In 2006, Mexico was the sixth-largest oil producer in the world, and the second largest in the Western Hemisphere (behind the United States). State-owned Petroleos Mexicanos (Pemex) holds a monopoly on oil production in the country and is one of the largest oil companies in the world. However, oil production in the country has begun to decrease, as production at the giant Cantarell field declines. The oil sector is a crucial component of Mexico’s economy: while its relative importance to the general Mexican economy has declined, the oil sector still generates over 10 percent of the country’s export earnings. More importantly, the government relies upon earnings from the oil industry (including taxes and direct payments from Pemex) for one-third of total government revenues. Therefore, any decline in production at Pemex has a direct effect upon the country’s overall fiscal balance.

Mexico’s total energy consumption in 2005 consisted mostly of oil (59 percent), followed by natural gas (27 percent). All other fuel types contribute smaller amounts to Mexico’s overall energy mix. Natural gas is increasingly replacing oil as a feedstock in power generation, due in part to the high level of world oil prices. However, Mexico is a net importer of natural gas, so higher levels of natural gas consumption will depend upon increased domestic production or imports from either the United States or via liquefied natural gas (LNG).

According to the Oil and Gas Journal (OGJ), Mexico had 12.4 billion barrels of proven oil reserves as of January 1, 2007. Most reserves consist of heavy crude oil varieties, with a specific gravity of less than 25° API. The largest concentration of remaining reserves occurs offshore in the southern part of the country, especially in the CampecheBasin. There are also sizable reserves in Mexico’s onshore basins in the northern parts of the country.

In 2006, Mexico was the sixth-largest producer of oil in the world. The country produced an average of 3.71 million barrels per day (bbl/d) of total oil liquids during 2006, down from 3.78 million bbl/d in 2005. Of Mexico’s oil production, about 88 percent was crude oil and condensate, the rest consisting of natural gas liquids (NGL) and refinery gain. Many analysts believe that Mexican oil production has peaked, and that the country’s production will continue to decline in the coming years. Based on its December 2007 Short Term Energy Outlook, EIA forecasts that Mexico will produce 3.52 million bbl/d of oil in 2007 and 3.32 million bbl/d in 2008. The decline is driven mainly by falling production at the super-giant Cantarell field (please see below for a more detailed discussion of Cantarell).

Mexico’s proven reserves have declined in recent years. According to state-owned Pemex, Mexico’s reserves/production ratio (based on previous-year production levels) fell from 20 years in 2002 to 10 years in 2006. Analysts believe that Pemex does not have sufficient funds available for exploration and investment to reverse the decline, owing to the larger amount of its revenues that the company transfers to the federal government.

The Mexican constitution provides that the Mexican nation owns all hydrocarbon resources in the country. In 1938, Mexico nationalized its oil sector, creating Pemex as the sole oil operator in the country. Pemex has four operating subsidiaries: Exploration and Production, Gas and Basic Petrochemicals, Petrochemicals, and Refining. Pemex is the largest company in Mexico and one of the largest oil and natural gas companies in the world.

Pemex faces a variety of challenges in its efforts to stem Mexico’s oil production decline. First, Pemex sends a large share of its revenues to the federal government, sometimes transferring amounts in excess of its actual profits. In addition, Mexico’s Congress must approve Pemex’s budget each year. This has the effect of constraining Pemex’s ability to independently make funding decisions and can hinder long-term planning efforts. These fiscal imbalances have led to Pemex carrying a high debt load, which could hinder Pemex’s access to international capital markets and prohibit increased spending on exploration and production. There have been efforts to help address some of these challenges. In September 2007, Mexico’s Congress approved some reforms, including a reduction in the tax rate levied on Pemex, which will make billions of additional dollars per year available to the company.

Most of Mexico’s oil production occurs in the Gulf of Campeche, located off the south-eastern coast of the country in the Gulf of Mexico. In 2006, this area accounted for 80 percent of Mexico’s total crude oil production. Other important production centers are onshore basins in the northern and southern parts of the country. Due to the concentration of Mexico’s oil production in the Gulf of Campeche area, any tropical storms or hurricanes passing through the area can disrupt oil operations. In 2007, Hurricane Dean forced the evacuation of all offshore platforms and shut-in all production for several days. In 2005, Hurricane Emily also impacted Pemex’s operations in the Gulf.

