For many past posts, I emphasized difficult times ahead for the US and other oil importing countries as oil production declines. But falling production will also hurt many producers who depend on oil exports for government revenue. The situation is extremely severe in our southern neighbor, Mexico.
Mexico’s oil production [including crude oil and natural gas liquids] peaked in 2004 at just over 3.8 million barrels per day (Mbd). Since then, decline has accelerated from 1.5% in 2005 to ~8.8% this year. With its production at less than 3.2 Mbd in 2008 (17% below the ’04 peak), 10% higher domestic consumption since 2004 has cut net oil exports almost in half. During the last four years, higher oil prices have masked this production decline by keeping revenue at historically high levels ~$90 billion per year. This revenue has become a crucial source for ~40% of Mexico’s federal budget. But lower production and higher domestic consumption in the years ahead could quickly make oil export revenue completely disappear.
Using a conservative estimate that domestic consumption will increase by 1.5% per year and oil production will fall 5% per year, within five short years Mexico would lose its status as a net oil exporter. As a result, their federal budget would have to be slashed more than 33%.
Claims vs. Reality
PeMex, Mexico’s national oil company, has vowed to stabilize its crude production at 3 Mbd by 2012. But their record in projecting oil production makes me skeptical they can achieve such a feat. Just this past May, PeMex chief Jesus Reyes Heroles said crude oil production would turn around to average 3 Mbd by the end of 2008. Instead, production fell further to its current level ~2.76 Mbd.
Much of the reduction in production comes from huge declines in its biggest field, the offshore super-giant Cantarell. After peaking in 2004 over 2 Mbd (~65% of Mexico’s output), Cantarell now produces only .9 Mbd (falling 32% in 2008 alone!). It is estimated by PeMex officials that Cantarell production will fall another 25% to ~.7 Mbd over the next year and some further beyond that.
Looking through the Wiki oil megaprojects database, there are some projects that can help offset Cantarell declines. The Ku-Maloob-Zaap oil field which began production in 2005 is scheduled to hit peak production of .5 Mbd in 2010 (an increase of more than .1 Mbd from today). One field they added this year is scheduled to peak at .2 Mbd in 2029 and another they plan to add next year should peak with .173 Mbd in 2012. PeMex has not announced any additions for 2010, and only has two small fields planned for 2011 and 2012 (at .05 and .07 Mbd) thus far. Based on current projects announced, production gains do not appear strong enough to offset declines over the next few years.
Mexican President Felipe Calderon passed a bill in October that allows PeMex to partner more with foreign oil firms to try to increase discoveries and production in the Gulf of Mexico. They believe Gulf discoveries may more than double current reserves numbers in the years ahead. But production from such deepwater fields generally takes at least eight years. So pinning any oil export hopes on new discoveries seems to be an overly optimistic exercise.
Mitigation Options
The one route I see that could preserve oil export revenue would be efficiency and conservation measures to cut domestic demand growth. Stabilizing demand at its 2008 level would generate tens of billions in revenue in 2014 and 2015. On the flip side, if demand growth increases faster than 1.5% per year or production declines continue at the 2008 level ~8.8% per year, tens of billions of dollars could be lost from potential 2012 and 2013 earnings.
One bright spot in Mexican hydrocarbon production is an increase in the production of natural gas. Natural gas can be used to substitute oil for many heating, electricity generation and even transportation applications. Such a switch can help to put a lid on domestic oil demand. It can also, along with an increase in solar and wind deployment, lower the carbon intensity of Mexico’s economy to help the country prepare for a post-Kyoto international regime that includes the participation of all major emitting countries.
Bottom Line: While Mexico will benefit from oil exports for at least the next three years, federal budget planners must reduce their dependence on such funds. Even if the price of oil increases toward records again beyond 2010, export earnings are poised to fall dramatically from the $90 billion level they have enjoyed these past few years. Efficient oil consumption and substitution to natural gas and renewables at home can help preserve export earnings, but some federal budget cuts look inevitable.
Tags: budget, climate change, exports, Mexico, Oil
Mexico should take advantage of the large areas suitable for solar energy, such as solar thermal. If our southwest has big potential for solar, the same is true across the border.
It does look like Mexico has solid solar potential. Here’s hoping solar costs (polysilicon, etc.) fall in the months and years ahead to help them tap solar cost-effectively.
Onwards to a sustainable energy future-