[lbo-talk] Output Falling in Oil-Rich Mexico, and Politics Gets the Blame

Yoshie Furuhashi critical.montages at gmail.com
Fri Mar 9 23:00:22 PST 2007


What looks like the problem of "peak oil" to some is in reality the political problem of mismatch between who has oil and who has investment capital and advanced technology, in the context of rising domestic oil consumption on the part of oil producers, NOT a geological problem of running out of recoverable oil (which we WON'T any time soon). This is actually a very politically interesting and important problem, at the heart of imperialist thought today, but "peak oil" theory confuses everything and turns attention of leftists away from the real problem. -- Yoshie

Mexican Oil, American Needs: <http://graphics8.nytimes.com/images/2007/03/08/business/0309-biz-PEMEX.gif>

<http://www.nytimes.com/2007/03/09/business/worldbusiness/09pemex.html> March 9, 2007 Output Falling in Oil-Rich Mexico, and Politics Gets the Blame By ELISABETH MALKIN

MEXICO CITY, March 8 — The KU-S oil production platform off the coast of Ciudad del Carmen, with its 10,000-ton tangle of yellow and red tanks and pipes, would seem the natural product of three years of soaring energy prices. The newly installed platform certainly is the face that Mexico's state oil monopoly, Pemex, would like to show off.

But Pemex is in trouble. Its production and proven reserves are falling, and it has no money to reverse the slide. Mexico is the second-largest supplier of imported oil to the United States, after Canada, but its total exports are slipping. If the company continues on its current course, Mexico may one day have trouble just keeping up with rising demand at home.

The evidence of its predicament is clear not far from the KU-S platform. On the horizon, some 50 to 60 miles into the southern Gulf of Mexico, aging rigs billow flames and black smoke over the waters as they burn off the natural gas they are unable to process.

The major reason that Pemex's prospects are so poor, energy experts agree, is government interference. The Mexican government, which expropriated the oil industry in 1938, depends on Pemex to finance its budget. Last year, sales at Pemex (its full name is Petróleos Mexicanos) reached $97 billion. But $79 billion of that went to the government, Pemex's chief, Jesús Reyes Heróles, said last month. That accounted for almost 40 percent of the federal budget.

Government interference is only part of the story. Pemex has been hamstrung by years of short-sighted management aimed at extracting the most cash for the government treasury — Mexico's president and Congress must approve the company's budget, its output, investments and exports each year. By law, Pemex is closed to any outside investment, shutting it off from private capital and expertise.

In addition, Pemex has not reinvested enough for decades and, because it faces no competition at home, has lagged behind many of the industry's technical advances. Its labor union has locked it into rigid work rules and siphoned off hundreds of millions of dollars for unexplained benefits. And that does not even touch on the widespread corruption and waste.

"Inside Pemex, I think they have creative solutions," said Amy Myers Jaffe, an energy analyst at the James A. Baker III Institute at Rice University. "They know what they want to do. How do you get that solved within the politics of Mexico?"

President Bush is scheduled to visit Mexico Monday and Tuesday, and oil is likely to be on the agenda. In comments to Latin American reporters this week, Mr. Bush mused that Mexico's president, Felipe Calderón, should consider private capital to expand Pemex production. The comments ruffled Mexican sensitivities over national sovereignty of its oil resources.

Over the last five years, Pemex has spent about $50 billion, mostly borrowed, to pump more and more oil and gas. "It should have spent much more on exploration so that it wouldn't be in the situation it is in today," said Adrian Lajous, who led Pemex in the 1990s. "It was a drive to generate short-term revenue for the government."

For all that spending, said George Baker, a Houston analyst who publishes a newsletter covering the Mexican oil industry, Pemex did not get much. "In the end, the results were very weak. You didn't build a new refinery. You didn't find more oil."

Mexico, the fifth-largest oil producer in the world in 2005, is sitting on tens of billions of barrels of untapped oil reserves. But much of that is in the deep waters of the gulf, not far from where American companies have announced discoveries. Pemex has neither the money nor the expertise to get at the oil.

Its biggest field, Cantarell, in the shallow waters of the gulf, is one of the world's richest. That field used to account for about 60 percent of Mexico's oil production, but has gone into a sharp decline. Production at Cantarell fell 13.5 percent last year, and it will fall another 15 percent this year, Mr. Reyes Heróles said recently.

The decline at Cantarell pushed Pemex's output down from its peak of 3.4 million barrels a day in 2004 to 3.26 million last year.

At the same time, Pemex's proven reserves of crude oil have fallen to 11.8 billion barrels at the end of 2005 from 15.1 billion barrels at the end of 2002.

