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OIL-MEXICO: Floundering in Deep Waters

Diego Cevallos

MEXICO CITY, Mar 28 2008 (IPS) - Billions of barrels of crude are lying under the deep seabed in the Gulf of Mexico, an area divided between Cuba, the United States and Mexico. But while the first two countries are approaching full commercial exploitation, the third is still trying to come up with a plan.

On the U.S. side of the Gulf, private companies have been working for more than 15 years at depths of between 1,000 and nearly 3,000 metres. In 2007, they extracted on average one million barrels per day (bpd) of crude and 3,900 cubic feet per day of gas.

Production is expected to increase sharply after 2011, when a 10-year commitment the United States signed with Mexico expires. The agreement was to refrain from extracting crude from the Western Gap, or "doughnut hole", an area of seabed where sovereignty had not been demarcated, off the coasts of Texas and the Mexican state of Tamaulipas.

On the Cuban side of the Gulf, crude extraction from several blocks granted in concession to the Venezuelan state oil company PDVSA, Spanish company Repsol-YPF and Brazilian oil firm Petrobras, among others, is to start this year.

Mexico estimates that there could be between 30 and 100 billion barrels of crude in its Gulf zone, an area of 575,000 square kilometres, at depths of between 1,000 and 3,200 metres.

In the last five years, the state oil monopoly Petróleos Mexicanos (PEMEX) has drilled only six exploratory wells, at 500 and 1,000 metres below sea level, but it has neither the technical know-how nor the financial resources to start extraction, nor to develop activities at greater depths.

The government of conservative President Felipe Calderón is concerned about the head start Cuba and the United States have gained, because part of the underwater reserves are in border areas, connected by caverns and underground lakes, so that it is possible that extraction on one side of a border may deplete reserves on the other side.

In April, parliament will discuss possible reforms at PEMEX and the future of exploration in the Gulf of Mexico.

Drilling an oil well in shallow water costs between 10 and 15 million dollars, while in deep water the outlay can exceed 100 million dollars. There is also the challenge posed by working at huge pressure, where modern robotic techniques are essential. Conditions for large-scale oil extraction in deep water can only be achieved 10 to 12 years after initial exploration work, which carries a high risk of failure, oil industry consultant David Shields told IPS.

In contrast to the results of studies by PEMEX and independent experts, the leftwing Party of the Democratic Revolution (PRD), the second largest party in parliament, sees no urgent need for exploring the Gulf seabed, and views that argument as merely an attempt to justify privatisation of PEMEX.

The left intends to organise mass demonstrations against attempts to alter state ownership of the 70-year-old PEMEX. In its view, all that is needed is to free the company from its obligation to hand over to the state an enormous proportion of its revenues, which have soared with the recent record prices for crude.

The windfall profits, amounting to 40 percent of the government’s current annual revenue, could legitimately be reinvested to reform and upgrade PEMEX and to expand its operations, the PRD says.

Over the past 20 years, PEMEX’s problems have become progressively more serious. In spite of the high prices of crude, which exceed official forecasts, it is forever in crisis, because every additional dollar goes straight into the federal coffers, and thence to state governments to make up for uncollected taxes.

Research studies warn that time is running out for Mexico, because its crude reserves on land and in shallow water will only last another 9.3 years.

Mexico is still one of the 10 largest oil producing countries in the world, but it has to import 40 percent of its gasoline and other fuels to keep its vehicles and industries running. The state’s expenditure on these imports is rising in parallel with oil prices.

The head of PEMEX, Jesús Reyes Heroles, says that oil drilling in the Gulf of Mexico by Cuba and the United States could harm this country unless it follows suit, or negotiates agreements to work together with its two neighbours. Potential depletion of Mexican reserves is a real danger, he says.

But PRD leader Andrés Manuel López Obrador says this argument "cannot be taken seriously."

To say that Mexico will lose its oil because of extraction under way by Cuba or the United States "is simply an excuse to persuade us to accept partnerships between PEMEX and foreign companies that supposedly have the necessary technology," said López Obrador.

"I shall not comment on the political rhetoric, but on the hard facts, and these indicate that a plan is urgently needed to exploit the Gulf and defend the oil and gas reserves in the border areas. This implies reforming PEMEX, a technologically backward company that is in crisis," another energy consultant, Marcelo Contreras, told IPS.

If deep water reserves are included, the future of Mexican oil could be extended to 26 years or more.

Mexico will have to contract or buy technology for operating in deep water, or establish joint ventures with foreign firms, private or state-owned, if it wants to extract the crude under its seabed, Contreras said.

Furthermore, PEMEX would need to undergo reforms so that it could work jointly with oil companies already operating in the U.S. and Cuban portions of the Gulf, he said.

Meanwhile, the Calderón administration has not explained what changes it proposes for rescuing PEMEX and facing the challenge of deep water drilling, although on this second point, spokespersons have talked about authorising a partnership with foreign state-owned companies like Petrobras.

But the authorities have repeatedly insisted that they have no plans to privatise PEMEX.

Lourdes Melgar, former head of the international division of the Energy Ministry, says that in addition to finding solutions for PEMEX and deep water exploration, this country should take urgent diplomatic action.

The goal would be to reach agreement with the United States about what will happen at the Western Gap when the moratorium on exploitation expires in 2011, and to negotiate terms for a similarly undemarcated offshore area in the eastern Gulf known as the Perdido Fold Belt, where U.S. companies are already extracting oil.

Negotiations would be aimed at defining the distribution of reserves outside the 200-nautical-mile boundary line, and how to proceed when the United States expands its operations, Melgar said.

These delicate issues, together with clarifying the future of PEMEX, will be at the heart of the debates in Congress over the coming weeks.

Meanwhile, national oil production is in decline. Between December and February, output fell from 3.1 to 2.9 million bpd, while exports of crude have dropped 14.6 percent, to 1.4 million bpd.

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