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MEXICO’S LOW OIL PRODUCTION PROMPTS FOREIGN PERMITS – FIRST TIME IN 78 YEARS

 30 Jul 2014

Petroleos Mexicanos (PEMEX) cut its output forecast to its lowest in at least 24 years, as the output of its mature oil fields are shrinking faster than it had previously expected. PEMEX is counting on a landmark law enacted last year that opens Mexico’s energy industry to private/foreign competition for the first time since 1938, in an effort to help stem declining output. The entrance of foreign oil exploration, development, and production Corps such as Exxon Mobil Corp. and Chevron Corp. could bring in $50 billion of annual private investment by 2020, According to Gabriel Casillas chief economist at Mexico’s “Grupo Financiero Banorte”. The questions not yet answered are if/how would these foreign oil concerns be compensated. The devil is in the details.

PEMEX’s CHIEF OF EXPLORATION AND PRODUCTION, GUSTAVO HERNANDEZ said: “We have been working to review the declines of each of our fields that contribute to national production…In the recent review we obtained a better idea of the declines of the fields and have adjusted the production expectation downward.” Hernandez’s concerns reflect the fact that the production forecast was recently lowered to 2.41 million barrels per day (bpd) from a prior projection of 2.5 million bpd – the lowest annual output since 1990, when PEMEX produced 2.55 million bpd.

PEMEX CFO MARIO BEAUREGARD SAID on 20 Jul 2014: “We want to reverse the decline in our oil production and need to invest more money in some of our projects…PEMEX has identified potential partners, and plans to move very fast in establishing joint ventures once additional energy legislation is approved…We must redefine our future strategy as a value generating operator, and not as a state monopoly…he quoted PEMEX CEO Emilio Losoya: “PEMEX faces the biggest challenge in its history as the company transitions from a government monopoly to a competitive entity”…PEMEX’s 2015 capital expenditures budget will be an estimated $29 billion, up from this year’s $27.7 billion”. Not a significant increase, given the dire situation of PEMEX.

The passage of Energy Reform legislation that sets a framework for the issuance of oil and natural gas contracts to foreign interests is being debated by the Mexican Congress (as of the last week of Jul 2014) by lower house committees after being approved by the Senate on 21 Jul 2014. The final bill will be sent (If/when) to President Enrique Pena Nieto for approval. The legislation would allow foreign oil companies to help produce an estimated 113 billion barrels of untapped Mexican crude. The company produced paltry average of 2.45 million bpd in the second quarter of 2014.

Thanks to Bloomberg for their 25 Jul 2014 story.

OUR TAKE AND COMMENT

SO HOW DID MEXICO GET IN THIS QUANDARY?

THE STORY GOES BACK TO 1936, when there were strong rumors of world war, and demands of oil and Nat gas in Mexico were relatively low, and were being met by foreign oil developers/exploration Corps, principally from the USA. Even so, “Gasolina Americana” was being imported and sold in Mexico. But… That year, then Mexico’s president Lazaro Cardenas and his government, decided that Mexican oil was a “Natural patrimony” that belonged to all Mexicans; so, that year Mexico enacted laws that in essence said: NO MAS! to all foreign interests in their oil/gas industry. The law was called “La Expropiacion Petrolera”, and wildly approved by most Mexicans. In essence, all foreign Corps were ordered to leave the country, leaving all equipment/refineries? etc. where it was (en-situ), and to cease/desist in all claims against Mexico. That was 78 years ago.

PEMEX IS BORN – Like in all bureaucracies friends of the Cardenas regime found a “bird nest on the ground” and were quick to seize the opportunity for prosperity and even riches. As time passed PEMEX grew, and developed a notorious lack of transparency in its dealings and employment. Soon its governance became “compartment-ized”, and turfs zealously defended. No one, especially those in government, paid much attention (oversight), and whistleblowers were quickly ostracized (dismissed and blackballed). There always was plenty of room for paternalism, and nepotism that survives today. Over the years, all its dependencies began to blame one another for their lack of efficiency and shortfalls. Such is the destiny of most monopolies, especially true /understandable when one considers a monopoly that controls all aspects of production (forward to the customer), from Exploitation to refineries (in many diverse parts of the country), to PEMEX gas/oil/ lubricants “service stations”.

