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The Death of Pemex

Shale Outlook South of the Border

Written by Keith Kohl
Posted July 12, 2013

The discovery of the once-mighty Cantarell oil complex in Mexico is easily one of my favorite stories of all time.

It's got all the components of a great plot: a giant national oil company (NOC), 35 billion barrels of oil tucked away underground, and a stubborn fisherman who only wanted his frustration over some oil seeps taken care of so he could get back to fishing.

By that time, Pemex had been around for more than 30 years — certainly long enough to know the oil industry's version of the golden rule: Whoever owns the oil makes the rules.

Now, only a decade after the supergiant Cantarell field reached its peak production, Pemex finds itself on the verge of collapse.

However, the more important question may be: Will Mexico follow?

Death of an Oil Empire

There's absolutely no doubt in our minds that NOCS have unparalleled control over 94% of global oil and natural gas resources.

noc 7-11

Considering national oil companies hold all the cards, there's only one thing for them to fear: a peak in production.

That's precisely what happened to Pemex when Cantarell peaked in 2003.

We're not just talking about a slow and steady decline here, but rather a sudden, precipitous drop.

Believe me, the exorbitant annual decline rates Pemex experienced after placing the field on nitrogen injection are the kind of stories young Saudi princes are told at a young age to get them into bed at night...

The death of the Cantarell field was more devastating to Pemex than you may have realized. Losing the biggest weapon in their arsenal has had disastrous effects, even fueling whispers that Pemex itself is doomed.

The answer to its sickly state? Allowing private companies to help develop Mexico's oil and gas resources.

Despite the rumors of Pemex's inevitable demise, Mexico's president was adamant in saying the state-owned oil and gas company wouldn't be given to the dogs of privatization.

What could he possibly be so worried about? Well, it might have something to do with the growing energy crisis about to take over the country in the wake of Pemex's abysmal failure in a post-Cantarell era.

Desperate Times Call for Desperate Measures

Today we're witnessing the plight of Mexico's energy industry.

Although production has been in decline for years, demand has been screaming higher (click chart to enlarge)...

mex consumption

These two fossil fuels account for 85% of Mexico's total energy consumption. Unlike the United States, which burns a tremendous amount of coal each year, Mexico only uses a trivial amount (roughly 5%) overall.

Adding more fuel to the fire of Mexico's energy crisis is its increasing addiction to natural gas, which is quickly replacing oil as a feedstock for generating power.

As you can see below, natural gas demand has been surging:

mexico power

As if that wasn't enough to cause a nationwide panic attack, keep in mind that Mexico's oil and gas reserves have plummeted since the 1990s (click chart to enlarge).

mex reserves

Fortunately, a solution to this crisis might be right around the corner...

As I told you last week, when it comes to North American energy, all roads lead to shale.

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Hedge Your Mexican Bets with Shale

Last month, I alluded to the fact that Mexico could be headed for an oil and gas revival.

So let's backtrack for just a moment.

Like the rest of North America, Mexico has wealth of unconventional underground oil and gas resources.

Although the country's oil production has had a certain stigma since Cantarell peaked, the country holds a respectable amount of the world's shale oil and shale gas reserves (click chart to enlarge).

world oil holders

Unfortunately, they're way behind in the North American shale boom.

Pemex is just finishing its second shale oil well in northern Veracruz state. Full commercial production of the country's shale oil and gas resources isn't expected for another year and a half.

In other words, the countdown to 2015 is on...

And that's when Pemex (assuming it's still Pemex) expects to start heavily developing Mexico's shale resources.

But we don't need to wait around for 17 months for Pemex to get its act together to realize some of these profits...

Although Pemex may not be for sale, the state-run company is fully aware of how much outside help it'll take to develop the 13 billion barrels of recoverable shale oil beneath Mexican soil.

Over the next year, I have a feeling Mexico will become friendlier with foreign oil companies that have the kind of experience necessary to tap into the tight oil-bearing rock formations.

After all, our own oil boom is in full gear. And the market is still flush with shale profits.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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