Mexico’s land and offshore regions are estimated to hold some of the largest oil and gas reserves in the world, but the country still is facing an uphill battle in moving from becoming an importer to a major exporter, according to state-run Petroleos Mexicanos (Pemex), which released preliminary figures on 2001 oil and gas production this week.

Pemex reported imports averaged 294 MMcf/d between January and November 2001, and even though it plans a major push to encourage outside investment in natural gas production this year, Mexico has an uphill battle in convincing not just outsiders, but many of its own constituents as it attempts an overhaul of its energy industry.

Closely tied to the United States, Mexico — which is estimated to hold some of the largest oil and gas reserves in the world — now faces importing even more fuel in the coming years because of the recession and falling energy prices. Just last year, Pemex stepped up a program to expand investment in the country’s energy sector, with President Vicente Fox and his Energy Ministry making several trips across North America and around the world to boost visibility and encourage investment. However, the mounting recession and the change in President Bush’s agenda following Sept. 11 have hurt Mexico’s chances to become more energy-independent in the coming decade.

In a report issued this week, the Mexican Energy Ministry reported that Pemex needs to invest at least $1.9 billion over the next five years just to upgrade its natural gas facilities and oil refineries. The spending is coupled with estimates that energy demand will be up at least 3% over the next decade, which translates into an increase of at least 14% in production to meet the country’s needs — before imports.

“We are tied to the United States economy, and until the production rates pick up in the United States, we don’t expect the infrastructure in Mexico to see as much investment as we had anticipated,” a source told NGI. Without the investment, the country is expected to have to import even more natural gas and refined products. The energy ministry warned in its report that to solve the problems, it has to upgrade Mexico’s refineries to increase supply by 1.4% a year over the next 10 years.

According to the latest report, between January and November 2001, Pemex produced an average of 4.513 Bcf/d in marine deposits and in oil fields in the north and south of Mexico. And natural gas imports are increasing, even while the country attempts to make money on exports — mostly into the United States. Pemex said that importing natural gas last year cost the government $399 million, while exporting 19 MMcf/d yielded a profit of $41 million.

Of the total amount of natural gas produced in Mexico, 1.533 Bcf was from marine deposits; 1.7 Bcf came from oil fields in the southern part of the country; and 1.2 Bcf was from northern oil fields. In November, Pemex estimated that natural gas production increased by 131 Mcf/d over October, when only 4.362 Bcf was produced for the month.

And despite its stepped-up efforts to boost oil exports, the country actually had to import 380,000 bbl/d just to meet domestic demand last year. In the past five years, importing oil to has cost Mexico about $7.6 billion. The Energy Ministry estimates it will spend at least $7 billion over the next five years — and needs more than that to actually improve and expand infrastructure.

With a newly elected and reform-minded president elected in 2000, Pemex was just beginning to ramp up interest last year in its “multiple-service contracts” plan, which would go mostly to support E&P efforts in the prolific Burgos Basin in the northeastern part of the country. The Burgos Basin, already eyed by U.S. and Canadian companies, is hoped to hold the key to as much as $10 billion worth of contracts over 10 years to foreign drilling companies. But the downturn in natural gas prices and the pullback in oil production has dampened enthusiasm.

Still, Pemex is forging ahead.

By the middle of 2002, Pemex wants to call for bids on the first group of corporate lots in the Burgos Basin, in the Rio Bravo area, which is adjacent to the U.S. border. The contract announcements, said Pemex, will send a message to foreign investors about new business opportunities, which before Sept. 11 had been a key aim of Fox and Bush in their bilateral agenda.

Pemex officials met with some big-money investors last month in Mexico City, a source told NGI, telling investors that by mid-2002, it planned to take bids on the first group of contracts — 10 lots — in the Burgos Basin, an area of about 12,000 square kilometers. Pemex estimates the contracts would provide 1 Bcf/d that could be achieved and sustained between 2005 and 2011. The first round of contracts will be worth between $6 billion and $8 billion to contractors over 20 years, said Luis Ramirez Corzo, the head of Pemex’s E&P division.

Fox, who suffered a huge defeat this week when the Mexican Congress turned down some of his major tax reform proposals, still has his hopes set on changing the country’s Constitution, which would allow the state-run Pemex to obtain more foreign investments. But a major overhaul of the Constitution, at least while the economy remains in a recession and worries persist about other needs, remains slim in the near term.

The multiple-service contracts supposedly would fall within the legal limits of Mexico’s Constitution, which does not allow foreign ownership of energy rights. The E&P contracts, said Pemex, would not be risk contracts, which allow profit sharing, instead offering fixed payments in cash for work. The foreign companies would not be able to “own” the investment — just the profits from the services offered. The companies opting into the contracts also would be asked to develop the fields that already have proven reserves, with the option of extending their activities to adjacent areas within the limits of the area assigned under the contracts.

In making the presentation to potential investors, Energy Secretary Ernesto Martens said he wanted Pemex to “include more processes than (service contracts) traditionally have included, from drilling to removing the natural gas liquids, cleaning the gas, compressing it and moving it through pipelines.” Martens also is pushing to include services such as rehabilitation of gas wells, well stimulation, processing of seismological information, maintenance of facilities, technical studies, field engineering and supplying materials.

For Martens and his boss Fox, increasing Mexico’s natural gas production is a national security issue because, according to Martens, gas demand is outstripping supply in the poor but growing country. Officially, Mexican forecasts indicate demand for natural gas will grow 9% a year through the next decade, but Pemex will only be able to increase output by 7% — at best — and only if it is allowed enough of a budget to do that.

Meanwhile, the Fox government’s opposition leaders say they are doubtful about the multiple-service contracts’ legality. Because Pemex wants to bundle many services into a single contract, those critical of the reforms suggest the contracts are unconstitutional. And unless natural gas prices rise to make investment more desirable — and the economy moves out of a recession — the Energy Ministry’s hopes of encouraging outsiders to take a chance on E&P remain slim at best.

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