Gold and silver mines around the world are facing increasing costs. One of the biggest costs they face is the increasing price of energy. Steve St. Angelo shows how the dwindling supply of major oil deposits, especially in Mexico, are leading to similar supply issues in metals.
The largest silver producing country in the world saw its oil production decline to the lowest level since 1995. Mexico who produced 162 million ounces of silver in 2012 is slated to increase this amount substantially by the end of the decade... that is, if they have the available energy to do so.
If we look at the chart below, we can see just how much Mexico's oil production has declined since 2000:
The last plot line on the chart was for June 2013 which was approximately 2.51 mbd (million barrels a day). However, according to PEMEX, Mexico's state-run oil company, in the month of July its production of crude & condensate declined to 2.48 mbd.
You see, this is becoming a big concern. The world and media have focused too much on total oil production rather than what is referred to as "Net Oil Exports." It doesn't really matter how much oil a country can produce, but rather how much it can export.
If we look at the chart below, we can see that Indonesia which used to be a part of OPEC, is now a net importer of oil:
Indonesia exported 1.18 mbd of oil in 1980, but by 2011 it had to import 489,000 barrels a day just to meet its domestic consumption. Indonesia fell victim to declining oil production on top of increased domestic consumption — a double whammy. The Land Export Model — a pattern of falling net oil exports was developed by Jeffrey Brown.
[Hear More: Jeffrey Brown on Global Net Oil Exports: Is It Midnight on the Titanic?]
If we take this example of falling net oil exports and see how it has impacted Mexico, we have the follow chart:
The gray area of the chart shows oil production, the black line denotes oil consumption and the green area is the actual amount of net oil exports. What we see happening here is the black line (consumption) is slowly increasing while the production and net exports are both decreasing.
Now, let me clarify a few of the figures. The oil production figures from the first chart at the top of the article represents only crude oil and condensate. The net oil exports above show total supply which includes natural gas plant liquids, refining gains and other fuels. Hence, the difference of about 400,000 +/- barrels.
Regardless, Mexico's total net oil exports declined from 1.9 mbd in 2004 to only 837,000 barrels a day in 2012. As Mexico's production continues to decline and as domestic consumption increases, the country will more than likely have to import oil by the end of the decade — or even sooner.
According to the recent article on Mexico's oil decline:
Two-thirds of Mexico's oil fields are in decline. Pemex estimates that oil output at the country's top producing field, Ku Maloob Zaap, will drop 60 percent over the next decade.
The decline in Mexico's oil production will put severe pressure on its gold and silver mining industry. Fresnillo is forecasting its silver production to grow from 37 million oz in 2012 to 65 million oz by 2018. Furthermore, many other silver mining companies in the country also plan on growing their silver production by the end of the decade.
Few analysts are forecasting how a falling oil supply in Mexico will impact the country's mining industry. We also must remember this pattern of falling oil production and increased domestic consumption is taking place in most of the oil exporting countries of the world.
[Related: Geologist Keith Barron: Gold & Silver Below the Cost of Production - Supply Crunch Ahead]
Additional Note:
Mexico is considering opening up the country to private oil and gas companies to assist in helping bring on more production in the future. However, I believe the optimistic projections of much higher oil production by the end of the decade may be quite unrealistic.
Raúl González García, Professional Geological Engineer
Director of Mexpetrol Argentina, 1996-1997
Sub Director of Exploration, PEMEX, 1991-1995
Mexico´s crude production peaked at 3.455 Mbopd in 2004 and has already declined to 2.568 Mbopd, (Feb 28, 2013). I believe it will not be possible to return to former production levels, nor even to the present official forecast of 3 million barrels per day, because of the following reasons:
The giant and super giant oil reservoirs, like Cantarell, discovered more than 30 years ago, were produced irrationally at accelerated rates and are now in an advanced stage of decline or are practically exhausted.
The rate of increased production from new oil discoveries will be slower than the rate of decline of existing mature oil fields because of delays and inefficiencies in development.
Because of these considerations, I believe that neither opening up exploration and production of mature fields to private investment nor applying new technologies to development of unconventional resources (shale oil and tight oil sands) will be able to add significantly to oil production. All that can be hoped for is that the decline will abate and production will remain well above domestic refining capacity of about 1.5 million barrels per day in order to avoid having to import feedstock.
Increasing investments in the belief that they will lead to increased overall production is a grave strategic error. It will continue to cause enormous value destruction for PEMEX and Mexico.
I will be writing more on this subject in future articles. At some point in time, the availability of liquid energy that runs the gold and silver mines of the world will fall in short supply. This is a future very few mining analysts or investors have considered.
Peak silver is coming and very few are prepared for how this will impact price.
There will be updates to the falling net oil exports in Mexico as well analysis on how this will impact its mining industry in the future at the SRSrocco Report.
Comments are always welcome at SRSrocco @ gmail.com
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