The Cantarell oil field, located in the Gulf of Campeche, is one of the largest oil fields in the world. In 2006, Cantarell produced 1.8 million bbl/d of crude oil, or 55 percent of the national total. The field consists of four major subfields: Akal, Nohoch, Chac, and Kutz. Production at Cantarell began in 1979, but production soon began to decline due to falling reservoir pressure. In 1997, Pemex developed a plan to reverse the field’s decline by injecting nitrogen into the reservoir to maintain pressure. The plan was a success, with production at Cantarell in 2004 double the level seen in 1995. However, production at Cantarell soon began to decline again. Crude oil production at the field peaked in 2004 at 2.14 million bbl/d, and production will likely continue to decline despite any incremental gains by incorporating additional satellite fields.

The two other major oil production centers in the Gulf of Campeche are Ku-Maloob-Zaap (KMZ) and Abkatun-Pol-Chuc. Located adjacent to Cantarell, the KMZ complex produced 403,000 bbl/d of crude oil in 2006, up from 321,700 bbl/d of crude oil in 2005. Production at the field has risen by 50 percent over the past decade, and Pemex hopes that continued development of the field will replace some of the decline in Cantarell production. By pursuing a nitrogen re-injection program similar to the one used at Cantarell, Pemex hopes to increase production at KMZ to 800,000 bbl/d by 2010. Another source of new crude oil production is Pemex’sCrudeoLigaro Marino, which aims to increase offshore production of lighter crude varieties by 250,000 bbl/d by 2010.

Off the coast of Tabasco state, the Abkatun-Pol-Chuchcomplex produced 332,000 bbl/d of crude oil in 2006, around 11 percent higher than 2005. However, 2006 production was still about half the level seen in 1996.

Important onshore production centers in the southern part of the country include Bellota-Jujoand Samaria-Luna. The largest field in the north is Poza Rica. Pemex sees the onshore Chicontepec project, located northeast of Mexico City, as a potentially large source of future production growth. Chincotepec contains an estimated 6.5 billion barrels of probable reserves. As of the end of 2004, Pemex reported that it had drilled 93 exploratory and 1,004 development wells in the area. However, the Chincotepec project is still in the very early stages of development, and there are no solid estimates available as to its full production potential.

Most of Mexico’s crude oil production consists of heavy crude varieties. Maya, a heavy crude which averages 22° API and 3.5-4.0 percent sulfur content, generally represents around two-thirds of Mexico’s total oil production. The country also produces two lighter crude streams, Isthmus (34° API) and Olmeca (39° API). In general, Mexico retains most of the lighter crude streams for domestic consumption and exports the bulk of its Maya production to the U.S. Gulf Coast, which has the sophisticated refining capacity necessary to process these heavy crudes.

Pemex operates an extensive pipeline network in Mexico that connects major production centers with domestic refineries and export terminals. This network consists of over 453 pipelines spanning 2,900 miles, with the largest concentration occurring in the southern part of the country. Mexico does not have any international pipeline connections, with most exports leaving the country via tanker from three export terminals in the southern part of the country: CayoArcas, Dos Bocas, and Coatzacoalcos.

In 2006, Mexico exported 1.79 million bbl/d of crude oil. The United States receives the vast majority of Mexico’s crude oil exports, which mostly arrive via tanker in at the GulfCoast. The close proximity of the U.S. market and the sophisticated level of refineries there will continue to attract the bulk of Mexico’s oil exports. Mexico is consistently one of the top three exporters of crude oil to the U.S., along with Canada and Saudi Arabia.

Mexico’s oil consumption averaged 2.00 million bbl/d in 2006. According to OGJ, Mexico has six refineries, all operated by Pemex, with a total refining capacity of 1.68 million bbl/d. The largest facility in the country is the 330,000-bbl/d Salina Cruz facility. Pemex also controls 50 percent of the 334,000-bbl/d Deer Park refinery in Texas. Despite its status as one of the world’s largest crude oil exporters, Mexico is a net importer of refined petroleum products. In 2006, Mexico imported 473,000 bbl/d of refined petroleum products, while exporting 183,000 bbl/d. Gasoline represented over 60 percent of product imports. A resumption of brisk economic growth is one cause for the increase in refined product imports.

According to OGJ, Mexico had 14.6 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2007. According to Pemex, the Southern Region of the country contains the largest share of proven reserves. However, the Northern Region will likely be the center of future reserves growth, as it contains almost ten times as much probable and possible natural gas reserves as the Southern Region. In 2006, Mexico produced 1.71 Tcf of natural gas, while consuming 1.98 Tcf. Pemex reported that Mexico imported 451 million cubic feet per day (MMcf/d) of natural gas in 2006.

