By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)

Mexico’s oil production is in a dangerously steep decline. Why should that matter to the United States? Because Mexico exports 1.2 million barrels of oil per day to the United States which is 8% of the U.S. supplies. Mexico ranks third behind Canada and Saudi Arabia in exports to the United States. In an already tight oil market it would be difficult for the United States to find another million plus barrels. And if we could, it would likely come from a shakier supplier.

In a recent televised address, Mexico’s President Felipe Calderon warned “We must act now, because time, and oil, is running out on us.” Analysts estimate at the current rate of consumption Mexico’s oil production could last 9.2 years and exporting will end in less time. “Unless something is done quickly to allow Pemex (Petroleos Mexicanos) to operate more as a real oil company, and not as a bureaucratic state-run firm, it will become a marginal exporter in the very short run”, says David shields, a Mexico City-based energy analyst and author of two books on Pemex. This would be a national disaster.

Mexico’s oil revenues account for 40% of their federal budget. For decades Pemex has been the cash cow for each president, providing the revenues for social programs, operating expenses, and government salaries. The majority of the Pemex revenues go first to union corruption, then to the federal budget and what is left over goes to operate Pemex. Even with revenues from almost $100 oil, Pemex went into the red in 2007, while oil companies around the world reaped record profits.

Mexico nationalized its oil industry in 1938. Taking the oil fields from foreign companies and standing up against foreign businesses, was more than just nationalizing the oil industry; it was an historic event in Mexico’s history. “In the rest of the world, oil is a commodity, in Mexico it is a symbol of sovereignty and nationalism”, said Hermenegildo Castro, a Senate aide.

The short story is, Pemex is broke and in debt; and since nationalizing the oil fields in 1938, has not been allowed to partner with foreign companies to develop potential oil fields. Mexico’s constitution declares that all oil belongs to the state and bars Pemex from conventional contracts with international oil companies. Mexico’s largest oil field Cantarell, which is the second largest oil field in the world, is in an annual decline rate of 15%. Mexico’s congress has known for several years the fate they are now facing and have done nothing to prepare for it. The continued rise of high oil prices has disguised the decline in production.

The good news is Mexico’s largest potential reserves are believed to be in the deep waters of the Gulf of Mexico. The bad news is Mexico does not have the technology, money or trained personnel to explore in deepwater and Mexico’s constitution bars Pemex from partnering with foreign oil companies.

Mexico’s President, Calderon recently introduced legislation that will give Pemex the ability to contract work out to private companies, manage its own revenues and raise cash by issuing bonds that only Mexicans could buy. Oil expert David Shields said Calderon’s energy reform bill is a good start, but falls short of making the seeping changes necessary to set Mexico’s ailing state oil company back on track. The bill does not allow companies to share in oil revenues and is not currently generating enthusiasm from international oil companies.

Deepwater exploration takes 5 to 10 years from the start to the gasoline pump. “We must act now, because time, and oil, is running out on us”, warned President Calderon.