Decline in oil production may affect U.S. consumers

[The second-largest supplier of oil to the US—Mexico—is facing oil production declines in their “super giant” field, Cantarell, which has helped to keep US oil prices low for two decades. Though Mexico’s only oil producer, state-owned Pemex, claims to still be scouring Mexico’s earth for further fields and options, we must question why Mexico drilled recently off-shore during the expensive, deep-water Noxal exploration. Considering that no major oil find (of over 500 million barrels) has occurred in the last few years, we can bet against any major onshore oil finds in Mexico in coming years. Any small reserves found in Mexico will take from five to ten years to bring to market, and only in amounts that could not come close to meeting world demand.—LAG]

A drop in output at the Cantarell oil field could mean higher prices for U.S. consumers as Mexico—the United States' second largest supplier—faces a likely decline in production from its largest oil field.

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Mexico's giant Cantarell oil field, which has financed government spending and held down U.S. gasoline prices for 20 years, is facing a production decline, a prospect that could heighten U.S. dependence on Middle East oil.

An internal report from Mexico's state-owned oil company, leaked last month, said water and gas were seeping into the massive offshore oil field in the southern Gulf of Mexico.

That development would reduce Mexican oil output, which would be bad news for U.S. consumers. Mexico is the second largest supplier of oil to the U.S. market.

The timing's bad. Global oil supplies are tight, and there's growing concern about several other important suppliers of oil to the United States. Unrest grows in Nigeria, conventional oil production is dropping in Canada, and Venezuela is taking an increasingly belligerent anti-American tone.

In his State of the Union address Jan. 31, President Bush vowed to wean Americans from Middle East oil.

But the threat of accelerated decline in Mexican oil output means other suppliers will have to pick up the slack, and the world's largest oil reserves remain in the Middle East.

Cantarell is one of the world's great oil fields; only Saudi Arabia's Ghawar field is larger. It was discovered in 1976 and has been a workhorse ever since.

''It's a super giant field, so when you have a super giant field declining, it's very difficult to compensate for that,'' said Adrian Lajous, a veteran oilman and the director of state-owned Petróleos Mexicanos (Pemex) from 1995 to 1999. ``Cantarell has peaked and has started its decline.''

Cantarell's output of 2 million barrels per day last year accounted for about 60 percent of Mexico's output of 3.3 million barrels daily. It's been pushed hard in recent years to take advantage of high global oil prices. Cantarell's production rose from 1 million barrels per day in 1994 to a peak of 2.13 million in 2004.

Until this year, 70.8 percent of Pemex's earnings went to Mexico's federal government.

Pemex management downplays the report, saying it was a low-level document whose worst-case scenarios reflected a ''do-nothing curve,'' scenarios in which Pemex didn't respond to changing conditions. Those worst-case outlooks suggested that by 2008, Cantarell's output could fall to barely more than 500,000 barrels per day, more than halving Mexican crude exports.

Rolando Galindo, a top Pemex financial advisor, told Knight Ridder this week that Pemex won't let that happen.

''We are not sitting on our hands,'' he said during an interview in Pemex's huge glass building, which towers over the hemisphere's largest metropolis.

In a conference call for investors Thursday, Pemex's production manager, Carlos Morales, lowered Cantarell's production outlook to 1.9 million barrels per day this year, a 6 percent decline, and said production would be 1.43 million barrels per day by 2008. That's a return to 2000 production levels.

Total Mexican oil output, he said, would hover between 3.3 million barrels per day and 3.5 million in coming years, remaining steady or growing slightly as output grows in other fields.

Mexican President Vicente Fox announced on Wednesday that Pemex would spend $37.5 billion over the next two decades to develop the Chicontepec oil field in southern Veracruz and Puebla states.

The field, estimated to contain 18 billion barrels of crude, produces 26,000 barrels per day but could produce as many as 1 million a day within eight years, Fox said.

The saving grace for Mexican oil output, and the U.S. consumers who depend on it, is that much may still be undiscovered.

''In Mexico, just 13 percent of explorable territory has been explored,'' said Sergio Rosado, the associate director in Mexico City for Cambridge Energy Research Associates, a global oil consultancy. ``There are many areas to develop.''

But Pemex's Galindo, like many outside experts, thinks that the era of easy, cheaply produced oil in Mexico appears to be over.

''With the decline of Cantarell, Pemex will no longer be Cantarell. For many years, we depended almost 100 percent, or in great measure, on Cantarell,'' Galindo said. “Now Pemex will have to work fields, not super giant fields like Cantarell, but . . . more complex fields. Our operations will have to become more efficient, because these are fields that cannot absorb inefficiencies like Cantarell at one time could.''

The cost to develop new fields such as Chicontepec comes at a difficult time for Pemex, which reported losses of $3.75 billion in 2005.

It can't turn to the private sector to help finance the development of new fields; Mexico's Constitution bars private companies from much of the oil sector.

Pemex also is spending billions to reconfigure its refineries so they can handle heavier crude oils. Pemex is a net importer of U.S.-refined gasoline.