Mexico’s natural gas production has grown in recent years, following steady declines during the late 1990s. During that time, natural gas consumption has grown steadily, driven mostly by the electricity sector, whose share of total natural gas consumption increased from 16 percent in 1996 to 32 percent in 2006. Pemex itself is the single largest consumer of natural gas, representing around 40 percent of domestic consumption in 2006.

Pemex holds a monopoly on natural gas exploration and production in Mexico. However, there is some private participation in ancillary services that support Pemex operations. The Mexican government opened the downstream natural gas sector to private operators in 1995, though no single company may participate in more than one industry function (transportation, storage, or distribution). It also created the Energy Regulatory Commission (CRE) to monitor the sector. CRE has awarded permits for natural gas distribution to Gas Natural, Tractebel, Gaz de France, Sempra Energy, Kinder Morgan, TXUEnergy, Grupo Diavaz, and Grupo Imperial.

Mexico’s constitution restricts private operators in the upstream natural gas sector. However, Pemex introduced multiple service contracts (MSC) in an attempt to increase non-associated natural gas production. Under an MSC, Pemex can hire a private contractor (including both foreign and domestic firms) to conduct production activities in proven reserve areas, for which Pemex pays cash for these services. At no time do these private operators gain ownership rights over the natural gas they produce, a provision to ensure compatibility of the MSC with Mexico’s constitution.

Pemex launched the first MSC bidding round in July 2003. The company awarded five blocks in the Burgos Basin to international and domestic operators: Repsol-YPF (Spain) received the Reynosa-Monterrey block; Petrobras (Brazil), Teikoku Oil (Japan), and Grupo Diavaz (Mexico) received the Cuervito and Fronterizo blocks; Tecpetrol (Argentina), Industrial Perforadora de Campeche (Mexico) received the Mision block; and Lewis Energy (U.S.) received the Olmos block. Pemex held a second MSC bidding round in July 2004. The round included acreage in the Burgos Basin that did not receive bids in the first round (Padera-Anahuac and Ricos blocks) and newly available areas of the Sabinas Basin (Pirineo and Monclova blocks). Results from the round were mixed. Pemex awarded the Padera-Anahuac block to consortium of two Mexican oil services companies in November 2004 and the Pirineo block to a consortium of seven Latin American firms in February 2005. However, the Ricos block received no bids, while Pemex later cancelled a successful bid on the Monclova block by a consortium of two U.S. and three Mexican companies.

Mexico’s natural gas production is relatively spread throughout the country. Onshore fields in the northern part of the country represented 42 percent of Mexico’s natural gas production in 2006, while onshore fields in the south contributed 25 percent, and offshore fields in the Gulf of Campeche represented the remainder. Mexico’s natural gas production is split between associated (58 percent) and non-associated (42 percent) production.

Pemex operates over 5,700 miles of natural gas pipelines in Mexico. The company has twelve natural gas processing centers, which produced 436,000 bbl/d of natural gas liquids (NGLs, including condensates) and 215,000 bbl/d of liquefied petroleum gas (LPG) in 2006. Pemex also operates most of the country’s natural gas distribution network, which supplies processed natural gas to consumption centers. The natural gas pipeline network includes ten active import connections with the United States.

Foreign companies have been able to make inroads into Mexico’s midstream natural gas sector. In December 2006, TransCanada inaugurated the 80-mile Tamazunchale Pipeline. The system, with an initial capacity of 170 MMcf/d, extends from the Pemex natural gas processing facility in Naranjos to a gas-fired power plant near Tamazunchale. In 2007, Gas Natural acquired a 34-mile natural gas pipeline as part of a deal to purchase four gas-fired power plants from Electricite de France.

There is a single operating LNG terminal in Mexico, and one other currently under construction. In addition, there are several more plants in various stages of the planning process. Many of the facilitates are near the U.S.-Mexico border in Baja California, with the intention to supply markets in both countries. In addition, numerous additional LNG projects have been stalled or cancelled.

Altamira, a joint venture of Royal Dutch Shell (50 percent), Total (25 percent), and Mitsui (25 percent) received its first LNG cargo in August 2006. The plant, located in Tamaulipas state, has an initial capacity of 500 MMcf/d, with plans to increase the project to a peak capacity of 1.3 Bcf/d. CFE has signed a 15-year contract to purchase the entire output of the terminal.