Mexico's nationalist energy policy has closed off the option that most cash-starved national oil companies have used — opening up some production to joint ventures with foreign companies.

Any debate about how to fix the industry quickly becomes snarled in Mexico's passionate oil politics. The official history celebrates the government's expropriation of the oil industry as a heroic act and recalls how ordinary Mexicans donated their jewelry to pay for "their" oil. In fact, state control of the industry is enshrined in Mexico's Constitution.

Even so, there is more agreement than ever before that the government has to rethink the way Pemex is run.

President Calderón has been vague about his government's plans three months into his presidency. His conservative National Action Party favors private investment.

The left and Mexico's old-guard nationalists oppose private investment, arguing that it is a cover-up for creeping privatization. That suspicion seems to resonate: a broad public opinion survey last year by CIDE, a university in Mexico City, and the Mexican Council on Foreign Affairs, found that 76 percent of Mexicans oppose foreign investment in oil.

"It needs to hurt like hell before you can have an intelligent discussion," said David Shields, a Mexico City energy analyst who has written a book about Pemex.

Graco Ramírez, a senator from the leftist Party of the Democratic Revolution, said Mexico was already feeling the pain. Other than the sale of any part of Pemex, he said, nearly everything else is on the table "because of the seriousness of the country's energy situation."

Shifting from the party's line, Mr. Ramírez, who is the secretary of the energy commission in Mexico's Senate, said there may be room for national oil companies — he singled out Statoil of Norway, Petrobras of Brazil and Petróleos de Venezuela, or PDVSA — to work with Pemex on deepwater exploration and a few other areas.

Mr. Calderón has mentioned two of those companies as well. In a visit to inaugurate the KU-S platform last week, the president announced the expansion of an existing technology-sharing agreement with Petrobras. Two days later, Pemex announced an emissions-reduction agreement with Statoil.

Political analysts warn that Mexico's fractious politics could delay serious change. Another problem is that the government would have to collect more taxes elsewhere if it took less from Pemex. "Some reform of the laws governing Pemex's operations seem almost certain to take place in the next 18 to 24 months," Pamela K. Starr, an analyst at the Eurasia Group in Washington, wrote in a report released Wednesday. But, she added, "These reforms will be limited in scope."

For now, Pemex is doing what it can alone to make up for lost time. In a beige-carpeted glass-walled research center that Pemex opened in Ciudad del Carmen six months ago, scientists and engineers study 3D images of the geological layers below the gulf's deep waters to determine where they will put exploratory wells.

"I think that this is the future or at least part of the future," said Pemex's director of exploration and production, Carlos Morales Gil.

Even under the best of circumstances, though, Pemex cannot expect to see deepwater oil before 2014.

For now Mr. Reyes Heróles has more immediate concerns. He has said that Pemex needs to spend some $8 billion to $10 billion a year over its current investment budget of about $14 billion.

He doesn't have it.

The company's finances are too "delicate" to keep borrowing, he said at a news conference last month.

It will cost about $15 billion a year just to enhance reserves and keep output of crude above three million barrels a day, he said. The company is developing new fields to help make up for the decline at Cantarell. One of those is the adjacent field of Ku-Maloob-Zaap, where the new KU-S oil platform will produce 250,000 barrels of crude a day.

Private analysts are cautious. "We don't see even in the most optimistic model that they could manage to reverse the total fall in production," said Alejandra León, an analyst at Cambridge Energy Research Associates in Mexico City.

Outside of exploration and production, the rest of Pemex — its refineries, its pipelines, its money-losing petrochemical plants — have been ignored. Mexico now imports about 30 percent of its gasoline from the United States. A series of fatal accidents a couple of years ago revealed the perilous state of its pipeline network.

For years, the natural gas that was pumped up with the Cantarell crude was flared off because Pemex was unable to process it. "It's like lighting dollars on fire," said Kenneth B. Medlock III, who is also at the Baker Center at Rice University.

Now Pemex is trying to make use of that natural gas and develop onshore reserves. The KU-S platform will process gas, not flare it, for example.

Pemex's debt has climbed to about $53 billion; its fast-growing pension liabilities have reached another $40 billion.

Pemex's former chief executive, Luis Ramírez Corzo, estimated last November that Pemex could trim $2.5 billion from its operating costs. Labor costs for workers who had not enough work to do or none at all cost the company almost $1 billion of that, he said.

And in a nod to the allegations of corruption at Pemex, Mr. Calderón named a new audit committee last month.

Mr. Lajous, who ran Pemex in the 1990s, said, "The union is one of the key political complexities of what you have to deal with."