It also can't produce enough natural gas to meet the demand from steel-makers and world-class manufacturers such as Mexican glassmaker Vitro. That forces manufacturers to import natural gas from the United States at sky-high prices.

''Vitro paid $58 million more in 2005 compared to 2004 due to the severe increase in the price of natural gas,'' spokesman Antonio Ocaranza Fernández said. ``While we've managed to face these prices, there are many smaller companies that have been unable to do so and have closed.''

Yet suggesting opening up Pemex is political suicide. Every since President Lazaro Cardenas nationalized the oil sector in 1938, Pemex has been synonymous with Mexican sovereignty.

Presidential front-runner Andrés Manuel López Obrador, a left-leaning populist former mayor of Mexico City, calls the lack of new refineries in Mexico ''criminal,'' but he's against amending the constitution to allow private and foreign investment in the oil sector.

Felipe Calderón, the candidate from the ruling National Action Party, told Knight Ridder that he'd allow private investment in downstream activities such as refining and petrochemicals but not in the production of crude.

''In terms of crude oil, I believe that must be exclusively the area of Pemex, and I'd take greater care with complimentary investment, preferring that it come from institutional investors in Mexico,'' he said.

Erratic is as erratic was yesterday with the SPX +0.2% to 1305.33 (1310.45 intraday high), Dow +0.5% to 11,253 and QQQQ -0.8%, led by the semiconductors with the SMH -3.3%. Today is Triple Witch option expiration and St. Patrick's Day to boot, not to mention the Full Moon this week. It was energy up yesterday, with the OIH +1.5% and the XLE +1.6%. The Dow diverged because of two below-the-line stocks, (GM), +3.3%, and (WMT), +2.3%. NYSE volume was 1.65 billion shares, with the volume ratio 64 and breadth +1116. The 4 MA VR and breadth are short- term overbought and the SPX has entered a key price and time zone, so any long position traders -- "heads up." There have been many above-the-line (ATL) stocks that have advanced over the past 5-7 days and are now extended. Also, the contracted volatility patterns have been resolved and if you are looking for stocks to position trade but are having trouble, that should tell you something.

The reported economic news is totally distorted from reality, especially the jobs data, because the Department of Labor can and does just guesstimate on how many new company jobs were created. That decision is very likely influenced by how the current political climate is blowing. Remember, the new Fed guy is the current administration's choice, although the bogus decision not to publish the M3 figures (starting this month) as Greenspan, and he had a Democratic allegiance. With the wind blowing hard in Iran and Iraq, the Plunge Protection Team

(PPT) will probably be called to action on various occasions of fear, but they started that game (that we know of) in 1987, which they have admitted; now they think it's a tool. Enron did it to a commodity and the Fed does it to the market, so what am I missing here? The media hypes rising interest rates and the Fed keeps printing money at the same time while making token interest rate raises on the other side, but the reality is they are still at the low end on a historical basis. The big "game" for this current bull cycle is about over and the next excellent position opportunity will most likely be in 10/06- 3/07.

Nigeria's oil production capacity has been cut to 631,000 barrels per day (bpd), or some 25 percent of the country's total output, following attacks on a major pipeline belonging to Italy oil giant Agip.

An Agip spokesman in Lagos told Xinhua on Monday that the Tebidaba-Brass pipeline in the southern oil-rich Niger Delta was blown up with dynamite on Friday night. "We are losing about 65,000 bpd, but we don't know who attacked it," the spokesman said by phone.

Nigeria is Africa's top oil producer and the world's eighth biggest oil exporter. Ethnic Ijaw militants led by a group called the Movement for the Emancipation of the Niger Delta (MEND) have staged a series of attacks on oil facilities and abducted 13 foreign oil workers in the delta in the past four months.

Ten of the oil hostages were later released but three Westerners, two Americans and one Briton, were still being held.

Royal Dutch Shell, the largest oil company operating in Nigeria,and other oil firms, have been forced to shut in about 556,000 bpd before the Agip incident.

MEND is insisting on the demilitarization of the delta as a condition for the release and the ceasefire. It also vows not to compromise on its demands for the release of two ethnic Ijaw leaders, payment of 1.5-billion-U.S. dollar compensation to Ijaw communities affected by Shell spillages. Enditem

NASA Climatologist Speaks out about Administration’s Attempts to Silence Him

James Hansen, the head of NASA's top institute studying the climate and arguably the world's leading researcher on global warming, told CBS's 60 Minutes last night that the Bush administration is censoring what he can say to the public. As proof, Hansen displayed a 2004 email he received that read, "The White House [is] now reviewing all climate related press releases." Hansen believes global warming is accelerating, pointing to the melting Arctic and to Antarctica, where new data show massive loss of ice to the sea. "In my more than three decades in the government I've never witnessed such restrictions on the ability of scientists to communicate with the public," said Hansen. The White House disputes the science behind global warming. While Bush ignores the counsel of the world's leading scientists who warn of pending environmental disaster, he solicits the opinions of fiction author Michael Crichton who tells him the science on warming is underwhelming. The White House has also relied on the advice of oil industry lobbyist Philip Cooney who, while he worked on the Council on Environmental Quality, edited government climate reports to play down links between greenhouse gas emissions and global warming. Hansen explains the danger of the White House's ignorance: "If the ice sheets begin to disintegrate, what can you do about it? You can’t tie a rope around the ice sheet. You can’t build a wall around the ice sheets. It will be a situation that is out of our control."

