The oil and natural gas reserves of Mexico’s Petroleos Mexicanos (Pemex) have been cut in half since 2002, and the state-run monopoly now faces a “critical” situation, the CEO said Sunday.

At current production rates, Pemex’s reserves will last about 9.3 years, said CEO Jesus Reyes Heroles. Speaking to Pemex workers on the company’s 69th anniversary Sunday, Reyes Heroles urged the government to reduce the company’s tax base and give it more leeway to make decisions on exploration and production (E&P).

“In the global market, the lack of flexibility works against the success of the company,” said Reyes. “Overall, Pemex’s situation is critical and merits immediate attention.” Reyes Heroles said a “winning Mexico needs a stronger Pemex that doesn’t pay so much tax and increase its debt like it has.”

Pemex replaced about 41% of its reserves last year. Proven reserves stood at 15.5 billion boe at the end of 2006, which is down from 16.5 billion boe at year-end 2005 and 30.9 billion boe at the end of 2002. Crude oil production at Mexico’s largest oilfield, Cantarell, is rapidly declining: output dropped 12% last year to 1.79 million bbl, and Pemex is forecasting a 15% decline to 1.53 million bbl in 2007.

Among other things, Reyes Heroles called for a major overhaul of Pemex’s tax system. He noted that in 2006, Pemex sent more than 93% of its profits to the government, and it accounted for 37.5% of the country’s income. In real terms, Pemex’s exploration budget in 2006 was 17% lower than in 2005 and 42% lower than in 2004. Pemex funds many of its exploration efforts by assuming debt, which rose by about $880 million in 2006 to $52 billion. Including unfunded pension liabilities, Pemex’s debt stands at about $107 billion.

Because Pemex is state-run, a new CEO takes over following the election of a new president. The board of directors consists of six presidential cabinet members and five union representatives.

“The conclusion is clear,” Reyes Heroles said. “Pemex can’t continue like this.”

President Felipe Calderon, who took office in December, said Sunday “we have to invest, and invest seriously, in exploration and turn this situation around.”

To blunt criticism that he plans to push for outside investment in Pemex — something his predecessor Vicente Fox tried unsuccessfully to do for nearly six years — Calderon said Pemex “will always continue to belong to all Mexicans.” He said the company can begin to replace 100% of its reserves with legislative changes, and without foreign investment, he promised.

Among other things, Calderon said the widespread corruption within Pemex had to be eliminated. There were an estimated 207 illegal openings discovered in Pemex pipelines and valves last year. A lack of infrastructure spending also is said to be a main cause for several oil spills and deadly gas explosions in recent years.

“We need to act now to guarantee the future,” Calderon said. “It’s not worth anything that the oil is ours if in the medium term we can’t take advantage of it.” He called it a “sad paradox” that Mexico imports about 20% of its gas even though there are known gas deposits on- and offshore that remain untapped.

Instead of trying to change the constitution to allow foreign investment in oil and gas ventures, Energy Secretary Georgina Kessel said the country should seek “complementary investments” in technology and science to develop its energy infrastructure.

“If we do not confront and resolve the problems posed by these challenges, the situation of Petroleos Mexicanos could become unsustainable over the long term,” Kessel said.

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