Schlumberger warns Mexico drug war hitting results

Wed Sep 15, 2010 6:57pm BST

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* Major Pemex contractor speaks publicly on violence

* Kidnappings, violence hurt natural gas operations in

* Pemex sees problem in areas where cartels prevent access

By Robert Campbell

MEXICO CITY, Sept 15 (Reuters) - Worsening violence is undermining energy projects in Mexico, oil services giant Schlumberger Ltd said on Wednesday in a rare acknowledgment of the toll a bloody drug war is taking on the energy sector.

Schlumberger, the Houston-based company that is one of state oil monopoly Pemex's [PEMX.UL] top service providers, blamed the drug violence for a worse-than-expected performance by its Mexican operations in the text of a presentation to be given later on Wednesday by Chief Executive Andrew Gould.

"The downturn in project activity in Mexico has been more severe than we originally anticipated as customer budget problems have been compounded with security issues in the north," according to a copy of the speech filed with U.S. securities regulators.

It was an unusually blunt statement from a big energy firm, which are traditionally reluctant to discuss Mexico's security situation for fear of offending Pemex and the government.

But the spiraling violence, which has killed more than 28,000 people since late 2006, is increasingly affecting operations in the natural-gas rich north of the country.

Industry sources told Reuters in August the violence had led Pemex and the private firms it employs to scale back drilling, maintenance and other activities at isolated sites in the Burgos basin, Mexico's main onshore natural gas production area. [ID:nN0417574]

Pemex acknowledges security is a concern in some areas, where well-armed cartels sometimes prevent staff or contractors from gaining access to sites near the U.S. border.

The violence has not affected any oil production, which is the source of a third of the federal government's revenues.

However, it has rattled private firms working with Pemex, many of whom have stepped up security precautions and forbid executives from spending time in parts of northern Mexico.

Schlumberger operates throughout Mexico, including in northern states where drug violence is on the rise as turf wars between rival cartels intensify.

CHICONTEPEC SLOWDOWN

Even though security is a worry, the main problem in Mexico for Schlumberger, which drills wells, constructs production facilities and provides services to improve output from wells, is the slowdown at Pemex's Chicontepec project.

The company is one of the largest contractors at Chicontepec, a Luxembourg-sized onshore area on Mexico's central Gulf coast, where billions of barrels of crude are locked into small geological structures that make production challenging and costly.

A slowdown in drilling at Chicontepec has contributed to a decline in overall drilling in Mexico, where only 66 wells were dug in July compared to 120 a year ago.

Chicontepec output has fallen far short of targets set by Pemex, leading to scathing criticism from regulators that the multibillion-dollar project risks being unprofitable.

Pemex has rejected the criticism, but is slowing down work until service companies, including Schlumberger, complete five so-called field laboratory projects aimed at testing new production techniques. (Reporting by Robert Campbell; editing by Missy Ryan, Bernard Orr)

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