Dec. 11 (Bloomberg) -- Petroleos Mexicanos, the biggest Latin American oil producer, may face a production drop of about 1 million barrels a day by 2016 if drilling equipment remains scarce and lawmakers fail to ease rules on the company.

Energy Minister Georgina Kessel said the government has a worst-case scenario of daily production at Pemex, the third- largest oil exporter to the U.S., falling to 2.1 million barrels in nine years from 3.1 million. In a best-case scenario, which includes law changes and stepped-up drilling in deepwater fields, Pemex may boost daily output to 3.4 million barrels, Kessel said in a Mexico City speech.

``We have to design technical, legal and economic instruments to strengthen the execution capacity of Pemex,'' Kessel said. ``I'm confident that with the legislators who represent us, we'll find solutions to reach this.''

The government for decades funded its spending with Pemex earnings and left little for the state-run company to increase crude production. Three years after production from Pemex's largest oil field, Cantarell, began to decrease, lawmakers started to react. Congress earmarked 182.6 billion pesos ($17 billion) for Pemex to spend in 2008, the largest budget.

Lawmakers also reduced taxes in a 2005 law and cut them again in September in a law that takes effect in January. Legislators are expected to vote on an energy bill in the session of Congress that begins in February, which may contemplate allowing Pemex to form alliances with state-run companies such as Petroleo Brasileiro SA and Norway's StatoilHydro ASA.

Cutting Debt

Pemex will lower debt this year for the first time since it began borrowing in 2001 and doubled its debt to more than $50 billion last year to expand exploration and offset Cantarell's decline. At the end of September, debt fell 13 percent to 537.9 billion pesos from a year earlier.

Still, Pemex faces declining crude output as it seeks to ramp up production in deep water and an onshore field called Chicontepec. The company's daily crude production has averaged 3.11 million barrels during the first 10 months of this year compared with 3.26 million barrels in 2006 and a peak of 3.38 million barrels in 2004.

Pemex Chief Executive Officer Jesus Reyes Heroles said in June that the company set a goal to keep production at 3.1 million barrels per day until 2012.

To contact the reporters on this story: Adriana Arai in Mexico City at at aarai1@bloomberg.net and Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net.

Last Updated: December 11, 2007 20:28 EST