Wednesday, March 19, 2008

Mexican Oil Exports: Start Saying Adios!

Most folks are surprised to learn that the world’s second largest oil field is not located in Saudi Arabia. Nor even in the Middle East. In fact, it is located offshore Mexico, in the Bay of Campeche, Gulf of Mexico. This “giant” field, with an ultimate recovery which may reach 20 billion barrels, was discovered in 1976 by Rudesindo Cantarell. Sr. Cantarell was not a geologist, nor a geophysicist, but rather ... a fisherman. It seems that the natural oil seeps were playing havoc with his nets! PEMEX, the national oil company of Mexico, finally investigated it and the rest, as they say, is history.

Cantarell Field, as it turns out, is a real freak of geology. The porosity - or holes in the rock where the oil is located - is believed to be the result of a rubble pile from an asteroid strike which took place some 65 million years ago! And not just any asteroid strike: The asteroid which caused what has become known as the Chicxulub Crater, on the Yucatan Peninsula, is thought to have been 6 miles in diameter, and many scientists attribute this particular asteroid strike as being the “extinction event” that took out the dinosaurs! The impact energy from that strike is believed to have been some 2 million times that of the largest man-made explosion, that of the Tsar Bomba, a 50 megaton hydrogen device set off by Russia in 1961. Interesting stuff!

Cantarell was put on production in 1979. Production was 1.16 million barrels per day (1.16 MMBO/D) in 1981, and in 1995 production was still 1 MMBO/D. In 2000, PEMEX installed the world’s largest nitrogen injection project on Cantarell. In this process, nitrogen is stripped from air and injected into the upper parts of the reservoir in order to maintain reservoir pressure, and thus to increase or maintain production. Production increased to 1.6 MMBO/D in 2001, then to 1.9 MMBO/D in 2002, and then to 2.1 MMBO/D in 2003. By the end of 2005, however, production had returned to 1.9 MMBO/D. In January, 2006, a PEMEX press release unveiled their conclusion that Cantarell had peaked, and would decline down to a rate between 1.5 MMBO/D and 0.5 MMBO/D by the end of 2008. The attentive folks at the Wall Street Journal must have sensed the significance of this event, as they first ran this story on 2/9/06, and they published an update in August of 2006. Since this time it appears they have been revisiting the story about every February, with stories on 1/27/07, and most recently on 2/15/08.

As of the end of 2007, Cantarell was said to be producing 1.4 MMBO/D, or down some 600,000 BO/D (or 29 %) from its peak rate in 2004!

Why is this important? Well, Mexico is the 3rd largest exporter of oil to the United States. Out of about 20 MMBO/D of total consumption (maybe closer to 21 MMBO/D now), we import some 60 %, or around 12 MMBO/D. Mexico makes up some 1.4 MMBO/D of that 12 MMBO/D, or about 10 % of our total imports.

So, if Mexico can’t supply that oil - just get it somewhere else, right? Well it appears that there is little or no “spare” capacity in oil production RATE, worldwide. So, if we need 1.4 MMBO/D from Mexico but they can’t supply it, we either have to get that oil instead of someone else, or do without. The oil pricing or geopolitical implications of this scenario should speak for themselves.

To put the ultimate loss of 1.5 MMBO/D out of Cantarell into perspective, consider the massive tar sands in Canada. Even though these tar sand RESERVES are huge, their production RATE is limited by the QUALITY of these deposits. Namely, one has to shovel, melt or dissolve this tar out of the ground. Today’s total production RATE from these tar sands, after huge efforts and investments of billions of dollars, only totals about 1.1 MMBO/D. And, with billions more invested, by 2015 they believe the rate can be increased by an additional 1.9 MMBO/D. So, if there weren’t any other RATE declines going on around the world, and if demand was not increasing, then the Canadian tar sands might be able to compensate for the loss of Cantarell.

Put another way, if other declines ARE present around the world, and if there are not many provinces where the RATE is significantly increasing (such as with the Canadian tar sands), and if the increases from the tar sands can barely make up for Cantarell declines, then what significant capacity increases are available to make up for the other declines?