PEMEX NEVER FORESAW criminality, sabotage, and improperly trained personnel in their refineries, and oil wells. During the last twenty years or so, there has been a rash of “MILKERS”. These are well financed and organized bands of oil/gasoline thieves who under the cover of night install pipes to/from existing PEMEX underground pipes conducting crude/gasoline to refineries/markets. Thieves normally build what appears to be a factory building a few hundred meters away from the duct, and quietly fill “pipas” oil transport vehicles. It is rumored that most such stolen oil quickly finds buyers from the USA, who of course buy it at discount prices, and everybody profits from Mexico’s patrimony. The worst part is, such criminals often make connection errors (taps) at the PEMEX pipe, and that has resulted in many hard to control fires in distant places. POTENTIAL SABOTAGE has been reported at several refineries. There are those who claim it is done in revenge by workers who feel overworked and underpaid. Hard to prove either way, but losses are extreme both in equipment and often human lives. It is not hard to see how criminality has had a negative effect on overall production; Additionally, there is a steady stream of PEMEX fuel transport trucks (PIPAS) accidents, and fuel spillages, but that is a never ending story.

BACK TO THE POLITICS OF OIL EXPLORATION and EXPLOITATION. Approval of the energy reform law is far from a “done-deal” in Mexico (as of Jul 2014). The Mexican Senate has approved such a measure, but the details are not yet known. It is in the Mexican Congress where it the bill faces strong opposition by some of Mexico’s five (5) parties. At issue are the details. The devil is always in the details. Some Diputados (Congressmen/ladies).are still at odds with “selling our patrimony”; that aside some realize that to attract foreign capital in a reasonable way; different contractual agreement should be made, according to the level of risk taken by the foreign investors. Such rationale goes something like this:

Pay for Services Rendered to Mexican equipment. Question arises: how much? per hour, per day?, per year? per occurrence?. Contractual language is of of the essence when contracting for millions of Pesos, and multi-year terms. “Time and materials” is an invitation to the foreign capitalists to steal.

Exploration / Exploitation in Known Production Fields. Such work normally requires less capital risk, but may require specialized equipment and know-how to do profitably. Foreign venture capital may require a negotiable share of the product. Perhaps an incentive fee for good results.

Deep-Water Exploration/Exploitation. Is a very risky capital venture, and one of the reasons Mexico does not want to even try it. Deep water exploration rigs are always available, but at great cost and risk to the operator and to the environment. Remember the BP Fiasco ? The environmental and legal repercussions have not yet ended after several years of litigation. It is thought Deep-Water Exploration/Exploitation negotiations may entail a minority share of the products going to Mexico.

Mexican Senate acts like it is a done deal, and as though they are certain President Pena Nieto will approve any such laws. It is hard to deduce why that is so. Perhaps because President Nieto already made a trip Davos, Switzerland, see:>energymaters.com/?p=1429 and there may be something for many other high-profile Senators who support the proposal.

It seems strange that  Mexico, and many other nations, now show a revived interest in oil/gas exploration and exploitation, no though is given to the fact that all hydrocarbons are considered the cause of the Climate Change Paradox, and will no doubt accelerate sea level rise, and many other “un-natural” climatic events that threaten our planet. It is Renewable energy (green energy” we should be planning for, and how to best improve the technology and application as best can in all energy deficient countries.

Edward Oliver Gonzalez,

Your Friend in Texas.

e-mail >gonzedo@yahoo.com

P.S. The author lived in northern Mexico during  his early years, now lives 150 miles north of the Nuevo Laredo Mexico border, and keeps up with Mexican TV News. Mexican TV provides very good political coverage.  Like most modern democratic governments, it sometimes seems like a three (3) ring circus.  It can be interesting !, if one is so inclined. We have a two (2) ring circus in the USA, where frank political discourse is seldom heard.

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July 30, 2014 at 1:42 AM Comments (2)