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Viewing cable 06MEXICO5810, MEXICO'S PLANS TO AVERT AN OIL CRISIS

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Reference ID Created Released Classification Origin
06MEXICO5810 2006-10-12 22:27 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Mexico
VZCZCXRO7776
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5810/01 2852227
ZNR UUUUU ZZH
P 122227Z OCT 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 3655
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 05 MEXICO 005810 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/ESC 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW 
DOC FOR ITA/TD/ENERGY DIVISION 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET MX
SUBJECT: MEXICO'S PLANS TO AVERT AN OIL CRISIS 
 
REF: MEXICO 1174 
 
Sensitive but unclassified, entire text. 
 
Introduction and Summary 
------------------------ 
 
1.  (SBU)   In the next 3-4 years, Petroleos Mexicanos 
(Pemex) will likely be able to keep Mexican oil production 
from falling sharply; however, in the medium to long term, 
the outlook is considerably less certain.  From 2010 on, 
production volume will depend on Pemex's ability to get 
significant production from deep-water in the Gulf of Mexico 
and the technologicly challenging Chicontepec field.  In 
March 2006, Embassy Mexico reported on the decline of the 
Cantarell oil field and Mexico's plan to replace that 
production (reftel).  Six months on, we spoke with Pemex and 
GOM officials and outside consultants and observers to see 
how Pemex was coping with the decline.  In the intervening 
six months, daily production from Cantarell has declined 
about eleven percent.  Pemex publicly calls for the drop in 
Cantarell production to be made up in the short term from 
production from the Ku-Maloob-Zaap business unit.  To develop 
the Chicontepec field and deep-water production from the Gulf 
of Mexico Pemex must resolve a series of technical and 
political challenges for which it is not prepared.  End 
introduction and summary. 
 
Mexican Production 
------------------ 
 
2.  (SBU) Without hoped-for reforms to either the Mexican 
energy sector or to the laws governing the operation of 
Petroleos Mexicanos (Pemex), the company officially predicts 
that nation-wide crude production will remain nearly constant 
at from 3.3 million barrels per day (MBD) in 2006, down from 
3.5 MBD in 2005. 
 
Forecast Mexican Crude Production 
2005-2010 
Source: Pemex Statements 
in millions of barrels per day (MBD) 
 
 
2005    2006    2007    2008    2010 
        est     est     est     est 
----    ----    ----    ----    ---- 
3.3     3.3     3.2     3.3     3.3 
 
 
Cantarell Decline 
----------------- 
 
3.  (SBU)  Pemex's Cantarell oil field reached peak 
production in 2004 and is now steadily declining.  The field 
currently makes up 61 percent of Mexican oil production.  The 
precise magnitude of the total decline in Mexican production 
depends on (1) the decline rate of the field, as well as (2) 
the rate with which Pemex can bring new production on line to 
make up for the drop.   This cable will review the various 
scenarios for both the drop in production, and consider the 
options Mexico will have to make up this lost production from 
future developments.  Based on best estimates released 
recently, Pemex and other observers expect that Cantarell 
will decline as follows: 
 
Forecasts for Cantarell Field Decline 
2005-2008 
Source: as shown with date 
in millions of barrels per day (MBD) 
 
                  2005   2006   2006   2007   2008 
                  act    ytd    est    est    est 
                  ----   ----   ----   ----   ---- 
Pemex Expected    2.03   1.86   1.90   1.68   1.43 
 
Consultant I                    1.90   1.70   1.52 
(8/06) 
 
Consultant II                   1.93   1.73   1.46 
(9/06) 
 
PEP Informal                    1.83   1.50   1.38 
Forecast 
(9/06) 
 
MEXICO 00005810  002 OF 005 
 
 
 
Pemex                           1.54   0.87   0.52 
"Do-nothing" 
Case 
(12/05) 
 
As of August 2006, the most recent month for which public 
production data is available, daily production in the field 
had already dropped to 1.75 MBD, though senior Pemex 
officials we spoke with note production in October-December 
2006 may rise slightly as construction projects in the field 
are completed. 
 