Some 100,000 of the company's 148,000 employees are members of the union, and the union has five representatives on Pemex's board.

The union leader in charge since 1993, Carlos Romero Deschamps, refused a request for an interview.

There are bright spots, though. "Pemex people are very good," said a foreign oil executive who asked not to be identified because of the sensitivity of the debate in Mexico. "There are professionals with lots of experience."

Ms. Jaffe of the Baker Institute agreed. "The problems of Pemex," she said, "are not technical. The problem is political."

And for all its troubles, Pemex is still a great source of pride to many Mexicans. Its workers are some of the best paid in Mexico, firmly in the middle class.

"It's one of the best companies in Mexico," said Israel Cervantes, 28, who has been working on the rigs for three years and takes home $2,200 a month. "You can do all right by your family here."

Is Iran Facing an Energy Revolution? <http://graphics8.nytimes.com/images/2007/02/12/business/0213-biz-ENERGY-WEB.gif>

<http://www.nytimes.com/2007/02/13/business/13energy.html> February 13, 2007 West Adds to Strains on Iran's Lifeline By JAD MOUAWAD

Western political and economic pressure on Iran over its nuclear program has chilled foreign investment to the extent that it is now squeezing the country's long-fragile energy industry, adding strains to a government that is burdened by sanctions and wary of unrest at home.

The world's fourth-largest oil exporter, Iran sits on the second-largest oil and gas reserves. But it has struggled in recent years to keep its oil production, currently running at about four million barrels a day, from falling.

Some analysts say that if this acute imbalance between stagnant production and rising demand at home continues unchecked, Iran will have no oil left over to export within a decade. Its oil exports, totaling $47 billion last year, account for half the government's revenue.

"They have a perfect storm of problems feeding into each other," said Robert Murphy, an analyst at PFC Energy, a consulting firm in Washington. He estimated that Iran might have no more oil to export by around 2015 if it did not rein in runaway consumption and reverse the long-term decline in its oil production.

"The domestic energy situation is as big as the international issue, and feeds into it in a very significant way," he said.

To curb demand, which has been driven in part by subsidies that keep the domestic pump price at a mere 35 cents a gallon, the government plans to begin rationing gasoline in March, a measure so unpopular, and potentially explosive, that rationing plans have been put off several times in the past.

Iran's energy problem is in many ways at the heart of the nuclear controversy as well. Iran's leadership says it wants to develop nuclear power generation to free its petroleum resources for domestic use or for exports. The United States and other Western countries say Iran is using the program as a front for building weapons. At a time of relatively high prices, oil is clearly providing Iran's government with enormous strength — but also with an Achilles' heel.

In December, the United Nations Security Council voted unanimously to impose limited economic sanctions on Iran until it halts its nuclear program. So far, American and European officials say they are not seeking to cut off Iran's oil exports, because that would disrupt global markets and raise prices for Western consumers.

Still, the pressure on Western energy companies not to deal with Iran may ultimately speed that outcome. Iran currently exports about 2.5 million barrels a day.

In recent weeks, senior American officials warned several European oil companies that if they invested in new energy projects, they risked financial sanctions in the United States, according to a European energy executive who spoke on the condition that he not be identified because of the delicate nature of his company's relations with Iran.

Foreign investors, who have helped promote Iran's oil development, have been scarce since the 1979 revolution, and the country's oil industry has now suffered decades of economic, political and technical problems. Iran has signed no firm oil or gas contracts with foreign investors since June 2005, when Mahmoud Ahmadinejad was elected president and began flaunting the country's nuclear ambitions and renewing tensions with the West.

At home, meanwhile, Iran has had to appease a population historically prone to unrest. It spends about $20 billion each year, or 15 percent of its economic output, to keep consumer prices low for gasoline, natural gas, electricity and other energy products, according to estimates from the International Monetary Fund and others. Those subsidies have prompted double-digit growth in consumption in this country of 70 million people.

Iran holds 11 percent of global oil reserves, second only to Saudi Arabia. But each year, Iran has to find ways to make up for natural declines in production from existing wells, which in past years has dipped by 200,000 to 500,000 barrels a day.

It has managed to hold its own, but just barely. Moreover, Iran's refining capacity lags far behind its domestic needs, so the country is forced to import 40 percent of its gasoline.

Because of delays in developing new fields, like Yadavaran, Azadegan and others, Iran has scaled back its targets; it now plans to increase oil production to 4.5 million barrels by 2010, down from 5 million barrels. But even that might prove challenging, according to analysts who cite the figures.

