Mexico's rapid decline in oil production is proving peak oil proponents right

09/10/2009 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The news just keeps getting worse from Mexico’s huge Cantarell oil field—and worse faster than anybody had expected too.

Cantarell, a big field in the Gulf of Mexico, was once the world’s second largest oil field. But after years of under investment by Mexico’s national oil company Pemex production started to drop.

I wrote about this decline in my December 2008 book The Jubak Picks. At that time Pemex was projecting that even if it stepped up its investment in technology to wring more oil out of the field production from Cantarell would fall to just 700,000 barrels a day by 2012.

That would make a huge fall from the 2 million barrels a day that Cantarell produced in January 2006, I wrote way back then.

On September 8, however, Pemex announced that production at Cantarell had already plunged to just 500,000 barrels a day, way below the 700,000 pessimistically projected in December 2008 for 2012.

The damage from Cantarell’s decline doesn’t stop with Pemex.

Before the collapse in oil production from Cantarell and the halving of oil prices, Mexico’s government got about 40% of its revenue from Pemex. The decline in oil production and oil prices have cut Mexico’s oil exports by roughly $14 billion a year.

So it shouldn’t come as any surprise that Standard & Poor’s lowered its credit rating on Mexico’s national debt to negative in May. Unless the country’s politicians can agree on a tax reform package—which is really a tax increase to make up for the shortfall in oil revenue—it’s like that Mexico faces another downgrade before the end of the year.

I’d say, by the way, that there’s almost no chance that Mexico’s dysfunctional political establishment will enact the changes in tax law needed to stabilize the country’s finances or the changes in the country’s oil laws that would let Pemex bring in the foreign partners it needs to increase production. At least not in 2009 and not before the crisis gets worse.

The proponents of peak oil—the theory that the world is no longer finding enough new oil from conventional sources to keep up with increases in oil consumption—can rightfully point to Cantarell as confirmation for one part of their theory. Once a field goes into decline, peak oil proponents have argued, the decline in production is shockingly rapid.

Cantarell is now Exhibit #1.

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