“Mexican Crude Oil Production: Recent Achievements and Perspectives,” by Daniel Romo Rico, Sergio M. Galina Hidalgo, and José Cruz Escamilla Casas

8/7/2019 Mexican Crude Oil Production: Recent Achievements and Perspectives, by Daniel Romo Rico, Sergio M. Galina Hi

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THE JOURNAL OF ENERGY

AND DEVELOPMENT

Daniel Romo Rico, Sergio M. Galina Hidalgo,

and Jos Cruz Escamilla Casas,

Mexican Crude Oil Production: Recent

Achievements and Perspectives,

Volume 34, Number 1

Copyright 2011


2/20

MEXICAN CRUDE OIL PRODUCTION: RECENT

ACHIEVEMENTS AND PERSPECTIVES

Daniel Romo Rico, Sergio M. Galina Hidalgo, and JoseCruz Escamilla Casas*

From 2005 to 2010, Mexicos crude oil production has declined 25 percent from

its historic output, which was reached in 2004. As of 2010, Mexico is facinga situation where the main productive oil reservoir is in the process of being de-

pleted as reflected in a reduction of the volume of crude oil exports in excess of 40

percent, down from the highest level observed in January 2006. This paper ex-

amines Mexican oil production and the major challenges that Petroleos Mexicanos

(PEMEX), the countrys national oil company, must deal with in order to maintain

*Daniel Romo Rico, Professor at the National Polytechnic Institute (IPN) in Mexico, holds

a Ph.D. in energy economics from the National University of Mexico (UNAM), a masters degreefrom LaSalle University, and a bachelors degree in economics from Universidad Autonoma

Metropolitana. Specializing in the Mexican oil industry, the authors areas of academic expertise are

macroeconomics, hydrocarbon economics, and finance of the oil industry; he has previously held

positions with the Mexican Stock Exchange, the Mexican Petroleum Institute (IMP), and Bancrecer

Bank.

Sergio Galina Hidalgo, currently on the Staff of Advisors for the Board of Directors of Petroleos

Mexicanos (PEMEX) and Technical Secretary of the Research and Development Committee, earned

his bachelors degree in physics, a masters in petroleum engineering, and a Ph.D. in energy

economics from UNAM. He has taught at UNAM, IPN, IMP, and the Technological Institute of

Monterrey. The author worked at IMP from 2000 to 2009 in the Strategic Planning Office and theResearch and Graduate Directorate where, in 2009, he was appointed Head of the Graduate Program,

the most important academic program for the oil industry in Mexico.

Jose C. Escamilla Casas, Professor of Geology at IPN, earned his masters and Ph.D. degrees in

earth sciences-geology from the University of New Hampshire. The author has acted as director and

collaborator on several research projects on structural geology and global tectonics in Mexico and

internationally. His recent research projects are focused on the structural implications of rock

deformation in the generation and accumulation of hydrocarbons in rocks in northeastern Mexico.

He has taught at the Autonomous University of the State of Hidalgo and at IPN.

The Journal of Energy and Development, Vol. 34, Nos. 1 and 2

Copyright 2011 by the International Research Center for Energy and Economic Development(ICEED). All rights reserved.

33


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its production platform. Additionally, this study reviews some of the main factors

that have influenced PEMEXs decisions and activities from 2009 to 2010. Fi-

nally, we address the complex political, strategic, and technical issues that are

most pertinent in understanding Mexican oil output.

We conclude that Mexico will continue to face significant difficulties inmaintaining its crude oil production because no new fields with large oil reserves

have been found in recent years while the depletion of actual productive fields

continues; this trend has been compounded by the failure of some projects to meet

the expected production outcomes.

The declining oil production in Mexico could have many effects over the total

supply available in the oil markets, particularly in North America, and could

change the role of Mexico as a reliable source of abundant oil for the United

States. In addition, the fall in oil exports has had a deep impact on PEMEXs

income and, ultimately, on the Mexican economy since the company is re-

sponsible for about one-third of total government revenues.1

Challenges to Mexican Oil Production

In 2000, PEMEX produced 3.012 million barrels per day (b/d) of crude oil

(historic production peaked in 2004 with 3.38 million b/d).

2

However, the totaloutput of crude declined in subsequent years and settled at 2.602 million b/d in

2009, largely due to the Cantarell macro field that was producing less than half of

its recorded level in 2004. In particular, the main Cantarell project, Akal-Nohoch,

which experienced its highest production of 2.4 million b/d in 2004, saw a sig-

nificant decline in its output to less than 500,000 b/d in November 2009. PEMEX

argued that the reduction in heavy oil production was due to increased gas-oil

contact and oil-water wells.3 PEMEX has relied upon the production from the

giant Cantarell oil field since the early 1980s; however, there are others elements

that help to explain the fall in oil production Mexico is witnessing. Table 1 pro-vides an overview of key upstream indicators.

Limited Exploration Success: One of PEMEXs major challenges has been in

trying to replace 100 percent of its hydrocarbon reserves annually. This has been

more significant in the case of proved reserves, which are technically more ac-

cessible. In 2000 the ratio of proved reserves to annual production was equivalent

to 21.3 years. By the end of 2009, this ratio was a little over 10 years.4 Three factors

are responsible for the reduction of hydrocarbon reserves: (1) the decline rate in

annual crude oil and natural gas production, (2) partial exploration results, and (3) thereclassification of hydrocarbon reserves to which PEMEX has been subjected under

the U.S. Securities Exchange Commission rules.5

THE JOURNAL OF ENERGY AND DEVELOPMENT34


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By January 1, 2010, the proved hydrocarbon reserves were evaluated at 14

billion barrels of crude oil equivalent (boe), 59 percent lower than the level

reported in 2000. Of the total proved reserves, 74 percent were crude oil, 10

percent fluids and condensate, and 16 percent dry gas equivalent to liquid. Total

crude oil proved reserves (of which 71 percent are located offshore) consisted ofheavy crude oil (62 percent), light crude oil (29 percent), and the remainder super

light crude oil.

