WoodMac: Mexico's Round One is internationally competitive

On 14 September, Mexico's Finance Ministry announced the minimum acceptable bids for the shallow water development opportunities phase of Round One.

Image of Round One. From CNH.

Wood Mackenzie considers the minimum acceptable bids to be internationally competitive and expects that around two-thirds of the qualified companies could place bids. “Ultimately, we think this will result in at least three of the five areas on offer to be awarded,” Pablo Medina, research analyst for Latin America upstream oil and gas at Wood Mackenzie said.  

The announcement comes two weeks ahead of the shallow water phase's closing on 30 September 2015.  Wood Mackenzie’s analysis notes that the minimum government profit share for the five areas on offer ranges from 30% to 36%. There is no minimum work commitment. The bidding formula remains unchanged with 90% of each bid weighted towards government profit share and the remainder towards additional work commitment.

Wood Mackenzie emphasizes that lessons learned in the shallow water exploration closing have been applied to this phase.

“In the previous phase, the government kept the minimum acceptable profit share bid secret. Companies bid under the minimum by just 5% on three of the blocks. Only two out of 14 blocks on offer were awarded so this is why the government decided to disclose the minimums two weeks ahead of the second phase closing.  Companies now have time to reconsider their bidding strategies based on the government's announcement,” Medina said.

Medina continued: “The second phase of Round One was initially perceived as unattractive for some companies given the small field size averaging 68 MMboe per bid area. However, given the delays with the Pemex migrations and JVs, companies seeking a rapid entry into Mexico may now deem these discovered resource opportunities (DROs) to be attractive.”

Wood Mackenzie’s analysis underscores that companies with the means could acquire operational experience through the development of these fields. Some companies may even be willing to reduce some economic upside through aggressive bidding in order to establish an early foothold in the country and position themselves for later opportunities. 

“A diverse range of companies that match this description qualified for this phase including Majors, International E&Ps, Asian NOCs and private-equity/Mexican conglomerate-backed companies,” Medina said. 

Overall, Wood Mackenzie expects that the terms set for this phase, including the prior announcement of competitive minimum bids, are positive and will result in a successful licensing round. Due to delays in the launch of Pemex's JVs and service contract migrations, some companies perceive these opportunities to be an expedient way to develop operational experience in Mexico while acquiring DROs with potentially attractive economics. “Now that a reasonable minimum bid level has been disclosed, competitive bidding will have the opportunity to set the market value of these assets,” Medina concluded.

The following are more key findings from Wood Mackenzie's analysis:

• There is a strong case for submitting bids for AMT, Hokchi and Mison-Nak.
• Ichalkil-Pokoch could be an attractive opportunity for some companies, but its returns could be lower than the top three areas.
• Xulum looks less attractive due to its small reserve size, heavy crude, and distance from infrastructure. Based on our assumptions, it will struggle to generate a reasonable rate of return under the announced minimum profit share.
• The hurdle rate that bidders employ for these opportunities will be a critical factor in developing a bid strategy. A bidder using a 15% IRR hurdle rate might be prepared to offer around a 70% government profit share bid for Hokchi, but a company applying a 20% hurdle rate would only bid up to around 55%.
• Risk factors such as higher costs, lower production, and lower long-term oil prices will also influence bids. We ran a downside sensitivity analysis to determine how vulnerable these areas are to these major risk factors. 
• Consortia will be particularly aggressive given that most are backed by private equity or a large Mexican conglomerate. These backers are not exposed to low oil prices and may view the current environment as a lower-cost entry opportunity.
• The opportunities available are arguably not material enough for most Majors. However, it is possible that they see offshore Mexico as an area of strategic interest and that these smaller fields could serve as an entry foothold to position them for later opportunities. The Majors could gain operational experience in Mexico without the security concerns associated with onshore acreage, and for a low entry cost relative to the later rounds.
• Asian NOCs could be looking at Mexico with a long-term perspective. The delays with the Pemex JVs have created a notion that there is a lack of material opportunities on offer, making these DROs appear more interesting. We believe that these shallow-water fields could provide a chance for the NOCs to spearhead their entry into Mexico with assets that could be onstream before the end of the decade. 
• For some Independents, Round One could be a way to enter a resource-rich country that has lower above-ground risk than other countries in their portfolio. For others, Mexico could be a way to expand their Latin American presence, into a country offering resource theme diversity.

Read more:

Mexico’s Round One minimums released

Where does Mexico go from here?

Mexico's bleak Round One ends

Talos consortia only Round One winner