Mexican Oil, American Needs:
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March 9, 2007
Output Falling in Oil-Rich Mexico, and Politics Gets the Blame
By ELISABETH MALKIN
MEXICO CITY, March 8 — The KU-S oil production platform off the coast
of Ciudad del Carmen, with its 10,000-ton tangle of yellow and red
tanks and pipes, would seem the natural product of three years of
soaring energy prices. The newly installed platform certainly is the
face that Mexico's state oil monopoly, Pemex, would like to show off.
But Pemex is in trouble. Its production and proven reserves are
falling, and it has no money to reverse the slide. Mexico is the
second-largest supplier of imported oil to the United States, after
Canada, but its total exports are slipping. If the company continues
on its current course, Mexico may one day have trouble just keeping up
with rising demand at home.
The evidence of its predicament is clear not far from the KU-S
platform. On the horizon, some 50 to 60 miles into the southern Gulf
of Mexico, aging rigs billow flames and black smoke over the waters as
they burn off the natural gas they are unable to process.
The major reason that Pemex's prospects are so poor, energy experts
agree, is government interference. The Mexican government, which
expropriated the oil industry in 1938, depends on Pemex to finance its
budget. Last year, sales at Pemex (its full name is Petróleos
Mexicanos) reached $97 billion. But $79 billion of that went to the
government, Pemex's chief, Jesús Reyes Heróles, said last month. That
accounted for almost 40 percent of the federal budget.
Government interference is only part of the story. Pemex has been
hamstrung by years of short-sighted management aimed at extracting the
most cash for the government treasury — Mexico's president and
Congress must approve the company's budget, its output, investments
and exports each year. By law, Pemex is closed to any outside
investment, shutting it off from private capital and expertise.
In addition, Pemex has not reinvested enough for decades and, because
it faces no competition at home, has lagged behind many of the
industry's technical advances. Its labor union has locked it into
rigid work rules and siphoned off hundreds of millions of dollars for
unexplained benefits. And that does not even touch on the widespread
corruption and waste.
"Inside Pemex, I think they have creative solutions," said Amy Myers
Jaffe, an energy analyst at the James A. Baker III Institute at Rice
University. "They know what they want to do. How do you get that
solved within the politics of Mexico?"
President Bush is scheduled to visit Mexico Monday and Tuesday, and
oil is likely to be on the agenda. In comments to Latin American
reporters this week, Mr. Bush mused that Mexico's president, Felipe
Calderón, should consider private capital to expand Pemex production.
The comments ruffled Mexican sensitivities over national sovereignty
of its oil resources.
Over the last five years, Pemex has spent about $50 billion, mostly
borrowed, to pump more and more oil and gas. "It should have spent
much more on exploration so that it wouldn't be in the situation it is
in today," said Adrian Lajous, who led Pemex in the 1990s. "It was a
drive to generate short-term revenue for the government."
For all that spending, said George Baker, a Houston analyst who
publishes a newsletter covering the Mexican oil industry, Pemex did
not get much. "In the end, the results were very weak. You didn't
build a new refinery. You didn't find more oil."
Mexico, the fifth-largest oil producer in the world in 2005, is
sitting on tens of billions of barrels of untapped oil reserves. But
much of that is in the deep waters of the gulf, not far from where
American companies have announced discoveries. Pemex has neither the
money nor the expertise to get at the oil.
Its biggest field, Cantarell, in the shallow waters of the gulf, is
one of the world's richest. That field used to account for about 60
percent of Mexico's oil production, but has gone into a sharp decline.
Production at Cantarell fell 13.5 percent last year, and it will fall
another 15 percent this year, Mr. Reyes Heróles said recently.
The decline at Cantarell pushed Pemex's output down from its peak of
3.4 million barrels a day in 2004 to 3.26 million last year.
At the same time, Pemex's proven reserves of crude oil have fallen to
11.8 billion barrels at the end of 2005 from 15.1 billion barrels at
the end of 2002.
Mexico's nationalist energy policy has closed off the option that most
cash-starved national oil companies have used — opening up some
production to joint ventures with foreign companies.
Any debate about how to fix the industry quickly becomes snarled in
Mexico's passionate oil politics. The official history celebrates the
government's expropriation of the oil industry as a heroic act and
recalls how ordinary Mexicans donated their jewelry to pay for "their"
oil. In fact, state control of the industry is enshrined in Mexico's
Constitution.
Even so, there is more agreement than ever before that the government
has to rethink the way Pemex is run.