Few New, Large Oil Production Projects: Despite attempts at developing new oil

projects that began in 2000, little success has been achieved. The most prominent

of the new oil production projects since 2000 include Kutz (2001), Sihil (2002),

Sinan (2003), Bolontiku (2004), and Ixtal (2005). All of these new undertakings

combined still only accounted for about 12.8 percent of total oil ouput by March

2010. Moreover, since 2006 PEMEX has not incorporated a significant new crudefield into its production portfolio. The offshore portfolio situation faces a similar

situation. PEMEX has worked since 2004 in expanding its deepwater exploration.

Table 1PETROLEOS MEXICANOS (PEMEX): UPSTREAM INDICATORS, 2004-2009

Indicators 2004 2005 2006 2007 2008 2009

Oil and natural gas output (million

barrels of crude oil per daymbcd) 4.4 4.4 4.43 4.39 3.93 3.78

Crude oil production (mbcd) 3.38 3.33 3.26 3.08 2.79 2.6

Annual variation (%) -1.5% -2.3% -5.5% -9.2% -6.8%

Natural gas production (billion cubic

feet per daybcfd) 4.57 4.82 5.36 6.06 6.92 7.03

Annual variation (%) 5.4% 11.2% 13.1% 14.2% 1.6%

Oil exports (mbcd) 1.87 1.82 1.79 1.69 1.4 1.23


Hydrocarbon reserves

Proved reserves (billion barrels of

oil equivalentbboe) 17.65 16.47 15.51 14.72 14.31 13.99


Development hydrocarbon

reserves (bboe) 11.35 11.33 10.65 10.01 10.2 9.6

Crude oil reserves (bboe) 12.88 11.81 11.05 10.5 10.4 10.02

Hydrocarbon proved reserves/total

production (years) 11.0 10.3 9.6 9.2 9.9 10.2

Rate replacement of hydrocarbon

proved reservesa

(%) 23.0% 26.0% 41.0% 50.3% 71.8% 77.0%

aIt includes delimitations, developments, and revisions.

Source: Petroleos Mexicanos.

MEXICAN OIL PRODUCTION 35


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By 2009, nine zones were under study.6 Nonetheless, by the end of 2009, there is

still no deepwater crude oil production.

Failure to Meet Expectations: Another challenge to PEMEX has been with its

projects not meeting expectations. In particular, the company has sought to find potential replacements for the countrys oil-producing work horse

Cantarellwhich is also one of the largest oil fields ever discovered in the world.

One project that was thought to be a contender to offset Cantarells declining

production was Chicontepec. Located northeast of Mexico City, Chicontepec

appears promising because an estimated 39 percent of Mexicos total hydrocarbon

reserves are concentrated in this area. However, Chicontepecs production in 2008

and 2009 was lower than anticipated despite the cumulative investment of $2.8

billion over this two-year span.7 The most significant obstacle has been that

Chicontepec is technically very challenging because it consists of a highly frac-tured reservoir with relatively low pressure. This, along with the fact that PEMEX

must develop infrastructure around Chicontepec, makes it a costly project both

financially and from a time perspective. Thus, despite the potential, Chicontepec

will not be a quick fix to solving the oil production output issue.

No Additional Oil Production from Mature Fields: PEMEX has 16 projects in

mature fields.8 In these fields, it is necessary to increase oil output through enhanced

recovery techniques requiring specialized knowledge and experience in the field

work of each asset. In some mature fields, PEMEX has chosen to inject nitrogen toenhance the production (Cantarell, Antonio J. Bermudez, and Jujo-Tecomiacan); in

the Poza Rica field, water is injected; and in the Bellota-Chinchorro and Cactus-

Sitio Grande fields plunger lifts have been employed. In spite of the enhanced re-

covery techniques employed by PEMEX, between 2003 and 2009 most of the

mature fields have not increased their crude oil production (table 2).

A Shifting Focus toward Natural Gas Production: To support the increased

consumption of natural gas in Mexico, the national energy policy has been pro-

moting greater investment in natural gas instead of crude oil production. Naturalgas increasingly is replacing oil as a feedstock in power generation and thus is

critical for electricity. PEMEX itself is one of the largest consumers of natural gas

in the country. This strategy has been successful in growing natural gas pro-

duction. In 2000, Mexicos natural gas production was 4,679 million cubic feet per

day (cf/d) by 2009 it had reached 7,030 million cf/d.

Offsetting Production Declines: Besides Cantarell, the other main production

center is Ku-Maloop-Zaap (KMZ). Both Cantarell and KMZ are located in the

Gulf of Campechethe main producing area for Mexican crude oil. Together,Cantarell and KMZ accounted for close to 57 percent of Mexicos total crude oil

output in 2009. KMZ has been critical in offsetting the declining production from



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Ta

ble2

PETROLEOSMEXICANOS(PEMEX

):CHANGEINCRUDEOILPRODUCTIONDECEMBER2

000-DECEMBER2007COMP

AREDTO

MAR

CH2010

Region/Field

Dec.

2000

Dec.

2001

Dec.

2002

Dec.

2003

Dec.

2004

Dec.

2005

Dec.

2006

Dec.

