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Mexico's Oil And Gas Licensing 'Round One' Finally Picks Up Pace

International and domestic private sector participants were designated catalysts for rejuvenating Mexico’s oil and gas sector, after the country tore-up constitutional impediments – dating as far back as 1938 – barring their participation.

Craving foreign direct investment, President Enrique Peña Nieto promised wholesale reform and renewed optimism in August 2014. Welcoming international players to a sector that was off limits for them in Mexico and curbing the clout of state-owned behemoth Petroleos Mexicanos or Pemex was the order of the day.

After Pemex walked away with most of the so-called “Round Zero”, phase I of “Round One” was the one to watch out for private sector challengers. True to form, some 30 international oil and gas companies expressed interest, with anecdotal evidence pointing to mounting regional interest as well. The President’s promise held firm despite the oil price decline, with policymakers, corporate advisers and analysts voicing a sense of hope when I reported on the subject for Forbes from Mexico City earlier in March.

Blame it on a high bid /ask threshold differential, oil price volatility or simply a country’s inexperience in managing the process at an extraordinary time for the sector – the much touted initial phase did not match the hype. Only 18 companies and seven consortia turned up with none of the oil majors in the room on decision day of 15 July 2015.

Eventually, nine decided to bid, of which seven actually did so and only two bids (Block 2 and Block 7) met the Mexican Government’s threshold price. When the dust settled, a mere 14% of the exploration areas on offer had received bids. By all accounts, that was a very poor showing compared to the historic first oil and gas licensing rounds of regional peers Colombia and Brazil, even if we agree that sector headwinds conspired against Mexico.

However, what has happened since leaves room for optimism as the government moved to ease bidding terms and conditions, Lourdes Melgar, Deputy Secretary of Energy in Mexico, told the IRN Oil & Gas International Licensing Summit 2015 in London.

Overtures included an unveiling of the government’s minimum threshold two weeks before its latest award of exploration rights on 30 September. The end result was a complete reversal of the events of July, as the auction comprising of nine Gulf of Mexico blocks split into five production sharing agreements saw three winning bids.

BP-controlled Pan American Energy, Italy’s Eni, Argentina’s E&P Hidrocarburos y Servicios, US independent Fieldwood and domestic player Petrobal were in the winners mix much to the delight of the country’s finance ministry.

“The process is now about balancing risk and return as we go past the initial stages of liberalization of the sector. Mexico is seeing diversity in terms of industry participants who are coming forward,” Melgar said, promising the country would continue with the opening up of further oil and gas exploration blocks at pace.

Bidding for 25 mature onshore fields in Nuevo Leon, Tamaulipas, Veracruz, Tabasco and Chiapas areas is on the horizon. As is deepwater offshore exploration in Perdido and Salina Basin prospects, with the latter being an extra heavy oil play.

The Deputy Secretary of Energy said her country expects production from the awarded phase II fields to commence by the fourth quarter of 2018. While total estimates for the five blocks comes up to 355 million barrels of oil equivalent (boe), peak output is likely to be in the 85,000 to 90,000 boe per day range.

Overall, the successful phase II bids even make out the first foray to be an initial lesson in licensing, rather than the failure it was in a relative sense.

Big question is where from here? “Onwards and upwards,” said Melgar adding that the Mexican government would lead the country’s oil and gas sector towards “profound change” in breaking the absolute monopoly of state-owned Pemex.

“Furthermore, the government has issued a five-year plan for exploration and production with sustainability at the forefront of all considerations and industry-wide consultation. The word ‘sustainability’ was exclusively inserted in our framework for constitutional change.”

Melgar also promised “unprecedented levels of transparency” in terms of bidding processes and procedures, as well as derived incomes and proceeds of the oil and gas bids, to garner “public, corporate and institutional investor” confidence.

In March there was hope, July saw disappointment, and September was marked by optimism tinged with relief. Mexico’s licensing journey from here on might have all to do with realism and managing expectations at a precarious time for the oil and gas business.

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