Reply #10: Here's one possible reason . . . . [View All]

[hatrack]

Remember the metaphorical “giant sucking sound” that Ross Perot invoked in the 1992 presidential debates? Perot employed that image to characterize the rapid exodus of jobs to Mexico that would surely result from ratifying the North American Free Trade Agreement. Fifteen years later, that vivid phrase could appropriately describe the increasingly desperate circumstances befalling Cantarell, Mexico’s largest oilfield, situated about 50 miles off the coast of the Yucatan Peninsula. The giant sucking sound you might hear at Cantarell is what happens when hundreds of oil wells begin drawing gas and water from the very reservoirs that used to yield copious quantities of petroleum. It’s the sound of an oilfield rolling over its peak.

To unknowing American ears, the name Cantarell evokes a casual, Southwestern feeling, more suggestive of a dude ranch than the world’s No. 2 oil field. By far the most productive oil reservoir in the Western Hemisphere, Cantarell was yielding more than two million barrels per day (bpd) as recently as 2005, outperforming all other fields save mighty Ghawar in Saudi Arabia. At $50 per barrel that level of production translated to $100 million a day. When a wealth generator of that magnitude starts to sputter and lose productivity, other oilfields must pick up the slack or else the Mexican economy is bound to take a hit.

Unfortunately, the most recent numbers from PEMEX, the state-owned oil company, don’t justify confidence. Output from Cantarell fell by nearly 500,000 bpd to about 1.5 million bpd in December 2006, a 25% decline from 2005’s totals. Cantarell’s swoon took PEMEX’s total output below the three million bpd level for the first time in six years. PEMEX exports more than half of its crude to the United States alone; only Canada exports a larger volume. Since Cantarell’s output is roughly equivalent to Mexico’s total exports, production declines will be felt in the United States, which will have no choice but to offset the loss by purchasing more expensive crude on the international market.

Make no mistake, a production crash at the world’s second-largest oilfield will have an effect on import volumes and the price of crude. In fact, oil markets have already taken notice. In mid-January the per barrel price of crude briefly sagged below the $50 mark. Since PEMEX’s admission two weeks ago, the markets have rebounded somewhat. PEMEX is working to expand output from other fields to offset continued losses at Cantarell, which are expected to average 15% a year. To meet that objective, PEMEX will inject nitrogen into the largest of the remaining oilfields, increasing reservoir pressure and flow rates. No doubt that will help, as Mexican crude is on the heavy side of the spectrum. But as demonstrated at Cantarell, where nitrogen injections since 2000 produced substaintial gains in flow rates, once the practice is discontinued, output drops sharply. If the projected annual decline rate is accurate, Cantarell will drop out of the million bpd club by 2010. As noted in the Wikipedia entry for Cantarell: “This rapid decline is postulated to be a result of production enhancement techniques causing faster oil extraction at the expense of field longevity.” Indeed, the consequences of nitrogen injection on an oilfield are not at all dissimilar to the effects of anabolic steroids on power hitters, both during and after usage.

EDIT


http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=115x83204

http://news-views.renewwisconsin.org/news/item.tcl?news_item_id=103604

Short version: There are only four oil fields in the world considered supergiants i.e. capable of producing more than 1 million barrels/day - Ghawar in Saudia Arabia, Burgan in Kuwait, Cantarell in Mexico and Da Qing in China (in descending order of size). As confirmed by the respective governments & state petroleum agencies of Kuwait, Mexico and China, three of the four are in permanent decline.

Cantarell, in particular, is of substantial interest to the United States, for a number of reasons:

1. Mexico is (depending on which sourcing you use) the second- or third-largest source of imported oil for the United States.

2. Cantarell is in rapid decline, as confirmed by PEMEX. The estimates range between 15% and 25% declines in 2006 alone, and for an oil field, that's a really rapid rate of decline. They are ramping up gas injection projects for other fields, but it's unlikely that any of them can replace Cantarell, at least not any time soon.

3. The Mexican government depends on PEMEX for about 40% of its revenue, and PEMEX depends (or depended, I should say) on Cantarell for more than 60% of its oil production. With Cantarell going south in a big way, the Calderon government is already turning to the idea of imposing new taxes on soft drinks, which are the staple beverage of Mexio's working and middle classes. How this will go over is anyone's guess, but there's a saying in Mexico: "If you're paying taxes, you have the wrong accountant" - which should give you an idea of how the commonweal is seen by many struggling to keep body and soul together.

4. Given the financial predicament in which the Mexican federal government now finds itself, if you think immigration was an issue in the 2006 election, just wait until 2008.

This was in the WSJ and lots of trade publications. The industry knows, Wall Street knows, but it isn't anything you're going to hear on the evening network news or the Anna Nicole Smith Networ . . . . oh, sorry, CNN. You have to go and hunt for this stuff.

And beyond all of the preceding, of course, there's the Devil's own winter in progress in the New England and Mid-Atlantic goosing fuel prices to boot.