2007

TotalPE

MEX

-447.5

-679.0

-673.6

-859.5

-626.7

-792.3

-382.9

-335.9

Northeas

tMarine

Region

-383.3

-759.6

-859.9

-1,081.3

-859.5

-943.4

-476.1

-457.1

Akal-Nohoch

a

-

-1,460.6

-1,531.8

-1,721.7

-1,520.9

-1,519.6

-1,020.4

-794.9

Chac

a

-10.3

-7.1

-7.1

-12.2

0.3

-2.1

-0.1

-3.2

Ixtoc

a

-1.5

3.3

-0.9

-0.5

0.8

-3.4

-3.2

-1.8

Sihila

n.a.

n.a.

60.3

52.8

52.8

39.3

42.5

50.6

Kutza

n.a.

12.8

13.3

9.2

7.6

8.7

8.7

9.7

Ku

b

147.9

142.6

128.0

137.7

152.0

101.0

69.2

-7.7

Zaap

b

258.8

261.0

258.2

231.7

216.5

207.3

217.3

110.4

Maloo

bb

186.2

174.3

157.2

159.8

160.6

155.0

158.5

108.1

Southeas

tMarine

Region

-67.2

48.2

127.4

153.4

160.9

122.1

30.5

41.6

Chuc

-65.1

-41.9

-30.2

-24.0

-23.1

-44.1

-26.2

-3.2

Caan

-142.7

-102.0

-82.3

-69.6

-63.2

-50.6

-39.3

-31.4

Ixtal

n.a.

n.a.

n.a.

n.a.

n.a.

107.6

53.1

53.4

Sinan

n.a.

n.a.

n.a.

64.1

48.8

33.1

11.9

6.8

Bolontiku

n.a.

n.a.

n.a.

n.a.

45.8

35.2

19.2

-10.5

SouthRegion

-18.5

11.3

30.9

46.4

56.2

14.4

49.4

69.0

Samar

iac

-43.7

-36.0

-25.8

-23.5

-15.5

-26.0

-19.3

-17.3

Jujo

-34.7

-26.6

-27.1

-19.8

-10.3

-23.8

-25.7

-20.2

Iride

c

-23.8

-24.2

-27.1

-27.6

-29.1

-35.0

-30.8

-19.9

Puerto

Ceiba

0.5

-10.4

-17.5

-39.8

-53.9

-46.6

-21.7

-19.3

Sen

d

21.9

12.7

27.0

37.3

33.3

29.3

29.6

22.5

(continued)



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Table2

(continued)

PETR

OLEOSMEXICANOS(PEMEX):CHANGEINCRUDEOIL

PRODUCTIONDECEMBER2000-DECEMBER2007COMPA

REDTO

MAR

CH2010

Region/Field

Dec.

2000

Dec.

2001

Dec.

2002

Dec.

2003

Dec.

2004

Dec.

2005

Dec.

2006

Dec.

2007

Tecom

inoacan

-8.3

-5.9

-3.1

-0.3

4.2

-3.2

-2.7

0.7

Pijije

d

40.1

38.8

35.5

33.5

35.7

31.6

31.1

31.7

Cardenas

-7.5

-2.0

-0.2

1.1

4.7

-3.8

0.7

3.1

Cundu

acan

c

-12.1

-9.4

-10.5

-13.4

-15.6

-12.7

-5.3

-0.9

Mora

1.7

2.6

3.0

5.7

5.5

4.7

-1.7

-1.2

Yagua

l

5.4

5.5

5.8

5.8

-1.1

-2.1

-1.7

-0.1

Oxiacaquec

-6.1

-4.6

-2.7

-2.4

-2.5

-2.6

-5.3

-6.7

Ogarrio

6.5

6.1

5.3

5.2

4.3

1.9

0.2

1.8

Cactus

-2.2

-2.3

-0.1

-3.4

-1.1

1.1

1.2

0.0

Chinchorro

-1.4

1.1

-1.4

-1.0

1.0

1.5

0.9

0.5

NorthRegion

21.6

21.0

28.0

22.0

15.7

14.6

13.2

10.5

PozaR

ica

-5.0

-5.3

-4.3

-5.9

-6.1

-4.8

-4.5

-3.9

Tajn

4.9

5.7

5.4

1.2

1.7

1.1

1.8

-0.7

Arenq

ue

-2.2

-3.5

-4.9

-3.4

-5.4

-4.3

-3.9

-2.7

Coape

chapa

5.9

5.9

5.9

5.7

-0.3

-4.8

-0.9

-0.7

AguaFra

3.8

4.1

4.2

2.4

-1.2

-0.6

0.8

0.3

Constituciones

-3.0

-2.4

-0.9

-1.3

-0.9

-0.8

-0.5

-0.9

aOne

ofthesub-partsofCantarell.

bOne

ofthesub-partsoftheso-calledKMZ.

cBelo

ngstoAntonioJ.Bermudezproject.

dBelo

ngstoDeltadelGrijalvaproject.

n.a.=

notapplicable.

Source:Constructedwithinformation

oftheSecretaradeEnerga,SistemadeInformacionEnergetica,availableatwww.energia.gob.mx,accessed

June12,

2010.



8/20

Cantarell. The production from KMZ increased from 284,600 b/d in 2000 to

800,000 b/d in 2009. In addition, PEMEX has been successful with the use of

a nitrogen re-injection program similar to that used at Cantarell to increase this

areas output levels.

Changing Crude Mix: One impact of the decline of Cantarell production is that

heavy crude oil as a percentage of the total crude produced has decreased. Most

Mexican reserves historically have consisted of very heavy crude oil varieties

(with a specific gravity of less than 25 API). About 58 percent of the total oil

produced in March 2010 was heavy oil (named Maya); this contrasts with the

heavy oil lifted in 2004 (over 72 percent of the total oil produced). Maya, a heavy

crude that averages 25 API, is generally exported to the U.S. Gulf Coast where it

is refined.

