Why Mexico sought OPEC oil cutbacks

Until Mar. 22, the oil industry would believe stories about UFO and Elvis sightings before news of a Saudi Arabia/Venezuela pact to cut crude oil output. Yet that day, Mexico's energy ministry announced a deal with Saudi Arabia and Venezuela to reduce oil production in a bid to revive crude oil prices (see related story, p. 22). Effective Apr. 1, Mexico promises to cut exports by 100,000 b/d, Saudi Arabia by 300,000 b/d, and Venezuela by 200,000 b/d. The three countries called for other

March 30, 1998

3 min read

David Knott
London
[email protected]

Until Mar. 22, the oil industry would believe stories about UFO and Elvis sightings before news of a Saudi Arabia/Venezuela pact to cut crude oil output.

Yet that day, Mexico's energy ministry announced a deal with Saudi Arabia and Venezuela to reduce oil production in a bid to revive crude oil prices (see related story, p. 22).

Effective Apr. 1, Mexico promises to cut exports by 100,000 b/d, Saudi Arabia by 300,000 b/d, and Venezuela by 200,000 b/d. The three countries called for other producers to help reduce global output by 1.2 million b/d.

Some other OPEC members are expected to announce export cuts, while Russia and Norway are believed to be considering reductions.

George Baker, a petroleum analyst specializing in Latin America at Mexico Energy Intelligence, Houston, said the deal is a result of Mexico's aggressive oil diplomacy.

Mexico's Energy Minister Luis T?llez visited Norway's Minister of Petroleum and Energy Marit Arnstad on Mar. 19, while Adri n Lajous, CEO of Petroleos Mexicanos, visited Algeria. Both men then flew to Riyadh.

Unprecedented

"The prominent role of Mexico in forging such an agreement is unprecedented," said Baker, "given Mexico's reluctance to be seen by the U.S. as being on intimate terms with OPEC.

"It is not publicly known whether it is Lajous, T?llez, or another official who is responsible for what appears to be a Mexican initiative in stabilizing the world oil market."

While analysts' attention has focused on how Saudi Arabia and Venezuela must be hurting with crude oil prices at their lowest since 1988, Mexico's initiative appears to be a reaction to unbearable pain.

"The recent drop in crude oil prices," said Baker, "to as low as $7/bbl for Maya, Mexico's principal export-grade crude, has put a dark shadow on government budgets for 1998."

While lower oil exports will hit Mexico's trade balance, says Baker, the exports cut is intended to help bring crude oil prices back to pre-crisis levels, which for Maya crude was $13.50/bbl in January.

Projects threat

Baker says Mexico's government has asked Pemex to suggest cuts in its investment budget, and that three megaprojects are threatened if oil prices do not rally.

Sixty percent of Pemex's near-term exploration and production capital outlay is earmarked for three offshore oil developments and one onshore gas project, says Baker.

In the offshore Campeche basin, Pemex plans to develop Cantarell and Ku-Maloob-Zaap projects to increase Maya crude production, while Delta de Grijalva is a light oil project.

In the Burgos basin of northeastern Mexico, Pemex aims to raise gas production to a total 6 bcfd by 2001, a 50% increase from just a few years ago.

"In the absence of an agreement with OPEC that will raise average prices," said Baker, "analysts predicted that Pemex would have to delay the Burgos, Ku-Maloob-Zaap, and Grijalva Delta programs, as none of these is essential to Pemex's immediate production or market needs.

"It is likely that the $5.3 billion Cantarell project, which accounts for more than 50% of the 3-year E&P investment budget, would need to go ahead anyway to obtain benefits from integrated planning."