Iranian production is now about 3.9 million barrels. It peaked at more than 6 million barrels a day in the mid-1970s, but plummeted to 1.5 million barrels just after the 1979 revolution. During the eight-year war against Iraq that followed, Iran's oil infrastructure lining the Persian Gulf was a frequent target.

Iran currently uses 1.5 million barrels of oil a day, triple its consumption in 1980, and must import about 170,000 barrels a day of gasoline, which last year cost the government more than $4 billion.

Some Iranian fields are in dire need of foreign technical expertise to help reverse their natural decline rates, estimated at 8 to 10 percent a year. Modern methods of enhanced oil recovery, which involve reinjecting natural gas to flush out more oil from the fields, can greatly increase production rates but are both costly and difficult to perform without foreign assistance.

"Iran needs to invest more than it does," said Manouchehr Takin, an Iranian energy analyst at the Center for Global Energy Studies in London. "It needs foreign companies to bring expertise, capital and technology."

But oil companies complain that the rewards are limited. Under Iran's stringent buyback contracts, oil companies basically operate as contractors for the government for a limited time. They are not allowed to book the reserves as their own and gain little in extra profits when energy prices go up.

Iran's energy officials have already indicated they would sweeten buyback contracts. At a meeting held at a Hilton hotel in Vienna this month, they unveiled a new licensing round for 17 onshore and offshore exploration blocks. The conference was attended by dozens of European, Chinese and Russian oil executives.

For Gholam Hossein Nozari, the managing director of Iran's national oil company, continued interest from Europe and Asia is "a sure sign companies do not cower to U.S. pressure," according to Iran's official news agency, IRNA.

Fereidun Fesharaki, an energy adviser to the Iranian government before the revolution, said, "For all its faults, the Islamic Republic is very flexible."

Not all countries or international companies have bowed to American pressure. India has rebuffed Washington's efforts to cut off gasoline exports to Iran. New Delhi has also rejected American requests to cancel a planned pipeline project that would take Iranian natural gas through Pakistan to India.

But recent conversations with European energy executives and consultants, who spoke anonymously to protect their relations with Iran, suggest there is a new wave of concern about starting projects in the country. Even Chinese companies, which Iran is trying to lure with big oil and gas deals, seem to be acting with caution.

Oil companies, including Royal Dutch Shell, Total of France, Eni of Italy and Repsol YPF of Spain, are playing for time in the hope that the political situation may somehow improve, energy analysts said.

Shell and Repsol announced last month a preliminary deal for South Pars, the world's largest natural gas field. But the project, estimated at $10 billion, has been delayed for more than a year. A final investment decision is not due until at least the end of 2007.

Asked about the project at a news conference this month, Jeroen van der Veer, the chief executive of Shell, expressed some embarrassment, saying, "We have a dilemma." Iran's oil and gas reserves are too big to ignore, he said, but "we have all the short-term political concerns, as you can see."

Last year, Inpex, a Japanese oil company, agreed to sharply cut its stake in a $2 billion project to develop the Azadegan field, in the southwestern province of Khuzestan, near Iraq. Inpex cut its stake to 10 percent from 75 percent after problems with land mines left over from the Iran-Iraq war delayed development. But some analysts said the decision reflected Japan's displeasure at Iran's nuclear stance. Japan accounts for 20 percent of all Iranian oil exports.

"Oil companies are simply assessing risk, including what some see as the real risk of a military strike against Iran," said Cliff Kupchan, an analyst at the Eurasia Group, a political risk consulting firm, and a former senior State Department official. "Some are deciding it's not worth it."

The United States is pressing Europeans to trim their government-backed loan guarantees, which amounted to $18 billion in 2005. European countries have recently said they would not issue guarantees for companies that the United Nations lists as tied to Iran's nuclear or missile programs. But Washington is calling on Europe to make sure it is not dealing with front companies, possibly in the energy field.

Since opening up their energy sector to foreigners in the 1990s, Iran's clerical leaders have sought to turn their energy riches into political alliances. In the mid-1990s, they tried to persuade an American company, Conoco (now ConocoPhillips), to develop an oil field in a strategic bid to thaw relations with the United States; when that failed, after President Bill Clinton banned American investments in Iran, Iran turned to Europe and Japan. More recently, Iranian leaders have set their sights on China and Russia.

But while China's three main state-owned oil companies have been eager to sign preliminary agreements with Iran in recent years, drawing criticism from the United States, analysts say few projects have actually gotten off the ground.

Steven R. Weisman contributed reporting from Washington and Nazila Fathi from Tehran. -- Yoshie <http://montages.blogspot.com/> <http://mrzine.org> <http://monthlyreview.org/>



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