The Performance of PEMEX in Recent Years

Mexico is the only Latin American nation that has a monopoly on oil explo-

ration, production, refining, and basic petrochemicals. These activities are con-

ducted through PEMEX, which was ranked as the eleventh largest oil company

world-wide in 2008. In the same year, PEMEX ranked as the third-largest oil

producer in the world and the eleventh most integrated company; it occupied theeleventh place in oil reserves, the thirteenth in refining capacity, and the fourteenth

in natural gas production.9 In Mexico, PEMEX is the largest company in terms of

revenues; in 2009 it accounted for 8.8 percent of the gross domestic product (GDP)

and its exports represented 15 percent of the national current account. It is the

main taxpayer, accounting for one-third of total government revenue and, through

its investment and activities, has a huge multiplier effect on the national economy.

However, PEMEX had faced a myriad of challenges arising from more than 70

years of operation that have limited its development in several ways. Most of them

involve factors that affected the performance of PEMEX, particularly as an oilproducer. We will address what these factors have been and what is being done to

remedy the situation.

Investment: From 1982 until the early 2000s, PEMEX ran a deficit in its in-

vestment. The annual capital expenditures averaged U.S. $2 billion between 1982

and 1989 and U.S. $4 billion in the 1990s. During those years, PEMEX concen-

trated its operations in the Gulf of Campeche and in the Southeast Region.

PEMEX investment averaged U.S. $7.6 billion between 2000 and 2002. In re-

sponse to an upswing in international oil prices, PEMEXs investment was in-creased to U.S. $18 billion in 2009 (figure 1), which is still far less than the

investments made by the international oil majors.10



9/20

In 1997 PEMEX adopted the Pidiregas program to finance long-term pro-

ductive infrastructure projects.11 This initiative was created by the government

because it faced severe budgetary constraints in the aftermath of the 1994 eco-

nomic crisis, thus necessitating the development of a deferred financing schedule

that would allow it to show a reduction in the fiscal deficit and to restore the

countrys financial situation. However, this situation resulted in the increase inPEMEXs debt. The investment in Pidiregas projects has risen since 2003,

reaching the highest level of U.S. $15.7 billion in 2009 (table 3). PEMEXs ability

to increase investment levels was aided by the run up of international crude oil

prices from 2003 to July 2008. This translated into the Mexican government re-

ceiving additional revenues that allowed it to strength its financial situation. In

2009 the government cancelled the Pidiregas program in PEMEX; nonetheless,

the company retains the outstanding debt that accompanied these projects.12

PEMEX has channeled its investment resources primarily into upstream ac-

tivities, mainly into oil and natural gas production. In particular, between 1997 to2009, just four projects represented almost 50 percent of total investment: Can-

tarell and KMZ, which are projects linked to producing oil and associated natural

Figure 1FISCAL POLICY AND PETROLEOS MEXICANOS (PEMEX) INVESTMENT, 1980-2009



10/20

Table3

PETROLEOSMEXICANOS(PEM

EX):MAINPROJECTS,2002-2009a

Projects

Until2002

2003

2004

2005

2006

2007

2008

2009

TotalAccrued

Total

19,457

7,534

9,799

9,703

11,948

13,961

15,698

15,698

103,797

PEPCan

tarell(1997)

10,632

2,139

2,413

2,300

2,383

2,661

3,399

3,812

29,737

PEPProgEstrategico

deGas(2001)

1,089

1,669

2,075

1,898

2,151

2,143

2,600

2,698

16,322

PEPBur

gos(1997)

3,583

1,019

1,449

1,141

1,440

1,338

1,493

1,713

13,177

PEPInte

gralKu-Maloob-

Zaap-Pidiregas(2002)

86

284

904

1,509

2,448

3,264

2,325

1,959

12,779

PEPInte

gralComp

Anton

ioJ.Bermudez-Pid

(2002)

47

334

555

648

635

777

994

960

4,950

PRMina

titlan(1998)

-

0

40

228

719

809

598

382

2,776

PEPInte

gralChuc-Pidiregas

(2002)

30

161

367

209

289

339

341

363

2,100

PEPInte

gralJujo-

Tecom

inoacan-Pidiregas

(2002)

28

154

150

216

271

338

571

502

2,231

PRCade

reyta(1997)

1,657

-

-

-

-

-

25

1,682

PEPDeltadelGrijalva

(1998)

643

60

64

101

152

169

389

366

1,946

PEPInte

gralAma-Prof-

Tzap-Vin-Pid(2002)

1

43

58

27

10

453

897

-

1,488

PEPInte

gralBellota-

Chinchorro-Pidiregas

(2002)

24

129

178

143

183

266

399

388

1,709

(continued)



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Table3

(continued)

PE

TROLEOSMEXICANOS(PEM

EX):MAINPROJECTS,2002

-2009a

Projects

Until2002

2003

2004

2005

2006

2007

2008

2009

TotalAccrued

PEPInte

gral

Arenque-Pidiregas

(2002)

18

101

202

216

204

323

194

175

1,432

PEPInte

gralCaan-Pidiregas

(2002)

38

77

123

166

206

228

294

292

1,425

PEPInte

gralElGolpe-Puerto

Ceiba-Pidiregas(2002)

40

178

150

195

150

183

220

169

1,286

RemainingPidiregasprojects

1,

540

1,186

1,072

708

706

668

984

1,893

8,758

aThis

takesintoaccountPidiregasprojectsfrom1997-2008andbudgetprojectsin2009;PEP=PEMEXExploracionyProduccion,aPEMEX

subsidiar

y;andPR=PEMEXRefinacio

n.

Source:TreasuryMinistry(SHCP),PublicAccount,variousyears.



12/20

gas, and the Strategic Project Gas and Burgos projects, related to nonassociated

natural gas development. Significant obstacles remain for PEMEX, e.g., building

the necessary infrastructure in the newer areas where it is producing oil and natural

gas, increasing preventive maintenance and reducing corrective maintenance, and

employing the underutilized infrastructure in different areas, particularly in

Cantarell, where production has dropped.