4.  (SBU) As Pemex produces the Cantarell reservoir, the 
declining oil volume creates a number of technical challenges 
that will reduce production volumes further.  The Cantarell 
reservoirs have a gas cap over an oil layer that in turn sits 
over a layer of water.  To continue to produce the Cantarell 
field, Pemex injects nitrogen into the gas cap over the oil 
layer.  This assures that wells continue to flow freely as 
the remaining oil in place is produced.  The injection 
increases the rate of oil recovery but also contaminates the 
gas on top of the oil.  As this happens, wells can produce 
significantly more gas or water.  Once the level of water 
coming from a particular well increases beyond what can be 
handled (traditionally, 20-30 percent by volume), the well 
has to be "shut in" until steps can be taken to separate and 
dispose the excess water.  On the same principle, the well 
also must be shut when it produces too much gas to avoid 
reducing the overall reservoir pressure.  As wells are shut 
in due to excess gas or water flow, production from the field 
drops.  Plans for three-phase separators to handle the 
additional water and gas have the equipment slated to come on 
line later in 2006, allowing wells to produce as much as 40 
percent water without affecting crude quality. 
 
5.  (SBU) Additionally, dissolved salt from the water can 
leech into the oil layer affecting the oil's quality.  Once 
the salt concentration becomes too high for the oil to be 
sold, the well also has to be shut in until steps can be 
taken to address the higher concentration. 
 
6.  (SBU) Pemex is developing projects to control the quality 
of gas and oil being produced, including equipment to 
separate nitrogen from the gas in the gas cap and to 
desalinate the produced crude.  According to Pemex, these 
investments should allow continuous production from Cantarell 
regardless of the positioning of the oil/water boundary and 
delay overall decline.  Nonetheless, installation of the 
water handling equipment has been delayed by at least a 
month.  Furthermore, as a result of Katrina-related 
construction delays, nitrogen recovery equipment will be 
delayed by four months.  These delays, according to Pemex, 
have led to additional lost production in 2006 that should be 
partly reversible by early 2007. 
 
Future 
------ 
 
7.  (SBU) In an October 10 presentation, Pemex Exploration 
and Production (PEP) Chief Operating Officer Carlos Morales 
Gil laid out Pemex's four-part strategy for managing 
Cantarell's decline: (1) Conduct additional studies to better 
model the field and improve exploitation schemes.  (Observers 
have noted that Pemex has a relatively poor understanding of 
the Cantarell reservoir's mechanics.); (2) Conduct additional 
analysis of fractures to ensure production of remaining oil 
in place; (3) Optimize the field's infrastructure during the 
decline and divest assets as necessary; and (4) Conduct an 
analysis of the Akal field with a view to include new 
reserves. 
 
8.  (SBU) Although it is not currently budgeted, Energy 
Secretariat Technical Advisor Edgar Rangel added that, in his 
 
SIPDIS 
view, Pemex will have to consider enhanced oil recovery (EOR) 
techniques for the field for those areas that have already 
been "swept", that is once the oil/water boundary has 
"pushed" oil completely away from the well bore.  Pemex and 
GOM officials also suggest horizontal wells be drilled in 
Cantarell to most effectively drain the shrinking reservoir. 
The idea is in the planning stage as a priority for 
2007-2008, though Pemex Exploration and Production CEO Marcos 
Ramirez told us, the plan would be "difficult to immediately 
implement."  Pemex engineers, who have never drilled a 
horizontal well, are currently working with North Sea 
 
MEXICO 00005810  003 OF 005 
 
 
producers to develop expertise in this area. 
 
9.  (SBU) Accoding to a July 2006 presentation by Pemex 
officials of the company's capital budget projection, 
Cantarell will not be a "first-priority" in the budget for 
the first time in 2007.  The Ku-Maloob-Zaap business unit 
(KMZ) and Chicontepec development capital spending will be 
more significant.  According to senior management at Pemex 
Exploration and Production, company officials expect 
Cantarell production to drop below 1 MBD by 2012-2013 and 
have presented this view to the Calderon transition team. 
 
Opportunities to Make Up 
------------------------ 
 
10.  (SBU) As reported reftel, Pemex states that in the next 
3-4 years, production lost from Cantarell can be made up by 
production from KMZ immediately northwest of Cantarell in the 
Bay of Campeche.  Over the medium and long term, Pemex 
believes that the onshore Chicontepec field and eventual 
developments in deep-water will maintain production near 
current levels of 3.3 MBD. 
 
