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Interview with David Shields—update on Mexico and oil

David Shields is a journalist and independent oil industry analyst based in Mexico City. Steve Andrews caught up with him yesterday and posed a few questions.

SA: Is Mexico’s well-being tightly tied to oil production?

David Shields: I think the oil industry is roughly 3-4% of Mexican GDP, which is not that high. It’s a much bigger proportion of tax revenues. So it’s very relevant. But oil prices have fluctuated wildly over time. There have been very bad years of Mexican oil revenues and Mexico has survived them. When you have a bad year you have to reduce your expenditures. But Mexico is a very troubled country and a very unequal country, so when there are oil revenues there is one part of society that seems to benefit and another large chunk that never seems to do so. So I think the answer to that is not a straight yes or a straight no, it’s a complex issue.

SA: A recent New York Times article asserts that Mexico’s basic problem is that a lot of it’s easy oil is “used up.” That’s a very imprecise turn of phrase, but do you generally agree with it?

Shields: I think a large amount of it is already used up. As a ballpark figure, roughly 70% of Mexico’s proven reserves have been consumed. So I think there is an awareness at Pemex that the future is about secondary oil recovery, enhanced oil recovery, and about finding more reserves, which is easier said than done. And also, peak water is an issue for Mexico going forward, but it’s an area in which we have no experience. And so it will be hard to do that unless the ways of working in Mexico are changed quite substantially which is political out of bounds right now.

SA: What’s the status of Mexico’s effort to create a new model for working with foreign oil companies?

Shields: For many years here, people have been thinking about models to use with international oil companies. But there is social and political opposition that is very strong. There is a perception among ordinary Mexicans that foreigners only come into to Mexico to take away our riches. That comes from the Spanish conquest centuries ago. So this is a long term barrier to international investors, particularly in oil. International investors have made their way into other areas of the economy successfully, but people here have some resentment, especially in banking. There are virtually no Mexican banks anymore; they’re all owned by Spaniards, by Americans, by Canadians.

Recent reforms in Mexico do have an intention to get international investors more involved in the oil industry. It’s possible IOCs would get involved, but probably the new reforms don’t go far enough to allow IOCs to get involved in Mexico because they do not allow any kind of sharing of revenues, sharing of production, and they don’t allow companies to book reserves. I think almost any IOC will tell you that a key condition for them to get involved abroad is for them to be able to book reserves wherever they work.

SA: Your oil minister Georgina Kessel has been quoted as saying that Mexican oil production will level off this year. Do you agree with that?

Shields: I don’t agree. Production may level off momentarily, either now or at different times in coming years, but I think the trend will continue to be downward. I basically agree with the analysis in the very good article by Roger Blanchard in your publication. He thinks Mexican oil production will fall by about 5% annually over the coming years. I think that is basically correct and what I would expect. It may be less or more than that in some years; it is not necessarily a linear thing.

I think the biggest problem Mexico has is that this is a country with some giant oil fields that are now either all mature or declining, with the exception of Ku-Maloob-Zapp. And KMZ is basically at its highest level right now, producing over 800,000 barrels a day. It’s not clear how long it will be able to keep up that production—maybe two years, and at best 5 or 6 years.—so there is a field that will soon join the decliners. And we have not had any major discoveries for a quarter of a century. Some of us believe that it could be feasible to find other major oil fields in Mexico, if you drill much further down or if you go further out into the Gulf of Mexico, but that hasn’t happened yet.

SA: Kessel has been quoted about the potential for 50 billion barrels in the deepwater Gulf.

Shields: That is kind of a generic assumption, but I don’t think it’s 50 billion in the deepwater. I think the 50 billion is what the government is calculating for undiscovered fields in Mexico in general. Some 29.5 billion is the estimate for what could be discovered in the deepwater. This is based on satellite studies and the seismic that they have.

SA: Do you have a sense for the time frame for when first oil might come from the deepwater?

Shields: It’s certainly unclear. The first deepwater oil would be at least 6 or 7 years down the road and it may be more. And first production may not be very high. To get major production from the deepwater, we’re talking about 12 years or more.

SA: The US EIA forecasts that Mexico’s production will decline by 600,000 barrels a day by 2020, at which point the country would become an oil importer. Do you agree with that view?

Shields: If we were to project the 5% annual decline rate mentioned earlier, production would probably not be very far away from that. There are many unforeseeable factors, but I would imagine that Mexico’s production by 2020 could be something like 1.8 or 1.9 million b/day. It could be lower.

The idea of importing oil has been a taboo in Mexico because we have been a large oil exporter. But political discourse is changing now. There is a growing awareness that even in the short term Mexico could possibly start importing light oil, regardless of our heavy oil exports. Some 20 or 30 years ago, Mexico’s output was largely light oil. Then Cantarell production moved up and Ku-Maloob-Zapp came in and they are heavy oil. Mexico’s refineries were built to process light oil and they haven’t really been revamped as they should have been. To get lighter blends for our refineries, we need to import some light oil. So in the near term we will import light oil even as we continue to export about 1 million barrels a day of heavy oil. But that figure will also gradually decline.

SA: Could you comment on the Chicontepec field? Right now it produces about 35,000 b/day.

Shields: The current administration has committed to this project and is still committed to it despite all the criticism and the problems. They went in without doing the prior studies to figure out what would be the right kind of exploitation to overcome geological problems that they have encountered. They are now doing the studies, testing technologies for Chicontepec. My opinion is that they went to the wrong place because historically, geologically, it has been such a challenge. If they had concentrated in proven basins in the southeast of Mexico, they probably could have done better.
Recent criticism is such that it is creating a negative feeling about the project that could be politically problematic going forward. Depending on the results over the next two years, the new government in 2012 will then make a decision whether or not to continue with Chicontepec. Unless results improve, I think they will not go on with it beyond 2012.

SA: At the ASPO conference, you laid out how Pemex gives different outlooks to different audiences—to the public vs. to the politicians in hearings. Is that still the case?

Shields: We are already sensing a change. To most people, the discourse was, “things are fine.” But most people, especially banks and international investors, realize that things are not fine. Their credibility has fallen before that audience, so they see there is no other way to treat that audience other than to give them the truth. The discourse had the intention of hiding or masking the decline of Cantarell. Well Cantarell has declined. So there is not much left other than to be honest about where things stand, though I think they are still being more optimistic than what reality would justify.

What do you think? Leave a comment below.

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