The Dallas Morning News
Tuesday, February 3, 2004

Mexican oil giant has mixed outlook

CEO optimistic, but budget, vulnerabilities could stall performance
By RICARDO SANDOVAL / The Dallas Morning News

MEXICO CITY The report card for Pemex for 2003 was largely positive. And for 2004, Pemex chief executive Raul Muñoz Leos predicted an increase in production and hinted at international alliances to look for new wells in deeper water in the Gulf of Mexico.

The state-owned oil monopoly, Petróleos Mexicanos, this week reported record production and total sales of about $60 billion in 2003 an encouraging performance that provided the government with a third of its federal budget.

"Despite the lackluster expectations that existed at the start of last year ... Pemex contributed in an important manner to the achievement of many national goals," Mr. Muñoz Leos said.

"We are on the right path," he added.

But enough questions remain about the current year to put a damper on that optimistic outlook, some analysts said.

Mr. Muñoz Leos cautioned that 2004 might be a difficult year, starting with what he termed an insufficient operating budget, authorized by the Mexican Congress.

And there are other factors clouding the picture for Pemex: the company's continued vulnerability to volatile world crude oil markets; below-par proven reserves; and lingering concerns about too much of Mexico's oil production coming from one massive oil field.

"Fundamentally, it is not clear that Mexico has as giant a potential for oil as Mexicans have been led to believe," Mexico City energy expert David Shields said after Mr. Muñoz Leos' hourlong presentation. "There's a question if Mexico can sustain this level of production, and this level of exports."

George Baker, a Houston-based energy analyst, said world oil prices are a major question mark. Mr. Muñoz Leos' prediction of $20 a barrel for Mexican crude in 2004 is "perhaps too optimistic," he said.

In 2003, Pemex received an average of $24.78 per barrel for its crude oil a high-water mark in a year when market volatility was fueled by the war in Iraq.

The company produced 3.3 million barrels of crude a day in 2003, up from 3.1 million the previous year. And it expects to pump an average of 3.45 million barrels in 2004.

In 2003, about 1.8 million barrels a day were exported, primarily to the United States. Total exports earned Pemex $16.8 billion last year, a marked increase over recent years.

But because of uncertainty over oil prices in the coming months, some analysts said, Pemex may find it tough this year to match the 2003 sales results.

While instability remains in the Middle East, production probably will increase from other major oil suppliers such as Russia, Venezuela and Nigeria, enough to keep prices below last year's level.

Proven reserves

In the long term, some analysts said, Mexico is running behind in its proven reserves, which declined about 4 percent in 2003, and in developing new oil fields that can compensate for the expected decline of its huge Cantarell field, which now produces nearly two-thirds of Mexico's oil.

The jewel of Mexico's energy industry was discovered in the 1970s at the Gulf of Mexico's southern edge. It ranks as one of the largest oil strikes of all time. But it was expected to begin an inexorable decline this year, according to independent experts and Pemex itself.

As part of Pemex's search for new oil sources, Mr. Muñoz Leos said, the company will invest $10 billion in exploration in 2004. Some will go for contracts with international experts who can help in developing potential fields in the deeper waters of the Gulf of Mexico. Mr. Muñoz Leos said that type of exploration and drilling is right now beyond Pemex's capacity.

In 2003, Pemex, on its own, found 41 fields that may one day yield new crude for the company, Mr. Muñoz Leos said.

But both Mr. Baker and Mr. Shields said that without energy sector reforms and opening Pemex to greater participation by foreign interests it will be hard to attract big companies.

Most companies insist on sharing the wealth of the oil strikes, but Mexican law allows only service contracts where foreign firms get a flat rate for their services.

International partners

There's also the continued fear that without significant energy sector reforms, major international oil companies will remain uninterested in helping Pemex develop its untapped natural gas reserves.

The country still imports significant quantities of natural gas. Last year, Pemex boosted domestic output and took its first steps toward attracting more private-sector investment to gas production.

"Still, there were qualitative gains for Pemex last year that bode well for the future," Mr. Baker said, identifying a jump in natural gas production to 4.5 million cubic feet per day as "an important trend that reverses what had been a serious, declining trend for the company."

"Despite persistent, consistent criticism of its contracting practices for natural gas," Mr. Baker added, "Pemex was able to hold tenders and assign four major contracts, which answered one pending question: If international energy companies can, today, do business in Mexico on profitable terms?

"The answer is 'yes,' and that should be credited to the work of Mr. Muñoz Leos and his team."