Aug. 2 (Bloomberg) -- Petroleos Mexicanos, Mexico's state- owned oil monopoly, said production at its Cantarell oil field, the world's second-largest by volume, will decline 8 percent in 2006, dropping faster than its December estimate of a 6 percent.

Cantarell will produce 1.86 million barrels of crude a day in 2006, Vinicio Suro, deputy director of planning and evaluation for Pemex's production and exploration unit, said in a conference call with analysts. Pemex in December said the field, which accounted for 57 percent of Mexican crude output in the first half of this year, would produce 1.9 million barrels per day in 2006 compared with 2.03 million barrels a day in 2005.

``The slides that they're starting to see out of Cantarell must have a lot of people stressed at Pemex,'' said John Padilla, director of IPD Latin America, an energy consulting firm with offices in Mexico City, Caracas and New York.

Pemex, the world's third-largest oil company by crude production, hasn't spent enough to develop deep-water deposits or the fractured oil pockets onshore that could eventually replace production at Cantarell because the state-run company doesn't plan much beyond the presidents' six-year term, Padilla said. Pemex accounts for about 40 percent of government revenue.

With efforts to stem Cantarell's decline and to boost output at peripheral fields, daily production at the company may decline to less than 2.8 million barrels by 2010 and 2.5 million barrels by 2012, Padilla said.

``Our bigger concern starts in about 2008,'' Padilla said.

Geological Models

Suro said Pemex is developing different geological models and estimates that could change the forecast for Cantarell production it made in December of 1.68 million barrels per day in 2007 and 1.43 million barrels a day in 2008.

Pemex expects to produce 3.345 million barrels of oil per day in 2006, Suro said, higher than 2005 daily crude output of 3.33 million barrels. In December, the company had estimated 2006 output would surpass 3.4 million barrels per day.

Crude production in the second quarter fell 3 percent to 3.33 million barrels per day compared with 3.43 million barrels a day a year earlier. In the first six months, daily crude production fell about 1 percent to 3.34 million barrels from 3.37 million barrels in 2005.

During the first half of the year, Pemex shut down 33 wells in its Cantarell field, which was discovered in 1976, because of increasing amounts of gas seeping into oil fields, Suro said.

Pemex is attempting to keep Cantarell's output from falling faster by injecting nitrogen in other parts of the field and using new extraction techniques such as horizontal drilling, he said.

The company has stepped up production at other fields, such as Ku-Maloob-Zaap, to make up for the decline of Cantarell, the world's second-largest oil field by volume.

Exploration

``We're both decreasing the decline in Cantarell with new investments and also substituting that decline with new fields,'' said Juan Jose Suarez, chief financial officer of Pemex on the call, in an interview in Mexico City.

This year, Pemex plans to spend 108 billion pesos ($9.9 billion) on production and exploration out of a total investment budget of $13.1 billion. The company will be able to finance that investment with the cash it generates, Suarez said. said Juan Jose Suarez, chief financial officer of Pemex on the call.

The company will ask for a budget of about $14 billion in 2007 and may need to borrow some to finance that, Suarez said. Pemex's net debt rose to $45.6 billion at the end of June from $35.3 billion as reported a year ago.

Cash

Pemex has more cash after a tax law that took effect in January lowered Pemex's taxes to about 52 percent of revenue in the second quarter from 62 percent a year ago. The company may begin to pay down debt in 2008 after the full effect of the tax cut kicks in, Suarez said.

The company reported second-quarter earnings rose sixfold to 11.6 billion pesos from 1.9 billion pesos a year earlier before adjusting for inflation.

Revenue jumped 28 percent to 282 billion pesos from 221 billion a year ago before adjusting for inflation and taxes rose to 145.4 billion pesos from 136.4 billion pesos as reported a year ago.

Earnings before interest, taxes, depreciation and amortization -- a measure of cash flow known as Ebitda --increased 42 percent to 218 billion pesos ($19.3 billion) from 153 billion pesos before adjusting for inflation.

To contact the reporter on this story: Thomas Black in Monterrey, Mexico at tblack@bloomberg.net

Last Updated: August 2, 2006 17:38 EDT