Mexico's declining oil output

Jul 01, 2010 02:00 AM

Mexico's declining oil output is a potential major challenge for the country and its neighbours, including the United States, because of its inevitable fallout in all sectors of the economy.
Already, because of uneven distribution of oil wealth and other factors, Mexico is riven by crime, drug trafficking and poverty-related issues that remained unsolved when the country produced more oil than it does now, figures showed.

The seventh-largest oil producer in the world -- the third-largest in the Western Hemisphere -- faces urgent tasks ahead to reverse the decline in production from the giant Cantarell field. Analysts cited latest statistics from Washington's Energy Information Administration that showed how the drop in Cantarell production could snowball into a major problem for Mexico.
The oil sector is a crucial component of Mexico's economy, the EIA said in its latest findings. While the sector's relative importance to the general Mexican economy has declined in the long term, the oilsector still generates more than 15 % of the country's export earnings.

More importantly, the government relies upon earnings from the oil industry, including taxes and direct payments from state-owned Petroleos Mexicanos, for about 40 % of total government revenues. Any decline in Pemex production has a direct effect upon the country's overall fiscal balance, the EIA said.
Mexico's total energy consumption in 2007 consisted mostly of oil, which comprised 55 % of the total. Dependence on gas consumption meant that natural gas accounted for 33 % of the total, while all other fuel types contributed smaller amounts to the country's overall energy mix.

Natural gas is increasingly replacing oil as a feedstock in Mexico's power generation which is welcome news as the country fights back on the effects of climate change. The downside is that Mexico is a net importer of natural gas, so the higher levels of natural gas consumption will likely lead to ever higher imports from either the United States or via liquefied natural gas from other suppliers.
As oil income appears set to decline, the prospect of Mexico having to spend more on gas imports is worrying planners. The problem is made more acute because Pemex holds vast natural gas reserves but is prevented by legal, economic or political barriers from better utilizing the deposits.

Of about 11.8 tcf of proved gas reserves, much is being used up by what critics call a misguided energy policy and dependence on gas for producing electricity. The latest published estimates said Mexico's gas consumption could be rising by nearly 7 % a year. Consumption in the electricity sector rose from 16 % in 1997 to 33 % in 2007.
Significant natural gas deposits in the ultra-deep waters of the Gulf of Mexico remain underexploited because Pemex lacks finances and technical expertise to develop the reserves.

Legal strictures in Mexico work against any attempt to attract outside investment. While in other Latin American countries joint ventures and partnerships are being explored at government-to-government or business-to-government level, in Mexico official barriers continue to discourage such developments.
Recent academic studies said the government's short-sighted energy policies could result in major economic challenges in the coming few years.

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