High Levels of Leverage: PEMEXs financial situation has deteriorated over

timethis represents another major challenge. The most pertinent element that

affects the performance of PEMEX is its high leverage rate. The company has paid

its debt service on time and has an acceptable credit rating, primarily because it

has recorded pre-tax profits that are among the most competitive in the in-

ternational oil industry.13 However, PEMEX reported net losses from 1998 to 2009

(with the exception of 2006), in large part due to the high level of taxes its pays,

which are unusual in their magnitude compared to those paid by international oil

companies and by other national companies. For the first decade of the 2000s, totalsales to total taxes paid have averaged 61 percent.

The net losses for PEMEX have negatively impacted its equity and leverage. In

the first case, its equity became negative in 2005meaning that its liabilities

exceeded its assets. With the 2005 fiscal reform, the companys equity was again

positive between 2006 and 2008 when the Mexican government transferred more

than U.S. $8 billion to PEMEX in this period.14Nevertheless, by 2009 the national

oil companys equity had turned negative once again. The erosion of PEMEXs

equity originated with its leverage, measured as the ratio of total liabilities to total

assets, which reached levels above 100 percent in December 2009; contrast thatwith the levels of the integrated oil majors, which averaged 54 percent from 2000

to 2008.15

Table 4KEY INDICATORS OF INTERNATIONAL OILS COMPANIES, 2008

Company

TotalNumber

of Employees

(in thousands)

TotalAssets

(billions of

dollars)

TotalRevenue

(billons

of dollars)

Total

Assets/TotalEmployees

(thousands of

dollars)

Total

Revenue / TotalEmployees

(thousands of

dollars)

BP 92 228 367 2.48 3.99

Royal Dutch/Shell 102 282 460 2.76 4.51

ExxonMobil 80 228 459 2.85 5.74

Total 97 165 264 1.70 2.72

Chevron 61.6 161 273 2.61 4.43

Petroleos Mexicanos 143.4 91 265 0.63 1.85

Sources: Individual oil companies, Annual Reports.



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Increasing Operating Expenses: With the depletion of Cantarell and new oper-

ational challenges, the finding and development costs as well as production costs

have been increasing. In the first instance, the finding of oil fields and development

costs, which are usually calculated based on a three-year moving average, reached

its highest level in 2002-2004 ($11.80 per boe) and $11.20 per boe in 2007-2009. Inthe second case, production costs were rising consistently over the past decade

(2000-2010). In 2000 PEMEXs production costs were $2.97 per barrel; by 2008

they had more than doubled to $6.16 dollars per barrel. In particular, the company

has faced the production costs with the Tertiary Gulf Oil Project (Chicontepec) and

in mature fields, including Cantarell.

Also adding to PEMEXs operating expenses is its large payroll. The firms

productivity level is considered to be uncompetitive stemming, in large part, from

the number of its employees relative to industry average (PEMEX had over

143,000 workers in 2008, compared to BPs 92,000 and ExxonMobils 80,000).

When reflected in performance and productivity ratiossuch as total assets to

total employees and total revenue to total employeesthe major international oil

companies outperform PEMEX with much higher levels (table 4).

Lower Trade Surplus: The crude oil exports of PEMEX fell to 1.2 million b/d in

2009 from their 2004 peak of 1.8 million b/d. However, because of rising crude oil

prices, the export value increased from 2004 to 2008. Thus, to some extent the

increase in global oil prices has been able to camouflage the situation. Meanwhile,

the import of petroleum products has increased in this decade (2000-2010). Themain imported product was gasoline, which rose from 90,600 b/d in 2000 to

329,000 b/d in 2009; this was due to the lack of processing infrastructure and the

growth of local demand. PEMEX registered a surplus in international trade be-

tween 2000 and 2009; yet, the increase in gasoline imports led to a reduction of

this surplus. For every dollar resulting from the import of petroleum products,

PEMEX exported $4.42 in oil products by 2003. In 2009, this ratio stood at $2.17

of exported products to $1 for imported petroleum products, signaling a significant

deterioration.

Technology: PEMEX had reduced its research and development (R&D) activ-

ities from the mid-1980s until 2006. This was due to the lack of financial resources

directed toward R&D in the government budget and because the companys

strategy was mainly focused on the production of oil in the Cantarell field. That is

why the relationship between PEMEX and the Mexican Petroleum Institute (IMP),

the research center created in 1965 to scientifically support the Mexican national

oil company, was modified through the years. The IMP was focused mainly in

technical services instead of R&D activities. Additionally, in the second half of the

1990s, PEMEX adopted the technology follower strategy. This meant thatPEMEX decided to buy technology in international markets instead of developing

it. This situation resulted in a decoupling of PEMEXs technical and operational



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needs within R&D development in Mexico, a loss of human skills in exploration

studies, few R&D products, and no connections between the challenges faced by

PEMEX and its technological dependence.

PEMEX was oriented to manage its operations and reduce its technical skills.

Thus, the Mexican oil company increased its purchases from service companiessuch as Halliburton, Schlumberger, Weatherford, and Noble Contracting SARL.16

PEMEX established collaboration agreements with international oil firms in order

to obtain some advantages in terms of technology exchange; however, such

measures are limited considering the impact on R&D results and applications

offered by PEMEX and the business profile of such companies.17 On a more

promising note, in 2005 and 2008 the Mexican Congress approved different re-

forms to the fiscal regime of PEMEX that resulted in the creation of two funds

aimed at financing R&D projects for the IMP and other public and private research

institutions though the Energy Ministry. By the end of 2009, both funds have

accumulated around $250 million. The amount of the resources is still less than

necessary to solve the most important R&D challenges of PEMEX, and the results

of most of the projects financed so far are yet to be concluded; nonetheless, there is

no doubt that this unprecedented support is an important step in the right direction

to revitalize the once successful oil R&D sector in Mexico.