President Calderón has been vague about his government's plans three
months into his presidency. His conservative National Action Party
favors private investment.
The left and Mexico's old-guard nationalists oppose private
investment, arguing that it is a cover-up for creeping privatization.
That suspicion seems to resonate: a broad public opinion survey last
year by CIDE, a university in Mexico City, and the Mexican Council on
Foreign Affairs, found that 76 percent of Mexicans oppose foreign
investment in oil.
"It needs to hurt like hell before you can have an intelligent
discussion," said David Shields, a Mexico City energy analyst who has
written a book about Pemex.
Graco Ramírez, a senator from the leftist Party of the Democratic
Revolution, said Mexico was already feeling the pain. Other than the
sale of any part of Pemex, he said, nearly everything else is on the
table "because of the seriousness of the country's energy situation."
Shifting from the party's line, Mr. Ramírez, who is the secretary of
the energy commission in Mexico's Senate, said there may be room for
national oil companies — he singled out Statoil of Norway, Petrobras
of Brazil and Petróleos de Venezuela, or PDVSA — to work with Pemex on
deepwater exploration and a few other areas.
Mr. Calderón has mentioned two of those companies as well. In a visit
to inaugurate the KU-S platform last week, the president announced the
expansion of an existing technology-sharing agreement with Petrobras.
Two days later, Pemex announced an emissions-reduction agreement with
Statoil.
Political analysts warn that Mexico's fractious politics could delay
serious change. Another problem is that the government would have to
collect more taxes elsewhere if it took less from Pemex. "Some reform
of the laws governing Pemex's operations seem almost certain to take
place in the next 18 to 24 months," Pamela K. Starr, an analyst at the
Eurasia Group in Washington, wrote in a report released Wednesday.
But, she added, "These reforms will be limited in scope."
For now, Pemex is doing what it can alone to make up for lost time. In
a beige-carpeted glass-walled research center that Pemex opened in
Ciudad del Carmen six months ago, scientists and engineers study 3D
images of the geological layers below the gulf's deep waters to
determine where they will put exploratory wells.
"I think that this is the future or at least part of the future," said
Pemex's director of exploration and production, Carlos Morales Gil.
Even under the best of circumstances, though, Pemex cannot expect to
see deepwater oil before 2014.
For now Mr. Reyes Heróles has more immediate concerns. He has said
that Pemex needs to spend some $8 billion to $10 billion a year over
its current investment budget of about $14 billion.
He doesn't have it.
The company's finances are too "delicate" to keep borrowing, he said
at a news conference last month.
It will cost about $15 billion a year just to enhance reserves and
keep output of crude above three million barrels a day, he said. The
company is developing new fields to help make up for the decline at
Cantarell. One of those is the adjacent field of Ku-Maloob-Zaap, where
the new KU-S oil platform will produce 250,000 barrels of crude a day.
Private analysts are cautious. "We don't see even in the most
optimistic model that they could manage to reverse the total fall in
production," said Alejandra León, an analyst at Cambridge Energy
Research Associates in Mexico City.
Outside of exploration and production, the rest of Pemex — its
refineries, its pipelines, its money-losing petrochemical plants —
have been ignored. Mexico now imports about 30 percent of its gasoline
from the United States. A series of fatal accidents a couple of years
ago revealed the perilous state of its pipeline network.
For years, the natural gas that was pumped up with the Cantarell crude
was flared off because Pemex was unable to process it. "It's like
lighting dollars on fire," said Kenneth B. Medlock III, who is also at
the Baker Center at Rice University.
Now Pemex is trying to make use of that natural gas and develop
onshore reserves. The KU-S platform will process gas, not flare it,
for example.
Pemex's debt has climbed to about $53 billion; its fast-growing
pension liabilities have reached another $40 billion.
Pemex's former chief executive, Luis Ramírez Corzo, estimated last
November that Pemex could trim $2.5 billion from its operating costs.
Labor costs for workers who had not enough work to do or none at all
cost the company almost $1 billion of that, he said.
And in a nod to the allegations of corruption at Pemex, Mr. Calderón
named a new audit committee last month.
Mr. Lajous, who ran Pemex in the 1990s, said, "The union is one of the
key political complexities of what you have to deal with."
Some 100,000 of the company's 148,000 employees are members of the
union, and the union has five representatives on Pemex's board.
The union leader in charge since 1993, Carlos Romero Deschamps,
refused a request for an interview.
