The Gross Mismanagement of Mexico's Oil Industry
Mexico should be rich. Instead, the country provides a disheartening example of what author P.J. O’Rourke might call “making nothing from everything.”
We’ve been trekking around the Pacific Coast – well, a very small part of it – for the past week or so. The stretch between Puerto Vallarta and Sayulita – about 40 miles – boasts some of the most pristine coastland your Aussie-born editor has ever seen. It is the type that might inspire California’s “trustafarian” community to erect multi-million dollar beachfront mansions, around which they would shoot opening credit footage for teen reality shows about the trials and tribulations of the good life. But down here, the towns are tiny, peaceful and conspicuously devoid of L.A.-style bling. Life is simple. Only the occasional fishing or surfing village punctuates enormous swaths of virgin, oceanfront real estate.
The locals, at least from what we’ve seen, are an especially hard-working bunch. By day, they toil under the red-hot sun…and then, when it goes down, they toil some more. What’s more, unlike their depressed, though highly privileged cousins north of the border, they smile like it’s a national sport.
But so what? If a tropical clime and a broadly grinning local workforce were the only ingredients necessary to bake a cake of national economic prosperity, Cuba might be the preferred dessert of the Caribbean. Instead, it barely passes for an econo-Twinkie. (The Mexican captain of a fishing boat we took over the weekend made the point for us: “Ok amigos. Today we go to a beautiful island for your pleasure,” he told the eager crowd. “Are you ready for this? We go to Cuba! Haha… Just joking! We wouldn’t do that to you. You’re our amigos!”)
The real wealth, of course, is to the east, in the Gulf of Mexico. The Cantarell Field, in particular, should have been a boon to this nation. And for a while, it was. Ironically, however, nothing suffers at the hands of bureaucrats quite like raw, capitalistic opportunity and the success it threatens to visit upon ordinary, voting citizens.
With roughly 18 billion barrels of recoverable oil (35 billion in total), the Cantarell Field is roughly one third larger than Alaska’s mighty Prudhoe Bay (with a “measly” 12 billion). What’s more, unlike the extreme arctic conditions in Alaska and the sheer remoteness of the project (at 650 miles north of Anchorage), Mexico’s black gold sits just 50 miles off the coast…and in Caribbean waters of scuba-friendly temperature.
Such is the richness of the Cantarell Complex, and the luck of Mexico, that it didn’t even take a geophysicist or highly paid geologist to discover it. Instead, Rudesindo Cantarell, a fisherman, noticed that his nets were actually clogging up with the black stuff. It seems the natural oil seeps were literally begging to be discovered. Cantarell couldn’t have missed it if he tried. But the story gets even more interesting. The holes in the rock – or pores – where the oil is located appears to be – wait for it – part of the rubble formation from the asteroid impact that created the Chicxulub Crater some 65 million years ago. More amazing still, many scientists actually credit this as the (or one of the) “extinction event/s” that eventually wiped out the dinosaurs. Call it a gift from the heavens (unless, that is, you happened to be a God-fearing dinosaur).
With heaven and earth conspiring to deliver such a bounty to the Mexican people, one is tempted, perhaps beyond better judgment, to ask: What could possibly go wrong? Enter Pemex, the nation’s state-owned petroleum company. Again, it seems there is no privilege so vast as to render it beyond the destruction of the “people’s” government.
Pemex was “created” back in 1917 when, bowing, as politicians seem genetically preprogrammed to do, to public pressure, President Cárdenas embarked on the state-expropriation of all resources and facilities and, in the process, nationalized both United States and Anglo–Dutch companies operating within its borders. Despite international boycotts, Pemex led Mexico to become the world’s fifth largest oil-producing nation.
Now, Fellow Reckoner, what do you suppose a wide-eyed group of bureaucrats might do with a plump, oily egg-laying goose? Invest in exploration and development of nearby fields? Farm out some of the work to foreign companies with the necessary expertise and proven track records to bring the stuff to market? Look to secure the future of the voters who put them in office by shoring up the foundation of the nation’s largest tax paying company? Ha! Don’t make us laugh. Why, they sharpen the cleaver…and sit down to enjoy a one-time-only feast. And after the last feather is plucked and morsel consumed? Hey, this is politics! That’s a problem for the next bum to deal with.
Despite annual revenues in excess of $75 billion dollars, Pemex is only able to survive today through its immense borrowing. Pemex pays out over 60% of its revenues in taxes and royalties. Those receipts, in turn, account for around 40% of the federal government’s entire budget. As such, the state-owned dinosaur is now over $40 billion in the hole (so to speak) and, to make matters worse, is facing inexorable production decline in many of its fields, including that giant asteroid baby, Cantarell.
“Mexico’s oil industry is in crisis,” Byron King, the intrepid editor of Energy & Scarcity Investor, recently explained to his readers. “Indeed the grim numbers come from no less a source than the Mexican Energy Ministry. Production statistics make it clear that Mexico’s overall oil output is declining rapidly – with the word ‘crashing’ coming to mind as one views the chart [below].
“After decades of production,” continues Byron, “Cantarell is getting long in the tooth. Oil output is declining rapidly. Cantarell is depleting at an astonishing rate. Meanwhile, the yield from new Mexican oil fields is simply not making up the difference.”
Cantarell “peaked” around 2003…and only then after a massive nitrogen injection project to boost production. Since then, it’s been in steady decline, from a high of 2.9 million barrels per day to just 464,000 per day currently.
“Due to falling oil output, especially from offshore, Mexico will likely cease being an oil exporting nation by 2015,” concludes Byron. “This looming problem holds dire implications for the national balance sheet of Mexico, as well as – by implication – for US energy and national security.”
We can only hope the “next bum” has better ideas about how to maximize Mexico’s vast oil potential than all those preceding him. Judging by their track record, that shouldn’t take much. Then again, we are talking about politicians here.