KMZ in 2009-2010 
---------------- 
 
11.  (SBU)  KMZ has been in production since 1981.  After 
Cantarell and Chicontepec, it represents the third largest 
Mexican producing area in terms of reserves.   When business 
unit operations started in 2002, Pemex had announced its 
intention of increasing production to between 700 and 800 
thousand barrels per day (kBD) by instituting a significant 
drilling program and injecting nitrogen for pressure 
maintenance. 
 
12.  (SBU)  According to Pemex and Energy Secretariat (SENER) 
officials, KMZ drilling work is "slightly behind schedule", 
and additional nitrogen injection capacity is slated to come 
on-line in "late 2007".  Currently producing about 400 kBD, 
Pemex officials we spoke with agreed that the 800 kBD would 
be reachable between 2009 and 2010.  Most of the work 
required to reach this production volume is drilling in the 
Maloob and Zaap fields. 
 
13.  (SBU) Currently, most production from the Ku field is 22 
degree API oil; similar to the current Mexican Maya blend 
crude.  Most future production will be much heavier 12-13 
degree API oil from the Maloob and Zaap fields.  To make the 
Maloob and Zaap production marketable, Pemex plans to blend 
it with onshore light oil production from Tabasco State, to 
reach the Maya blend specifications.   Current plans call for 
blending in a Floating Production Storage and Offloading 
(FPSO) vessel to be permanently moored in the area in the 
"first half of 2007."  The FPSO will have capacity for 600 
kBD of oil handling. 2.5 MBD of oil storage and 120 MSCFD of 
gas compression.  According to Pemex Marketing, when the KMZ 
FPSO comes on line, the Mexican Maya blend viscosity will 
drop by 1/2 degree API and the crude will become sourer.  The 
blending process should permit sales to remain 
on-specification. 
 
14.  (SBU) Rangel raised concerns that in order to ensure 
sufficient light, sweet crude for blending with KMZ 
production, Mexico may likely have to begin EOR techniques in 
the Tabasco fields.  Rangel also noted that Mexico had begun 
looking to outside companies for experience with "upgrading," 
a kind of in-situ refining process, as another option for 
making the Maloob and Zaap heavy oil lighter and thus more 
marketable. 
 
15.  (SBU) In order to gain the benefits of KMZ production to 
offset the Cantarell decline in the short and medium term, 
Mexico will have to continue the aggressive drilling program 
in the area, and meet the technical and business challenges 
the fields' extra-heavy oil will present.  It is in 
recognition of these challenges that most observers, 
including PEP Chief Operating Officer Carlos Morales, agree 
that production can reach the 700-800 kBD range for the 
complex; though it is very possible the production plan could 
shift as a result of delays. 
 
Chicontepec 2010-2013 
--------------------- 
 
16.  (SBU) In 2003, Pemex contracted a consortium of 
 
MEXICO 00005810  004 OF 005 
 
 
Schlumberger and ICA/Flour Daniel to conduct a 300 well pilot 
in the Chicontepec field to examine the feasibility of 
producing from the giant reservoir.  Active for over 50 
years, production has always been difficult and expensive; 
nonetheless, Pemex estimates the 72 mile long by 18 mile wide 
field has 136.5 billion barrels of oil in place, though 2P 
(proven plus probable) reserves are 6.6 billion barrels, 
second only to Cantarell. 
 
17.  (SBU) The challenge is that the Chicontepec reservoir is 
"tight," not allowing oil to flow to the well bore and the 
reservoir pressure is very low.  If the pilot is a success, 
Pemex's current plans call for a 13,000 well development plan 
at a total cost of USD 25-30 billion.  Our GOM interlocutors 
admit that "no real exploitation plan is in place for 
Chicontepec," but observers mention a possible 320 kBD peak 
in 2013 in the first phase. 
 
18.   (SBU) Even this first phase depends on the outcome of 
the pilot project.  Assuming technological solutions are 
found to address the tight formation, full development would 
still involve significant social, political, and financial 
challenges.  The 13,000 wells will have to be drilled in an 
area with over 2,200 communities causing significant 
disruption and displacement.  According to PEP CEO Marcos 
Ramirez, production costs for the field originally about USD 
4.50 per barrel are likely to exceed USD 7 per barrel. 
 
