World's second-largest oil field output suddenly declines.....article

Posted on Tue, Jul. 25,


MEXICO
Massive oil field in decline

Production at Cantarell, the world's second-largest oil field, has
begun to dwindle, threatening to crimp the
world's oil supplies even further.

BY MARLA DICKERSON
Los Angeles Times
MEXICO CITY - Output at Mexico's most important oil field has fallen steeply
this year, raising fears that wells there that generate 60 percent of the
country's petroleum are in the throes of a major decline.

Production at Cantarell, the world's second-largest oil complex, in the
shallow Gulf of Mexico waters off the shore of Mexico's southern Campeche
state, averaged just over 1.8 million barrels a day in May, according to
recent government figures. That's a 7 percent drop from the first of the
year and the lowest monthly output since July 2005, when Hurricane Emily
forced the evacuation of thousands of oil workers from the region.

Though analysts have long forecast the withering of this mature field, a
rapid demise would pose serious challenges for the world's No. 5 oil
producer. The oil field has supplied the bulk of Mexico's oil riches for the
last quarter of a century, and petroleum revenue funds more than a third of
federal spending.

FALL EXPECTED

''Cantarell is going to fall a lot, and quickly,'' said independent
consultant Guillermo Cruz Dominguez Vargas, a former executive with Mexico's
state-owned oil monopoly, Petróleos Mexicanos, known as Pemex. ``I can't
imagine the strain on this society if there is nothing to replace it.''

It would also be bad news for the United States, for which Mexico is the No.
2 petroleum supplier behind Canada. And it could exacerbate tight global
supplies that have kept oil at record prices.

The world's great ''elephantine'' fields have already been bagged, forcing
companies to hunt in remote areas for smaller amounts of oil to feed
burgeoning demand, according to Houston energy analyst William Herbert.

''Unfortunately, the era of low-hanging fruit . . . has really run its
course,'' said Herbert, co-head of research at Simmons & Co. International,
a Houston-based energy investment bank. He put the odds of finding another
field the size of Cantarell in Mexico or anywhere else at ``slim and none.''

Exceeded in size only by Saudi Arabia's huge Ghawar field, Cantarell is a
giant that is past its prime. Monthly production peaked in late 2004 at 2.1
million barrels a day and has fallen more than 15 percent since then.
Experts agree it has nowhere to go but down.

The multibillion-dollar question is just how quickly Cantarell will lose its
productive capacity and whether Pemex will be able to coax more oil out of
existing fields to take up the slack while it searches for new deposits.

OFFICIALS QUIET

Pemex would not respond to requests for an interview. But officials publicly
have downplayed prospects of a swoon in the press and in official releases.
In fact, the company has projected that its overall oil output will increase
slightly in 2006 to an average of 3.4 million barrels a day from 3.3 million
daily last year.

The company has done extensive maintenance on Cantarell to keep the oil
flowing. In December 2005 Pemex predicted that the field will produce an
average of 1.9 million barrels a day in 2006, a 6 percent drop from 2005,
followed by double-digit annual declines that will reduce average production
to 1.4 million barrels daily in 2008.

Other studies aren't so optimistic. Sea water is threatening to swamp the
wells of Cantarell as the field's pressure diminishes, a symptom of old age
that makes it tougher to extract the remaining oil. Pemex's own worst-case
scenarios leaked to Mexican newspapers show production plummeting to about
520,000 barrels a day by the end of 2008 -- a 71 percent free fall from May
levels in less than three years.

Mexico City energy analyst David Shields said the swift drop over the first
five months of 2006, and conversations with Pemex insiders, have convinced
him that prospects at Cantarell are worse than officials will admit
publicly. June figures for the field won't be available until later in July.
But Mexico's overall crude production fell in June, the third consecutive
monthly decline, making it unlikely that Cantarell staged a revival.

PEMEX PROBLEMS

Whether Cantarell's slide prompts changes in Mexico's oil sector remains to
be seen. Critics have long lambasted state-owned Pemex as a hotbed of
inefficiency and corruption that officials have treated more like an ATM
than Latin America's largest company. But record oil prices have lessened
the urgency to overhaul the company.

Despite record sales of $86.2 billion last year, the company lost $7.1
billion after taxes. It's the most indebted oil company in the world,
carrying a staggering $50 billion in loans on its books. Pipeline leaks and
explosions are commonplace, in part because the monopoly lacks sufficient
funds for basic maintenance. Mexico buys a quarter of its gasoline from
foreigners for want of refining capacity.

Mexico nationalized its industry in 1938 in response to decades of perceived
exploitation by foreign oil interests. The belief that ''el petróleo es
nuestro'' or ''the oil is ours'' is deeply embedded in the national psyche.

Cantarell is a particular source of pride. Named for a Yucatan Peninsula
fisherman, Rudecindo Cantarell, who first noticed crude bubbling to the
surface of the Campeche Sound in 1976, the field vaulted the nation into a
global oil power.