The Costa Azul project, near Ensenada, is currently under construction. Project leader Sempra Energy plans to begin operations in the first half of 2008, with a peak send-out capacity of 1 Bcf/d. Royal Dutch Shell had originally obtained a permit to build its own LNG receiving terminal in the area, but later decided to buy into a 50 percent share of Sempra’s project instead. Most of the natural gas will supply domestic customers in northwest Mexico, but some natural gas could also be exported to California or Arizona.

In May 2004, DKRW signed an agreement with the state government of Sonora to build a 1.3-Bcf/d LNG receiving terminal at Puerto Libertad, on the Gulf of California. El Paso later joined the project as well. According to project sponsors, the plant could begin operations by 2011. Some of the natural gas will supply local consumers, with the remainder exported to the United States.

In June 2006, CFE released the first public tenders for the construction of an LNG receiving terminal at the port of Manzanillo. The tender calls for the terminal to supply 500 MMcf/d of natural gas for 15 years, possibly expanding to 1.5 Bcf/d. CFE has targeted 2011 for the commencement of the plant’s operations. In 2007, CFE signed a deal with Respol-YPF to supply LNG to the Manzanillo terminal; according to statements by Repsol-YPF, it would supply the facility from the Peru LNG project.

Mexico had 52 gigawatts of installed electricity generating capacity in 2005. The country generated 240 billion kilowatthours (Bkwh) of electric power in 2005. Conventional thermal generation represents the overwhelming majority of Mexico’s electricity generation, though the mix from these sources is gradually shifting from oil products to natural gas. Mexico consumed 183 Bkwh of electric power in 2005.

State-owned Comision Federal de Electricidad (CFE) is the dominant player in the generation sector, controlling about two-thirds of installed generating capacity. CFE also holds a monopoly on electricity transmission and distribution outside of Mexico City and some other municipalities; within those areas, state-owned Luz y Fuerza Centro (LFC) holds a monopoly on distribution activities. The Comision Reguladora de Energia (CRE) has principle regulatory oversight of the electricity sector.

Changes to Mexican law in 1992 opened the generation sector to private participation. Any company seeking to establish private electricity generating capacity or begin importing/exporting electric power must attain a permit from CRE. CFE also operates Mexico’s national transmission grid, which consists of 27,000 miles of high voltage lines, 28,000 miles of medium voltage lines, and 370,000 miles of low voltage distribution lines.

In the past, fuel oil and diesel fuel represented the largest share of the feedstock in Mexico’s conventional thermal generation mix. However, natural gas consumption for electricity generation has risen dramatically in recent years, and natural gas is now the dominant feedstock: according to Mexico’s Energy Secretariat (Sener), Mexico consumed 735 trillion Btu of natural gas for electricity generation in 2006, versus 475 trillion Btu of petroleum products. This shift has been the principle driver behind Mexico’s rising natural gas consumption. Coal consumption by the electricity sector has also risen in recent years, reaching 300 trillion Btu in 2005.

Mexico has a single nuclear power plant, the 1,400-MW Laguna Verde nuclear reactor in Veracruz, operated by CFE. In April 2007, CFE awarded a contract to an international consortium headed by Alstom to modernize the plant and increase generating capacity by 20 percent. Hydroelectricity supplied 13 percent of Mexico’s electricity generation in 2005. The largest plant in the country is the 2,400-MW Manuel Moreno Torres in Chiapas.

CFE operates two wind power facilities, La Venta and Guerrero Negro, with combined capacity of 3 MW. In March 2007, CFE La Venta II came online, adding 83MW of generating capacity to the wind park. CFE has launched a tender for a third phase of the project, which would add an additional 100MW of capacity. The Cerro Prieto complex is the largest geothermal facility in Mexico, consists of four plants with a combined capacity of 720 MW.

Mexico has an active electricity trade with the United States. Mexico exported 1.14 Bkwh of electricity to the United States in 2006, while importing 0.87 Bkwh. Many companies have build power plants near the U.S.-Mexico border with the aim of exporting all generation to the United States. There are plans to connect Mexico with Guatemala and Belize as part of the Sistema de Interconexion Electrica para America Central (SIEPAC). The plan is part of a larger effort, the Plan Puebla-Panama, to create an integrated electric power market in Central America.