be able to offer a potential 
partner in these fields a cash flow stream that would be 
based on production from the field without offering ownership 
of the reserves.   While Pemex expects only 30 MBD out of 
Chicontepec in 2006, with the application of more advanced 
technology, this could increase to 300 MBD by 2012. 
 
Deep Water 
---------- 
 
MEXICO 00001174  003 OF 003 
 
 
 
¶10.  (SBU) As step further, Pemex Exploration and Production 
has also convened a working group chaired by Planning Vice 
President Vinicio Suro to begin developing the methodology 
necessary to begin joint ventures for deep water development. 
 Guaso suggested that such a contract would also provide a 
Pemex partner a guaranteed cash flow based on production from 
the developed field and the hydrocarbon price.  While Guaso 
agreed the move would not require a Constitutional change, 
it, like the development of Chicontepec, would require 
significant political buy-in and changes to legislation 
beyond those currently contemplated.  Given the long (10 
years or more) lead time for deep water development, even if 
Pemex started today, new production would not come on line 
until well past the 2010 mark. 
 
Pemex Reform 
------------ 
 
¶11.  (SBU) Pemex's execution of these major medium and long 
term developments hinges on its ability to circumvent or 
alter federal procurement rules.  The Mexican Chamber of 
Deputies briefly considered a proposal which included such a 
provision at the end of 2005.  Informal debate continues 
during the just-opened 2006 session in the Chamber of 
Deputies and Senate Energy Committees, though no member has 
brought forward a specific draft.   Guaso punctuated the 
problem noting that right now, to build an offshore platform, 
Pemex must follow the same procurement rules that the 
Secretary of Education uses to build a school.  Such 
 
SIPDIS 
contracting rules would make partnership schemes like the 
ones described in the Chicontepec and Deep Water examples in 
the previous paragraphs impossible.  Both Guaso and Suarez 
Coppel characterized the reform proposal as having broad 
based support with both the PRI and the PRD supporting the 
changes.  Staffers from the Senate and Chamber of Deputies 
Energy Committees have told us separately that 
representatives from the Secretariats of Energy and Economy, 
as well as Pemex, are working with Committee members to 
prepare a bill (dictamen) that would include the government's 
proposals.  Their goal is to have a draft agreed by all 
parties approved before the end of this session (in April). 
No actual draft has yet been prepared, though the legislators 
say they are committed to have it ready by the end of March. 
 
 
Comment 
------- 
 
¶12.  (SBU) Mexico is not running out of oil, but the 
continued investment plan for Pemex at Cantarell will likely 
result in a ten percent per year decline over the next four 
years.   Production from Ku-Maloob-Zaap should largely 
counterbalance this production decline through 2010.  After 
that, any significant Mexican production volume increase 
would come only as a result of real policy reform.  The 
measures already in play for this April are only a first 
step, and even in this case, the likelihood that these 
reforms will pass is in question.  Discounting the Cassandras 
that expect a precipitous fall in Cantarell production, and 
assuming oil prices stay at least flat, the government 
entering in December will still have to begin the next set of 
reforms immediately to permit the new developments needed to 
offset a significant fall in production after 2010.  While we 
should avoid making public pronouncements about this very 
sensitive sector of the Mexican economy, it may be 
appropriate to tell senior Mexican officials privately that 
Mexico's own economic security will hinge its ability to 
bring needed expertise and capital to the sector.  The 
upcoming SPP and BNC would provide opportunities to reinforce 
this message. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
GARZA