Legal Scheme: PEMEX is ruled by a complex legal framework in terms of the

range of processes involved. Its activities are regulated by the legal framework

applied to the energy sector through the Ministries of Finance, Public Function(formerly Comptroller General of the Federation), and Energy; and also is subject

to the guidelines established by the Energy Regulatory Commission (CRE) and the

National Hydrocarbons Commission (created in 2009). The state oil company is

further subject to environmental regulations of the Ministry of Environment and

Natural Resources, among others. Despite the Corporative Governance applied

since 2009 with the Energy Reform of October 2008, PEMEX faces numerous

formalities and procedures that do not apply to other oil or private companies,

generating additional costs because of the bureaucracy involved. The 2008 Energy

Reform gave the Mexican national oil company more independence from thegovernment in terms of financial issues, allowing PEMEX to borrow debt, to

modify its budget, and manage its working capital; however, it depends on the

national budget being approved by the Mexican Congress. If the government does

not have significant revenues, PEMEX could receive fewer resources for its

capital and current spending.

Difficulties in the Decision-Making Process: Petroleos Mexicanos has been

subject to constant changes in management and reorganizations resulting in an

environment that does not allow for an optimal decision-making process.18

Thepresence of diverse groups inside the company (both at the corporate as well as the

subsidiary levels) with competing objectives, often not aligned with those of the



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company, can lead to a major disconnect and dysfunctional outcomes.19 In some

cases, the relationships between the managers of these companies are not clearlydefined, lack transparency, and chain-of-command issues can arise. In other

situations, the employees do not have the financial incentives that possibly could

increase their productivity. Adding to the complexity of the situation is that

PEMEX is influenced by various groups linked to political parties, utilities, private

companies,20 and, most notably, with powerful labor unions.21 Furthermore, the

rotation of the PEMEX chairman position has affected the decision-making pro-

cess adversely. There were seven CEOs between 1998 and 2009,22 with the ac-

companying changes and cost of reshuffling old employees and staff members.

Moreover, PEMEX performance has been subject to the oversight of the Ministryof Finance, which is responsible for government expenditure management. With

the new makeup of the PEMEX Board of Directors, which was restructured with

Table 5PETROLEOS MEXICANOS (PEMEX): MAIN CHALLENGES IN UPSTREAM

Field Challenges

Cantarell d Management of wells with high gas-oil ratio and water volumesd Unconventional application of new technologies in drilling and well

completion to produce in areas of reduced thicknessd Studies and pilot tests for the implementation of enhanced recovery

processd Study of the gas injection in the zones invaded by water to increase the

recovery factord Development of fields adjacent to Cantarell such as Sihil, Kutz,

Kambesah, and Ixtoc to use the available infrastructured Implement new technologies for control of gas and water in the wells

Ku-Maloob-Zaap

(KMZ)

d Develop new fields of extra heavy oild Develop infrastructure for the management and distribution of

extra-heavy crude and the incorporation of reserves from the East

Campeche exploratory projectd Construction of infrastructure to meet commercial specifications in heavy

crude oil (dehydration and desalting)

Chicontepec d Continue with the development of infrastructure, in particular drilling

wells and acquisition and/or rental of artificial systems equipment

d Seismic and multi-dimensional acquisition to improve the physicalmodeling of rock

d Drilling unconventional wellsd Implementation of artificial production systems and methods for

maintenance pressure

Source: Petroleos Mexicanos, Informe de Avance del PE, 4th quarter of 2009, available at http://

www.PEMEX.com/files/content/Informe_peo_4t_2009.pdf, accessed April 12, 2010.



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the 2008 Energy Reform to incorporate four professional members, it is possible to

partially address this situation.

Crude Oil Production Outlook

PEMEX has a potential in prospective hydrocarbon reserves of over 52 billion

barrels of crude oil equivalent, located primarily in the Gulf of Mexico, where 55

percent of these resources are concentrated. The remaining reserves are situated

mainly in the Southeast and Chicontepec basins.23 The countrys total prospective

hydrocarbon reserves added to the total proven hydrocarbon reserves, illustrate the

high potential reserves in Mexico.

PEMEX faces the challenge of increasing its proved crude oil reserves, which

would necessitate the increased incorporation of oil reserves in shallow waters and

onshore, while intensifying activity in deepwater projects. Undertaking such

projects will result in having to tackle specific technological challenges, including

dealing with geological structures that are located at great depths or in complex

geologic formations. Additionally, the company is dealing with the problems of

availability of drilling equipment, of a loss of exploration skills that PEMEX had

in previous years when it was focusing on production activities, of being able to

apply additional funds for exploration projects (some of which require other in-

centives to encourage a rate of return similar to other projects), and finally, of theindispensable need to have qualified human resources.