There are bright spots, though. "Pemex people are very good," said a
foreign oil executive who asked not to be identified because of the
sensitivity of the debate in Mexico. "There are professionals with
lots of experience."
Ms. Jaffe of the Baker Institute agreed. "The problems of Pemex," she
said, "are not technical. The problem is political."
And for all its troubles, Pemex is still a great source of pride to
many Mexicans. Its workers are some of the best paid in Mexico, firmly
in the middle class.
"It's one of the best companies in Mexico," said Israel Cervantes, 28,
who has been working on the rigs for three years and takes home $2,200
a month. "You can do all right by your family here."
Is Iran Facing an Energy Revolution?
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February 13, 2007
West Adds to Strains on Iran's Lifeline
By JAD MOUAWAD
Western political and economic pressure on Iran over its nuclear
program has chilled foreign investment to the extent that it is now
squeezing the country's long-fragile energy industry, adding strains
to a government that is burdened by sanctions and wary of unrest at
home.
The world's fourth-largest oil exporter, Iran sits on the
second-largest oil and gas reserves. But it has struggled in recent
years to keep its oil production, currently running at about four
million barrels a day, from falling.
Some analysts say that if this acute imbalance between stagnant
production and rising demand at home continues unchecked, Iran will
have no oil left over to export within a decade. Its oil exports,
totaling $47 billion last year, account for half the government's
revenue.
"They have a perfect storm of problems feeding into each other," said
Robert Murphy, an analyst at PFC Energy, a consulting firm in
Washington. He estimated that Iran might have no more oil to export by
around 2015 if it did not rein in runaway consumption and reverse the
long-term decline in its oil production.
"The domestic energy situation is as big as the international issue,
and feeds into it in a very significant way," he said.
To curb demand, which has been driven in part by subsidies that keep
the domestic pump price at a mere 35 cents a gallon, the government
plans to begin rationing gasoline in March, a measure so unpopular,
and potentially explosive, that rationing plans have been put off
several times in the past.
Iran's energy problem is in many ways at the heart of the nuclear
controversy as well. Iran's leadership says it wants to develop
nuclear power generation to free its petroleum resources for domestic
use or for exports. The United States and other Western countries say
Iran is using the program as a front for building weapons. At a time
of relatively high prices, oil is clearly providing Iran's government
with enormous strength — but also with an Achilles' heel.
In December, the United Nations Security Council voted unanimously to
impose limited economic sanctions on Iran until it halts its nuclear
program. So far, American and European officials say they are not
seeking to cut off Iran's oil exports, because that would disrupt
global markets and raise prices for Western consumers.
Still, the pressure on Western energy companies not to deal with Iran
may ultimately speed that outcome. Iran currently exports about 2.5
million barrels a day.
In recent weeks, senior American officials warned several European oil
companies that if they invested in new energy projects, they risked
financial sanctions in the United States, according to a European
energy executive who spoke on the condition that he not be identified
because of the delicate nature of his company's relations with Iran.
Foreign investors, who have helped promote Iran's oil development,
have been scarce since the 1979 revolution, and the country's oil
industry has now suffered decades of economic, political and technical
problems. Iran has signed no firm oil or gas contracts with foreign
investors since June 2005, when Mahmoud Ahmadinejad was elected
president and began flaunting the country's nuclear ambitions and
renewing tensions with the West.
At home, meanwhile, Iran has had to appease a population historically
prone to unrest. It spends about $20 billion each year, or 15 percent
of its economic output, to keep consumer prices low for gasoline,
natural gas, electricity and other energy products, according to
estimates from the International Monetary Fund and others. Those
subsidies have prompted double-digit growth in consumption in this
country of 70 million people.
Iran holds 11 percent of global oil reserves, second only to Saudi
Arabia. But each year, Iran has to find ways to make up for natural
declines in production from existing wells, which in past years has
dipped by 200,000 to 500,000 barrels a day.
It has managed to hold its own, but just barely. Moreover, Iran's
refining capacity lags far behind its domestic needs, so the country
is forced to import 40 percent of its gasoline.
Because of delays in developing new fields, like Yadavaran, Azadegan
and others, Iran has scaled back its targets; it now plans to increase
oil production to 4.5 million barrels by 2010, down from 5 million
barrels. But even that might prove challenging, according to analysts
who cite the figures.
Iranian production is now about 3.9 million barrels. It peaked at more
than 6 million barrels a day in the mid-1970s, but plummeted to 1.5
million barrels just after the 1979 revolution. During the eight-year
war against Iraq that followed, Iran's oil infrastructure lining the
Persian Gulf was a frequent target.
