MEXICO CITY (Reuters) - State-run oil company Pemex is spending heavily on the Chicontepec oil field viewed as the least potentially profitable of current projects, Mexico's oil regulator says.

Pemex spent 26.7 billion pesos ($1.98 billion) on the Chicontepec project in 2011.It represents 12 percent of the company's total production and exploration budget and 86 percent of its exploration budget, according to an English version of a report posted on Saturday on the National Hydrocarbons Commission's website.

"Chicontepec projects present the least profitability and highest uncertainty when they are compared to every other project," the report said.

Overhauling the state oil monopoly to increase output, profitability and transparency is a top issue in the July 1 presidential election, since Mexico relies on oil revenues to fund around a third of the federal budget.

Mexico, the world's No. 7 oil producer and a major exporter to the United States, could become an oil importer in the coming years if it can not replace a sharp drop in output from major oil fields with new discoveries.

The report also says 75 percent of potential deepwater exploration projects would not likely be profitable to develop. Shallow-water projects look more likely to generate profits, it says.

Pemex, which is not publicly traded, has lagged in developing the technology to successfully tap deepwater wells. That has led to calls to open up the oil sector to greater private investment, which could jump-start production.

The independent commission, which gives official recommendations to Pemex, last year rejected the oil giant's development plan for the Chicontepec fields.

Pemex has sunk billions of dollars of investment into the Chicontepec project, but has fallen short of production goals due to challenging geology.

The commission report said Pemex had much more profitable projects that it could be exploiting, noting only 22 percent of exploration projects that would likely be highly profitable were funded in 2011.

The report noted Pemex was only spending 13.5 percent of its production and exploration budget on developing new projects.

How to improve management of Pemex's hulking bureaucracy is high on the agenda in the political campaign.

The centrist Institutional Revolutionary Party, or PRI, has a wide poll lead over the ruling conservatives, the National Action Party (PAN), and both parties are proposing major reforms, including opening up the oil industry to more private investment.

($1 = 13.4930 Mexican pesos)

(Reporting By Michael O'Boyle and Mica Rosenberg; Editing by Xavier Briand)