Given the current level of depletion of Cantarell and the downward trend in

other fields, it is difficult to give credence to the view that the crude oil production

will increase if PEMEX cannot incorporate new crude oil developments or if it

does not have successes with its ongoing projects. Within this context, PEMEX

has stated its strategic plan via the following objectives: (1) reach a replacement

rate of 100 percent of proved reserves in 2012; (2) maintain a reserves to pro-

duction ratio above 10 years; (3) have an average annual oil production rate be-

tween 2.5 million and 3 million barrels of crude per day for the period from 2010 to2024; and (4) support the output of natural gas in the range of 6 billion to 7 billion

cubic feet per day of average annual production for the period from 2010 to 2024.24

In particular, PEMEX will have to exploit the complex fields and those con-

taining heavy oil as well as those in maturation stage. The characterization of such

fields is a central component of their exploitation, which demands technology,

strategic work in the fields, and comprehensive analysis (table 5). Furthermore,

PEMEX needs to develop appropriate systems (platforms and subsea systems) to

meet the operational requirements of fields located offshore, for instance, in

deepwater.The Chicontepec project has been the most important onshore alternative that

PEMEX has to compensate for falling crude oil output. This project has an



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estimated 40 percent of total Mexican hydrocarbon reserves (possible, probable,

and proven), but it contains just 3.4 percent of total proved reserves. The field has

a low recovery factor (5 percent) and its production costs are higher than either

Cantarell or the Ku-Maloop-Zaap fields. In 2010 the National Hydrocarbons

Commission and the board of directors of PEMEX recommended that this fieldshould be studied in greater detail before its development.25

A special element in the PEMEX strategy will be to convince the services

companies to produce crude oil and natural gas with the best technology available

and using the best practices. PEMEX will provide cash incentives for their per-

formance based on the 2008 Energy Reform; however, unlike the strictly service

companies, the international oil companies are interested in their own oil and gas

production.

Another critical element in PEMEXs strategy is improving the companys

overall skill basis, which involves having both talented and appropriate human

resources and improving its technology situation (either through adapting or de-

veloping technologies). Although PEMEX, as noted earlier, contributes funds in

the SENER-CONACYT Program and resources directly channeled to IMP, this

strategy does not involve an integral program in upstream activities.

Although, PEMEX achieved greater financial independence in decision making

with the 2008 Energy Reform, the tax regime and the availability of resources in

public spending are factors that potentially could limit the growth of its investments.

First, it will be very difficult for the Mexican Congress to pass another fiscal reformthat would reduce the taxes paid by PEMEX because the Mexican political parties

are already gearing up for the 2012 elections. Second, the possibility to direct more

investment into PEMEX will depend on the governments decision on how to al-

locate resources to other activities of public-sector spending, such as education or

security, rather than channeling it to the national oil company. Through 2011,

PEMEXs investment level will remain unaffected, reaching around $23 billion,

mainly due to the increase in refinery infrastructure and upstream energy in-

vestment. Finally, PEMEX is confronted with the task of reducing its leverage level

and operating expenses while maintaining an adequate income level. These financialelements are factors that could limit PEMEXs investment and operational expenses.

Conclusions

In recent years, Mexican crude oil output has fallen dramatically, a situation

attributable to a number of operational, technological, and financial factors as well

as a number of events outside of the national oil company, some of which are

related to fiscal policy and highly political in nature. PEMEX must confront theseissues in order to maintain its crude oil production and its export platform, which

has significant ramifications for Mexicos economy. We estimate that crude oil



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output in Mexico will remain at its current level in the medium term because no

new important fields have been found. Cantarell oil production will be able to

maintain close to current levels. Ku-Maloop-Zaap will not show further increases

in production. Efforts to revitalize mature fields and heavy crude fields are in

development, but additional oil production will be insignificant in proportion tototal oil output and the Chicontepec project is not expected to significantly in-

crease its production over the next two or three years (2010-2012) until they have

an adequate and reliable characterization of the oil field (as recommended by

the National Hydrocarbons Commission). An obstacle to increasing PEMEXs

crude oil production is linked to the political dynamics of the executive and leg-

islative branches, which have the ability to either reduce the tax burden that the

company is under or to generate additional fiscal stimulus to improve its perfor-

mance. If PEMEX is not supported, then the other alternative could be to open the

oil industry to the private sector. However, in a realistic political scenario, it would

be very difficult for the Mexican Congress to approve another reform of PEMEX

because, in 2011, the political parties will kick off the presidential campaign and not

even the right-leaning parties will want to risk their political capital in a country

where nationalism over the oil industry is alive and well after more than 70 years.

NOTES

1Daniel Romo, Sergio Galina, and Alfonso Perez, Could Mexico Be an Important Source ofUncertainty for Oil Markets? Recent Trends in PEMEX Investment Projects, The Journal of

Energy and Development, autumn 2005, pp. 125-37, and Sergio Galina, Daniel Romo, and Alfonso

Perez, Mexico in the Context of the 2003 International Energy Crisis, The Journal of Energy and

Development, spring 2004, pp. 159-69.

2The Cantarell field was discovered in 1976 and was considered the fifth largest in the world. It

consists of the Akal-Nohoch, Chac, Kutz, Ixtoc, and Sihil projects. In 2000 Cantarell provided 48.8

percent of total Mexican oil production and by 2004 it reached a peak of 63.2 percent, in part due to

PEMEXs enhanced recovery techniques involving nitrogen injection into the field, which began in

2000, through a plant constructed by the Netherland Sewell Company.

3Petroleos Mexicanos (PEMEX), Reporte de resultados financieros de PEMEX (PEMEX

Audited Consolidated Financial Report Statements) (Mexico City: PEMEX, 2010), available at

www.pemex.com, accessed on December 2, 2010.

4Petroleos Mexicanos (PEMEX), Reservas de hidrocarburos al 1 de enero de 2010 (Hydro-

carbon Reserves Report, January 1, 2010) (Mexico City: PEMEX, 2010).

5Since 2003, PEMEX has used the definitions of proved reserve issued by the Securities and

Exchange Commission (SEC) of the United States, which has resulted in a reclassification of re-serves in the Chicontepec area. Petroleos Mexicanos (PEMEX), Memoria de Labores (Mexico City:

PEMEX, 2003), p. 21.



19/20

6These areas are Perdido folded belt, Oreos, Nancan, Jaca, Nox-Hux, Temoa, Han, Holok, and

Lipax.