Iran currently uses 1.5 million barrels of oil a day, triple its
consumption in 1980, and must import about 170,000 barrels a day of
gasoline, which last year cost the government more than $4 billion.
Some Iranian fields are in dire need of foreign technical expertise to
help reverse their natural decline rates, estimated at 8 to 10 percent
a year. Modern methods of enhanced oil recovery, which involve
reinjecting natural gas to flush out more oil from the fields, can
greatly increase production rates but are both costly and difficult to
perform without foreign assistance.
"Iran needs to invest more than it does," said Manouchehr Takin, an
Iranian energy analyst at the Center for Global Energy Studies in
London. "It needs foreign companies to bring expertise, capital and
technology."
But oil companies complain that the rewards are limited. Under Iran's
stringent buyback contracts, oil companies basically operate as
contractors for the government for a limited time. They are not
allowed to book the reserves as their own and gain little in extra
profits when energy prices go up.
Iran's energy officials have already indicated they would sweeten
buyback contracts. At a meeting held at a Hilton hotel in Vienna this
month, they unveiled a new licensing round for 17 onshore and offshore
exploration blocks. The conference was attended by dozens of European,
Chinese and Russian oil executives.
For Gholam Hossein Nozari, the managing director of Iran's national
oil company, continued interest from Europe and Asia is "a sure sign
companies do not cower to U.S. pressure," according to Iran's official
news agency, IRNA.
Fereidun Fesharaki, an energy adviser to the Iranian government before
the revolution, said, "For all its faults, the Islamic Republic is
very flexible."
Not all countries or international companies have bowed to American
pressure. India has rebuffed Washington's efforts to cut off gasoline
exports to Iran. New Delhi has also rejected American requests to
cancel a planned pipeline project that would take Iranian natural gas
through Pakistan to India.
But recent conversations with European energy executives and
consultants, who spoke anonymously to protect their relations with
Iran, suggest there is a new wave of concern about starting projects
in the country. Even Chinese companies, which Iran is trying to lure
with big oil and gas deals, seem to be acting with caution.
Oil companies, including Royal Dutch Shell, Total of France, Eni of
Italy and Repsol YPF of Spain, are playing for time in the hope that
the political situation may somehow improve, energy analysts said.
Shell and Repsol announced last month a preliminary deal for South
Pars, the world's largest natural gas field. But the project,
estimated at $10 billion, has been delayed for more than a year. A
final investment decision is not due until at least the end of 2007.
Asked about the project at a news conference this month, Jeroen van
der Veer, the chief executive of Shell, expressed some embarrassment,
saying, "We have a dilemma." Iran's oil and gas reserves are too big
to ignore, he said, but "we have all the short-term political
concerns, as you can see."
Last year, Inpex, a Japanese oil company, agreed to sharply cut its
stake in a $2 billion project to develop the Azadegan field, in the
southwestern province of Khuzestan, near Iraq. Inpex cut its stake to
10 percent from 75 percent after problems with land mines left over
from the Iran-Iraq war delayed development. But some analysts said the
decision reflected Japan's displeasure at Iran's nuclear stance. Japan
accounts for 20 percent of all Iranian oil exports.
"Oil companies are simply assessing risk, including what some see as
the real risk of a military strike against Iran," said Cliff Kupchan,
an analyst at the Eurasia Group, a political risk consulting firm, and
a former senior State Department official. "Some are deciding it's not
worth it."
The United States is pressing Europeans to trim their
government-backed loan guarantees, which amounted to $18 billion in
2005. European countries have recently said they would not issue
guarantees for companies that the United Nations lists as tied to
Iran's nuclear or missile programs. But Washington is calling on
Europe to make sure it is not dealing with front companies, possibly
in the energy field.
Since opening up their energy sector to foreigners in the 1990s,
Iran's clerical leaders have sought to turn their energy riches into
political alliances. In the mid-1990s, they tried to persuade an
American company, Conoco (now ConocoPhillips), to develop an oil field
in a strategic bid to thaw relations with the United States; when that
failed, after President Bill Clinton banned American investments in
Iran, Iran turned to Europe and Japan. More recently, Iranian leaders
have set their sights on China and Russia.
But while China's three main state-owned oil companies have been eager
to sign preliminary agreements with Iran in recent years, drawing
criticism from the United States, analysts say few projects have
actually gotten off the ground.
Steven R. Weisman contributed reporting from Washington and Nazila
Fathi from Tehran.
