Current crude production in Mexico, the largest source of foreign oil for the US market, appears "at the very least" stagnant and may be close to peaking, analysts in the Houston office of Raymond James & Associates Inc. reported June 13.
"The month-to-month volatility hides the fact that, on a 12-month moving average basis, it looks like Mexican oil production may have already peaked," they said. That doesn't imply "a dramatic fall in output anytime soon," the analysts said, "but it does indicate that the growth rates of 1999-2002 have slowed down meaningfully, if not disappearing outright." They project Mexican production will post modest annual declines in 2005 and 2006 for the first time since the late 1990s. "Even if production is flat, that would still provide strong evidence that the No. 1 source of foreign oil to the US is close to peaking," they said.
Since Mexico produces 4% of the world's total oil, a peak and eventual decline in its production would have major consequences for global supplies, driving up prices.
Western Hemisphere supplies
"Contrary to conventional wisdom, the Middle East is a relatively minor source of US oil imports," the analysts noted. Only Saudi Arabia ranked among the top five sources of imported crude through the last 12 months. Iraq was the only other Middle Eastern country among the top 10.
In March, Mexico sold 1.59 million b/d in the US market, or 16% of total US importsslightly more than Saudi Arabia (1.55 million b/d) and Venezuela (1.32 million b/d).
"The US actually imports most of its oil from the Western Hemisphere, and three countries in particular: Canada, Mexico, and Venezuela. These three countries together provide roughly 45% of US oil imports," the analysts said. "By comparison, the entire Persian Gulf region accounts for only about 25%."
In the Western Hemisphere, Canada is a "bright spot," the Raymond James analysts said. "Canadian production has grown consistently every year since 1999, and the oil sands provide a massive resource to be developed over time. On the other hand, the Venezuelan oil industry, given the volatile political situation and rising tax burden, is in rough shape, with production still not fully recovering from the 2002-03 strike by the national oil company [Petroleos de Venezuela SA (PDVSA)]."
While Mexican production rose annually in 1999-2004, the increase last year was negligibleonly 12,000 b/d, or under 0.4%.
Production in the first 3 months of 2005 is flat month to month.
"This suggests to us that Mexican production is on the verge of peaking within just a few years, if it hasn't already," said the Raymond James analysts. They listed several reasons for slower growth in Mexican production:
-- Most of Mexico's oil is produced offshore and is characterized by steep decline rates. "This is as true of the Gulf of Mexico (both the US and Mexican sectors) as it is of the Bay of Campeche in southeastern Mexico, which accounts for two-thirds the country's production," the analysts said.
-- Mexico's Cantarell oil field, the largest in the Western Hemisphere and the second largest in the world measured by daily production, is expected to peak this year. Located in the Bay of Campeche, Cantarell produces roughly 2 million b/d, "meaning it pumps over half of all Mexican oil and 3% of global supply," said the analysts. "Once this mature field peaks, it is going to be virtually impossible for the rest of Mexican production to offset the declines."
-- Foreign investment in the upstream operations has been constitutionally prohibited since Petroleos Mexicanos (Pemex) was formed in 1938.
-- The tax burden on Pemex remains high "to make sure that the oil industry provides revenue for the Mexican government." A third of the federal budget comes from taxes on Pemex.
"At this point, it is too early to tell whether Mexican oil production has already set an all-time peak, but based on the last 2 years of data, it seems that the peak is fast approaching, if not already here," the analysts said. "Of course, oil is fungible, and what ultimately matters for prices is global production, not that of a single country. Still, in conjunction with other non-OPEC producers having peaked long ago (US, Britain, Norway, etc.) and others that are currently experiencing production growth slowdowns (Russia and Venezuela being the most important), the Mexican slowdown takes on additional importance. Because this serves to increase non-OPEC supply growth, we look at it as a bullish stimulus for oil prices over the next several years and beyond."
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