Facing up to an imminent energy crisis

By Rudy Martin | 2008-06-30

Last week, PEMEX reported that crude oil production at Cantarell, the third largest oil field in the world, declined 439 million barrels or by 14% over the same period last year. Light, sweet crude oil hit a record price of nearly 143 dollars a barrel Friday. While Americans buckle up for higher gasoline prices over the upcoming Fourth of July holiday, the drama of Mexico’s awakening to the reality of its own energy shortfall continues.

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In this week’s episode, Mexico’s Secretary of Energy, Georgina Kessel again reiterated the need to make the state controlled oil company PEMEX more efficient and to find new reserves. Mexico has six refineries and declining reserves and slowing daily production. The Mexican oil resource management system is not keeping up with demand. As a result of a long series of missed opportunities, Mexico now imports 4 out of every 10 liters of gasoline and it is also a net importer of diesel and natural gas. Secretary Kessel underscored her point by mentioning that the supply situation is already tight in some interior regions. In some spots, the supply of petroleum products is only one day during peak demand periods.

For longer term investors, the real problem here is not the capability of PEMEX and it’s not the Mexican government’s resolve. The problems are timing and external resource constraints.

No matter how far down the Mexico oil production falls it will serve as an example to others. In this case progressively higher Peak Oil production went from an optimistic target goal to a sad historical fact in a short period of time. On top of this, with the limited availability of offshore drilling equipment and ships that are now being booked five years in advance, there is a declining slim chance this will turn out positive for Mexico without external help and without significant political change.

Presidential candidate McCain visits Mexico on July 3rd. Expect him to reiterate his support for NAFTA and to stress how important Mexico is to the US – especially in energy sector.

For more information about which stocks are likely to directly benefit from the exploration and development of Mexican oil, signup for my monthly newsletter, The Latin Capital Market Report.

Company News

• Petrobras (PBR:NYSE) Brazil's state-run PetroBras will start pumping oil from Nigeria's offshore Agbami oil field in partnership with Total and Chevron-Texaco, the Agencia Brasil state news service reported. PetroBras plans to pump 100,000 barrels a day from the field and will boost its output to 250,000 barrels a day by next year. The company plans to invest some 15 billion dollars over the upcoming four years in foreign oil ventures.

• Braskem SA (BAK:NYSE) placed debt to fund its Ipiranga buy. Brazilian petrochemicals corporation Braskem has placed a US$500 million debt offering, becoming one of the first companies to benefit from Brazil’s new investment grade status.

• Distribucion Y Servicios (DYS:NYSE) the stock was among the hardest hit last week. The ADR reached a high of 24.8 and fell back to 21.5 as investors continue to speculate as to who might be interested in acquiring this Chilean supermarket chain.

General News

• The emerging capital markets retreated last week. The average Latin Stock Beat Universe was down 3% last week and is down 6.6% for the month. Momentum is negative. Stocks with gains for the week totaled 16 and losers totaled 95.