7Mexico, Comision Nacional de Hidrocarburos (National Hydrocarbons Commission), In-

version Total de PEMEX PEP por Activo y Proyecto (Total PEMEX PEP Investments: Assets

and Projects) (Mexico City: Comision Nacional de Hidrocarburos, 2010), available at

www.cnh.gob.mx, accessed on April 12, 2010.

8These mature fields are mainly concentrated in the southern region (56 percent). The most

important are the J. Antonio Bermudez field (which includes the Samaria, Iride, Cunduacan,

Oxiacaque, and Ogarrio projects, among others), the Tecomiacan Jujo field, and the El Golpe-

Puerto Ceiba field. Other mature fields are located in Poza Rica, Veracruz, Arenque, and Cantarell.

9Petroleum Intelligence Weekly, PIW 2008 Rankings, November 30, 2009.

10In 2008 the oil majors investments (ExxonMobil, Chevron, BP, Total and Royal Dutch Shell)

totaled around $27 billion.

11The Pidiregas initiative consisted of borrowing financial resources for investment projects.

PEMEX recorded the debt in its financial statements, but the government did not do so, considering

it as contingent debt.

12For budgetary and accounting purposes under the Standards and Government Accounting

Basics, the Mexican government recognized all Pidiregas financing and public debt in PEMEX as

public debt after January 31, 2009. This information is available on the PEMEX website, http://

www.ri.pemex.com/index.cfm?action=content&sectionID=12#Pregunta12, accessed on April 10,

2010.

13The debt rating of PEMEX is BBB on the Standard & Poors scale, available at http://

www.ri.pemex.com/files/content/PEMEX_RU_1209.pdf, accessed on May 12, 2010.

14The tax regime for PEMEX was adjusted in 2005, 2008, and 2009. In 2006, the Mexican

Congress approved the most important change in the companys tax requirements. It reduced

PEMEXs tax level and created new incentives to promote R&D in the oil industry, improved the

auditing process for the operations of the national oil company, and provided more financial

resources to PEMEX. Centro de Estudias de Las Finanzas Publicas (CEFP), El Re gimen Fiscal de

PEMEX-2006 (The Fiscal Regime of PEMEX-2006) (Mexico City: CEFP, 2006), available at

http://www.cefp.gob.mx/intr/edocumentos/pdf/cefp/cefp0312006.pdf, accessed on March 12,2010.

15Based on information from the Organization of the Petroleum Exporting Countries (OPEC),

Annual Statistical Bulletin (Vienna: OPEC, various years).

16Of the total PEMEX exploration and production purchases of materials and services between

2004 and 2009, four companies accounted for 18.9 percent of the total contracts: Schlumberger (8.7

percent), Halliburton (3.9 percent), Weatherford (2.6 percent), and Noble Contracting SARL (3.7

percent). These data were calculated based on information from PEMEXs Institutional database

available at www.pep.com, accessed on May 13, 2010.

17PEMEX signed general agreements of cooperation with international oil companies such as

Statoil, BP, ExxonMobil, Chevron Deepwater Mexico, Inc., Petrobras, Total, and Shell Mexique



20/20

Cooperation Technique, among others. These have been signed over the past decade (2000-2010),

with a spike occurring in 2007 and 2008. Petroleos Mexicanos (PEMEX), Memorias de Labores

(Mexico City: PEMEX, various years).

18To conduct their operations PEMEX has its main operating corporation along with four major

subsidiaries: PEMEX Exploration and Production, PEMEX Refining, PEMEX Gas and Basic

Petrochemicals, and PEMEX Petrochemicals. The company has subsidiaries abroad, including

PEMEX PMI, which is dedicated to international marketing of PEMEXs exported and imported

products, financial companies, aimed primarily at debt issuances backed by PEMEX, and it

maintains shares in firms involved in drilling and refining.

19Political parties are involved in PEMEX decisions, for example, the case of former PEMEX

Director Rogelio Montemayor, who supported the PRI presidential campaign in 2000.

20Meja Domnguez, Contratistas, Amos de PEMEX, Revista Ve rtigo, February 12, 2010, available

at http://www.periodistasenlinea.org/modules.php?op=modload&name=News&file=article&sid=6181.21PEMEX must give financial resources to its labor unions to help subsidize the construction of

houses, stores, schools, and provide other social services. Besides PEMEX contracts services with

the Union Labor, Periodico La Jornada, December 16, 2009, p. 22.

22Between 1998 and 2009, PEMEX went through a number of CEOs, including Adrian Lajous

Vargas, Rogelio Montemayor Seguy, Raul Munoz Leos, Luis Ramirez Corzo, Jesus Reyes Heroles

Gonzalez Garza, and Juan Jose Suarez Coppel.

23Petroleos Mexicanos (PEMEX), Las reservas de hidrocarburos de Me xico. Evaluacion al 1 de

enero de 2009 (The Hydrocarbon Reserves of Mexico. Evaluation as of January 1, 2009), (MexicoCity: PEMEX, 2009), available at http://www.ri.pemex.com/index.cfm?action=content&sectionID=

134&catID=12201, accessed on April 12, 2010.

24Energy Secretary, Estrategia Nacional de Energ a ( National Energy Strategy) (Mexico City:

Energy Secretary, February 2010).

25Comision Nacional de Hidrocarburos (National Hydrocarbons Commission), Proyecto Aceite

Terciario del Golfo. Primera Revisio n y Recomendaciones, (Mexico City: Comision Nacional de

Hidrocarburos, April 2010), and agreements of the board of directors of PEMEX, available at http://

www.pemex.com/files/content/pemex_acuerdos_814.pdf, accessed on October 10, 2010.


Documents

“Mexican Crude Oil Production: Recent Achievements and Perspectives,” by Daniel Romo Rico, Sergio M. Galina Hidalgo, and José Cruz Escamilla Casas