Angola's finance ministry said on Monday it had partnered with China to move ahead with construction of a $3 billion oil refinery in the port of Lobito.

"Yes, it's true, with China," Finance Ministry spokesman Bastos de Almeida told Reuters, confirming local media reports. He gave no further details.

State oil firm Sonangol said in December that construction could start this year and that it was upbeat about finding investors for the project.

China is keen on oil from West Africa to fuel its rapid economic expansion. Last month traders reported that the total flow of West African crude set to go to Asia in March matched the all-time high, buoyed by Chinese buying.

Angola is sub-Saharan Africa's second largest crude producer after Nigeria. It churns out around 1.3 million barrels of oil per day and this is expected to rise to two million barrels per day as a number of new developments come onstream.

Angola has said in the past that it would like to see the refinery's capacity reach about 200,000 barrels per day.

Local media reported that the refinery would be built by a new joint venture called Sonangol-Sinopec International, an enterprise jointly controlled by the Angolan government run Sonangol oil company and China's state-owned Sinopec.

The new refinery will permit Angola to reduce imports and start to export value-added petroleum goods. The Ministry of Petroleum estimates that 80 percent of Lobito's production will be for export, principally serving regional countries.

"The refinery has been one of these prestige projects that the government has been keen to see progress on," said Alex Vines, Africa head at the Royal Institute for International Affairs, a UK-based think-tank.

"It fits into the grand post-conflict infrastructural projects that the presidency wants to see progress on prior to any election," said Vines.

Angola is scheduled to hold its first parliamentary poll since 1992 this year but no firm date has been set.

Two of China’s biggest oil suppliers have begun to ration diesel, triggering lorry queues at petrol stations across two of the country’s most prosperous provinces. Such was the demand that the state-run oil giants Sinopec and PetroChina set a limit on customers of 25 to 50 litres a visit.

The rationing appears to be restricted to the southeastern provinces of Zhejiang and Jiangsu, two of the most dynamic regional economies in the world’s second-largest oil consumer. One driver at a petrol station in Zhejiang was astonished at the queues: There are no shortages in neighbouring Fujian province, he said.

Speculation has been building for weeks that the Chinese Government was ready to allow an increase in petrol and diesel prices and the public reaction was swift as news, and rumours, of the rationing spread across Zhejiang.

Some pumps in the province are reported to have run dry. The owner of a private transport firm in the eastern Zhejiang port city of Ningbo said: “Our drivers are stranded here because both the Sinopec and PetroChina petrol stations next door told us they ran out of diesel.”

However, this latest bout of rationing has been less serious than a supply crunch last summer that hit most eastern and southern regions in the country for about two weeks. An official with Sinopec in the Jiangsu provincial capital of Nanjing said: “What’s different this time is that stockpiling, not supply shortage, is the cause of queueing and rationing.”

The squeeze last August was led by a surge in fuel exports. State refiners boosted overseas sales to rescue slumping domestic margins caused by the Government’s cap on pump prices.

The Sinopec official said that the company was better prepared this time: “Stocks are below normal, but we still have oil to supply.” He said the company’s inventories could last another five days, against a typical stock of seven to ten days.

Speculation has grown this month that Beijing will announce a retail price rise in petrol within days, now that the annual session of the National People’s Congress, the parliament, has ended. China avoids policy changes during parliament — to reassure its 1.3 billion people that the Government is moving smoothly to ensure a better standard of living.

A price increase would be the first since last July, when prices were raised about 15 per cent — while crude prices had increased more than 30 per cent. China has kept a lid on price increases, fearing inflation and possible social unrest. The diesel price is particularly sensitive because it accounts for one third of all Chinese oil demand. It is the main fuel used by farmers, who have gained least from economic reform, and who are most vulnerable to sudden price swings.

Remarks at the weekend from officials of the People’s Bank of China, the country’s central bank, that inflation of 0.9 per cent was a comfortable level, fuelled the rumours that the Government was ready to raise the price of oil products. The Government has been coming under increasing pressure to raise prices to boost profits at loss-making state refiners and to cap runaway demand.

PetroChina, Asia’s top oil and gas company and the country’s second-biggest refiner, unveiled a 23 per cent jump in second-half profits yesterday as it sold more oil at higher prices to energy-hungry China. A refining loss of 19.81 billion yuan (£1.41 billion), as a result of the country’s price controls, took a bite out of the profit figure, but, nevertheless, PetroChina’s coffers are bulging after last year’s record run-up in crude oil prices. The company is expected to pursue its quest for more global oil reserves by buying PetroKazakhstan from its parent company China National Petroleum.

PetroChina earned 133.36 billion yuan for the full year, compared with a marginally revised 103.84 billion yuan in 2004. The rise in profits was thanks to a 44 per cent surge in oil selling prices.