So, Cantarell Field is a "poster child" for Peak Oil concerns.

Most recently we wondered, “If Cantarell is down significantly, and other Mexican production is up some, but not enough to compensate, what must be making up the balance?” Namely, if production is down and Mexican domestic consumption is flat or up (as is normal in a developing country), then imports must go up, or exports must go down, in order to compensate. In other words, something’s got to give.

After a little investigation, we were troubled by the conclusions.

First, using a decline profile we derived from the Oil and Gas Journal/El Financero/Sener data, we projected Cantarell to be down to 1.204 MMBO/D by the end of 2008.

Next, we arrived at the projected 2008 oil production by adjusting the 2007 figure of 2.925 MMBO/D (average of 11/2007 & 12/2007, from Reuter’s, 1/21/08, UPDATE 3-Mexico oil output, exports wane in 2007) for the projected 2008 Cantarell decline. (In doing so, we are assuming little if any increase in production from other Mexican fields for 2008. Since 2004, those other fields have only been able to increase production and make up for about 100,000 BO/D of the 600,000 BO/D drop in Cantarell production.)

We are still using the Mexican oil import number (that is, imports of oil into Mexico) of 309,000 BO/D, from the world factbook estimate from 2004. It seems likely that imports of oil into Mexico over that period have dropped, as imports elsewhere typically have done.

Additionally, for 2008 we use the Mexican domestic consumption figure of 2.078 MMBO/D (also from the 2004 world factbook estimate). This seems too conservative, and unlikely. Namely, oil consumption increased in most developing countries over the 2004 – 2008 timeframe.

As to exports, the world factbook shows 2.268 MMBO/D was exported from Mexico in 2004. And the Reuter’s article lists 1.684 MMBO/D as the amount exported on an average basis, in 2007. That’s a drop of 584,000 BO/D, from 2004 though 2007! Where was this oil going, and what are those folks doing to replace about 600,000 BO/D over that interval?

In summary, the projected 2008 Mexican oil balance of -730,000 BO/D doesn’t appear to be too far out of line with past “balances” shown by our rough calculations, but the concerns are:

  • One would think that consumption in Mexico would be up, over the last 4 years.
  • It is unlikely Mexico is still importing as much oil as in 2004.
  • Exports show to be down 26 % since 2004! This is a significant trend!
  • The “balance item” is substantial enough in relation to US imports of Mexican oil that it could materially impact that US import figure.

Once again - conservation, alternative energy efforts and domestic exploration all must be significantly increased as it appears that the days are numbered as to getting a significant amount of oil from Mexico. More specific recommendations to follow in the next report.

Footnotes for chart:

  1. Prior to 2005, Cantarell produced at a flat rate of 2 MMBO/D for a short period of time. During this time the field was being injected with huge volumes of nitrogen for pressure maintenance.
  2. Mexican oil production has been widely quoted as 3.4 MMBO/D in 2004 – 2005, same figure also recently used in a Wall Street Journal (2-15-08) article.
  3. The Sener study, referenced in the recent El Financero newspaper article, in turn quoted by Oil and Gas Journal (2-7-08), listed specific declines for Cantarell for 2005, 2006, 2007.
  4. Cantarell 2008 ending rate based on the production projection derived based on decline rates quoted in El Financero article.
  5. Declines from Cantarell applied to total, initial rate in 2005, so we are assuming the other production in Mexico remains flat.
  6. same
  7. Imports from world factbook page, assumed flat.
  8. Exports from world factbook page, assumed flat until new data for 2007.
  9. Consumption from world factbook page, assumed flat. But usually consumption increases over time.
  10. Balance should be zero, represents errors in one or more estimates.
  11. Imports from Mexico into the US, from EIA page.
  12. Same as (11), but average for 11 months in 2007.
  13. From Reuter’s (1/21/08), “UPDATE 3 – Mexico oil output, exports wane in 2007”.

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