Mexican Oil Chief Expects 2011 Production Increase

Walking into Jose Suarez Coppel's office overlooking Mexico City, one sees all the trappings of an oil CEO: glass bottles filled with oil samples, financial screens flashing the price of oil, production charts for oil fields.


And then there's the bright red phone behind his desk—a direct line to the president of Mexico. Suarez is the head of Petroleos Mexicanos—or Pemex—the country's state-owned oil monopoly.

Suarez was put in charge of the company last year because Pemex faced a crisis: a massive decline in daily oil production over the last 6 years, from 3.3 million barrels per day to only 2.5 million.

The Mexican government gets 40 percent of its budget from oil revenue generated by Pemex, and legislators were panicked that they would start to lose a key part of their funds as they watched the country's golden goose dying before their eyes.

Suarez says with changes being implemented this quarter, production will not only stablize, but actually increase in 2011. A Supreme Court decision just last month allows Pemex to pay outside drillers based on how much oil they find and drill for, something previously prohibited under Mexican law.

It may seem like a small change, but Suarez believes it will help Pemex structure contracts that provide enough financial incentive to get deep water drillers to partner with them in the Gulf of Mexico, where there are billions in barrels in potential reserves.

Another major hurdle is convincing legislators to regulate and tax Pemex less. Suarez can never plan long-term production budgets because he doesn't control them—Congress does. It's the equivalent of Exxon Mobil having to wait for John Bohener and Nancy Pelosi to appropriate it money every year.

And while most companies in the world have to pay taxes on profits, Pemex must pay a 60 percent tax on its revenue. It isn't that Mexico doesn't have oil—it has 30 years of reserves. The problem is it doesn't have the technology and equipment to get to those reserves because it rarely has money left over to reinvest after paying its tax bill.

As a result, the energy giant has more than $50 billion in debt, extraordinary in a world where oil is trading between $85-$100 per barrel.

The stakes are high for the U.S. because Mexico, at least for now, is one of its top three foreign oil suppliers. If Mexico doesn't turn things around, the U.S. will be forced to rely on other countries even more.