19.  (SBU) Given Pemex's current tax position, without a 
further change to its fiscal regime, the company would lose 
money when producing from Chicontepec.  Before large scale 
development can begin, Pemex will have to work with the 
Finance Secretariat (Hacienda) to modify the tax structure to 
permit Pemex to develop the resource without losing money, 
most likely by changing the fiscal regime for fields with 
high production costs. 
 
Deep-Water Challenges in the Long Term (post 2010) 
--------------------------------------------- ----- 
 
20.  (SBU) Pemex has previously announced that it believes 54 
billion barrels of oil equivalent are in place to be produced 
from deep-water deposits in the Southern half of the Gulf of 
Mexico.  In their long-term plans, according to PEP CEO 
Marcos Ramirez, the company plans to produce 500 kBD for its 
own account from 400-500 deep-water wells by 2016. 
Nonetheless, beyond the political obstacles, Ramirez admits 
Pemex lacks both the technology and the investment to move 
forward with deep-water development. Pemex officials admit 
that the 500 kBD figure is an optimistic one given the 
difficulty of constitutional reform. 
 
21.   (SBU) PEP Chief Operating Officer Carlos Morales laid 
out a five-part strategy for Pemex deep-water development at 
an industry meeting October 10.  The strategy called for the 
company to: (1) accelerate incorporation of deep-water 
reserves through exploration; (2) accelerate deep-water 
production through definition of production goals; (3) 
strengthen Pemex deep-water ability throughout the value 
chain;(4) Increase PEP ability to execute through work with 
third parties; and (5) insure that drilling resources are 
available.  Morales went on to say that for Pemex, 
partnership with third parties was not an option, but rather 
the only way the company could meet its production goals.  He 
added aggressively that if Constitutional change were 
required to make this possible, it was Pemex's responsibility 
to see that it happened. 
 
22.  (SBU) According to SENER Hydrocarbon Director General, 
Rafael Alexandri, Mexico will drill approximately 4 wells per 
year in deep-water -- up to 1000 meters water depth -- 
through 2009.  While company officials admit that significant 
reserves lie even deeper, technology and rig availability 
keep Pemex from drilling in water more than 1000 meters deep. 
 Its most recent effort, Langkawasa cost $48 million to 
drill, and Pemex expects Mexican "deep- water" wells cost 
about $60 million each a current prices. 
 
23.  (SBU) Alexandri told us he believed that given changes 
in the market, and the growing market power of service 
companies, Mexico could find enough expertise to allow them 
to continue with an exploration and development program that 
will enable Mexico to remain at 3.3 MBD average until the 
Mexican congress is able to pass realistic reforms to allow 
some form of partnership with outside expertise. 
 
MEXICO 00005810  005 OF 005 
 
 
 
24.  (SBU) At the same time, he believes that given the size 
of the opportunity, the International Oil Companies would 
remain in Mexico to make certain that the service companies 
do not take too large a share of the relationship. 
 
25.  (SBU) Strategically, Alexandri added, once political 
restrictions are lifted, Pemex would like to drill its own 
"discovery" wells in deep-water first to give it more 
leverage to negotiate with international partners on 
development.  To assist in Pemex negotiations with 
international firms, Pemex would most likely go with a 
consortium model to allow Pemex to work off of all the 
members in an outside group, rather than trusting a specific 
one. 
 
Comment 
------- 
 
26.  (SBU) While the worst-case scenario predicted for 
Mexican production decline has not materialized, the 11 
percent drop from Cantarell in the past six months is steep. 
We believe that production plans from the KMZ business unit 
will be almost enough to mitigate the somewhat larger than 
expected decline from Cantarell resulting in just slightly 
reduced Mexican production through 2009.  This seems to match 
anecdotal reports we have received from local U.S. company 
representatives who tell us that Pemex Marketing Officials 
warned U.S. Gulf Coast customers in August that the company 
would not be able to regularly fulfill all of their 
contracted deliveries next year.  After 2010, Mexican 
production will depend on Pemex's ability to get large 
volumes from Chicontepec and deep-water.  Whether or not 
Chicontepec makes up large volumes will depend on Pemex's 
ability to tackle the technical challenges involved, as well 
as maintain a robust (greater than 1000 wells per year) 
drilling schedule.  Pemex's success in deep-water will depend 
on changes to Mexico's constitution that would allow 
partnerships with third parties, a far from certain outcome 
despite bold statements from Pemex management. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
GARZA