Significance

Mexico's reserve replacement rate has been raised to 57% in 2004 from 27% in 2001, showing the effect of higher investment under the National Action Party (PAN) government, according to claims by the energy secretariat and the head of Pemex.

Implications Proven oil reserves have actually declined, with implications for Mexico's ability to maintain current levels of crude production. The development of prospective reserves in the deep waters of the Gulf of Mexico faces difficulties due to a constitutional ban on foreign companies holding oil exploration and production concessions.

Outlook The long-term sustainability of the oil sector depends on a lightening of Pemex's tax load and on allowing greater private participation in the oil sector.

Energy Secretary and Pemex Head Highlight Reserve Replacement Increase

Mexico's new Energy Secretary, Fernando Canales Clariond, has said that Mexico needs US$40 billion in investment in oil exploration over 10 years to increase the country's reserve replacement rate to 100%. In a speech to representatives from the business sector at the World Trade Centre in Veracruz, Canales stated that the reserve replacement rate had been raised to 57% from 27%, when the National Action Party (PAN) entered government at the end of 2000. Canales also welcomed the Chamber of Deputies' recent approval of a revised tax reform for Pemex that will result in US$2 billion in savings for the company and expressed hopes for the bill's swift approval by the Senate.

Canales's reserve replacement figures were confirmed by a statement released by Pemex, in which the state oil company said that the annual incorporation of crude oil reserves had risen from 216 million barrels in 2001 to 916 million barrels in 2004. Pemex also confirmed the estimate for prospective reserves in the Gulf of Mexico (GOM) at around 54 billion barrels of oil equivalent (boe). Speaking at a separate event, Pemex's President Luis Ramírez Corzo said that the company had invested US$11 billion in 2004.

Outlook and Implications

The emphasis by both Canales and Corzo on the higher reserve replacement ratio for proven, probable and possible reserves between 2001 and 2004 did not reveal that Mexico's proven hydrocarbon reserves as of 1 January 2004 were 18.895 billion boe, down by 42% from 32.614 billion boe in 2001. Furthermore, although there is always the potential for prospective reserves to become 'proven' in the future, claims about increases in the reserve replacement rate become largely academic when the need for energy reform and greater investment in the sector are blocking the possibility of developing Mexico's deepwater reserves.

Substantial increases in Pemex's exploration and production (E&P) budget since the Vicente Fox administration took power have enabled the company to boost crude production. Pemex's average crude oil output rose by 12.3% to 3.383 million b/d in 2004, compared to 2000, the year the Fox administration took power. However, Pemex's heavy fiscal burden and the constitution's bar on foreign companies holding oil E&P concessions continue to act as deterrents to greater investment in boosting both reserves and production. Insufficient investment by the state has already converted Mexico into a net gas importer, despite the country's abundant natural gas reserves. In addition, there are concerns that without new investment, Mexico risks losing its status as a net oil exporter once production from its main field - the Cantarell, which currently accounts for around 80% of Mexico's total production - starts to decline more quickly. Potential reserves in the deep waters of the GOM are seen as a ray of hope, but their development has so far been frustrated by the difficulties of preparing a development model that appeals to foreign investors but does not contravene the constitution.

Unfortunately, President Fox's plans to submit constitutional reforms to allow private investment in non-associated gas E&P and pipeline maintenance are unlikely to fare any better in the opposition-dominated Congress than his earlier energy reforms, especially with the 2006 presidential elections fast approaching.

However, there is a possibility that energy reform will be revived after the elections. The decision of the opposition Institutional Revolutionary Party (PRI) at its national assembly in March 2005 to modify its internal statutes in order to support greater private participation in the energy sector generated hopes that the PRI might be more amenable to energy reform in the event that it wins the 2006 presidential elections. However, the party made it clear that this did not mean it would be prepared to support existing proposals for energy reform proposed by Fox's PAN government. The decision marked a historical shift, since upholding the constitutional ban on foreign companies holding oil and gas exploration concessions had long been part of the party's policy agenda. A proposal in October 2005 by former PRI leader and presidential pre-candidate Roberto Madrazo to issue 20% of the shares of a new gas unit within Pemex on the local stock exchange was a further sign that the PRI might be prepared to support reform to allow greater private investment in non-associated natural gas E&P, if elected. The would-be presidential candidate for the left-leaning opposition Democratic Revolution Party (PRD), Andrés Manuel López Obrador, also appears to have conceded that there is a need for greater private investment in the sector. Nevertheless, both Madrazo and López Obrador have expressed their opposition to the privatisation of the energy sector.

Raul Dary 24
Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

http://www.globalinsight.com/ and http://www.wmrc.com/