After Mexico’s historic energy reform, many have high hopes for the country’s oil and gas sector. But, the first offshore bid round was a disappointment with only two of 14 areas being awarded. Audrey Leon examines what the country has learned from its first auction and what can be done for future rounds.
The opening of Mexico’s energy sector was a historic move for a country who still heavily prizes its resources as a treasured birthright.
Much fanfare preceded the country’s first offshore round, which included 14 shallow water areas off the coastal states of Veracruz, Tabasco and Campeche. However, when it came to down to days before the historic round, many players, including Houston-based Noble Energy, Glencore E&P, Colombia’s Ecopetrol, and Thailand’s PTTEP, and even Mexican national oil company Pemex chose to sit out and watch how the event unfolded.
The round held on 15 July took about three hours, in which the only winner of two areas – Blocks 2 and 7 – were awarded to the Talos consortia made up of Houston-based Talos Energy (45%, operator), Mexico-based Sierra Oil & Gas (45%), and the UK-based Premier Oil (10%). The round was a failure by Mexican regulator the National Hydrocarbons Commission (CNH)’s own standards, which said the round would be a success if 4-7 areas were awarded.
“I do think (Round One) was a significant disappointment,” says Francisco J. Monaldi, a fellow in Latin American Energy Policy for the Baker Institute at Rice University. “Many companies chose to stay out to see how things evolved, and how they settled, with the expectation that they don’t want to be the guinea pigs; they wanted to understand the rules better. I think the expectation was too high.”
What happened?
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| Photo from Mexico's Round One auction in July. |
There were a lot of criticisms hurled at Mexico’s first offshore bid round. For one, Mexico kept their minimum production share requirements a secret until the bidding took place. Monaldi says, “The arguments that I have heard for not disclosing the minimum, is that it frames the bidding offers to be close to that level, but many other countries do set a publicly the minimum.”
According to Adrian Lara, a senior analyst with GlobalData, of the 14 blocks less than five of the areas up for bid had conditions that could have attractive prospective resources, and this coupled with the terms were offered by the state, made them even less attractive to bidders.
“In the end,” he says, “the minimum established by the government – the profit to the state was set at 40% – was considered to be quite high. In between 20-30% was GlobalData’s assessment, which was what we discussed with some operators. We were not surprised that many did not present an offer [for the blocks].”
An often cited criticism of Round One was that the areas up for lease were not attractive enough for international oil companies (IOCs). Monaldi says it was a curious strategy when compared with Venezuela’s first leasing round where the OPEC member auctioned proven reserves. The expectation, Monaldi says, is Mexico’s next round in September will feature more attractive areas with proven reserves.
“It’s strange (the strategy), the second bid should have been the first,” Monaldi says. “I’m not sure why they did it in this order, but I think they (Mexican officials) wanted to learn.”
Another criticism of Round One was that Mexican officials rejected bids for being too low, even when no other bid was available. For example, US-based oil company Murphy Oil and its Malaysian partner Petronas presented a bid for Area 3 and 4, two 233sq km areas offshore Veracruz at a water depths ranging 53m and 70m, respectively. However, both were rejected for being too low. Similarly, Indian IOC ONGC Videsh’s bid was rejected for Area 6, a 466sq km tract offshore Tabasco, for being too low.
CNH was criticized for not opting to renegotiate the bids offered. However, both Monaldi and Lara say too much was at stake during this first round for the agency to renegotiate those bids offered.
“These bids aren’t going to save Mexico,” Monaldi says. “The production from these fields is years off. This will not reverse declining oil production, what will is farm-outs which will be offered in December.”
Lara says that CNH lacks the discretionary power to even renegotiate offers. “They could be accused of colluding (if they did) and they are supposed to be disconnected.” He says flexibility would have a high cost, politically, for the agency.
“CNH is still in its infancy,” he says. “They need to be considered independent.”
Monaldi agrees saying that CNH needs to be very clear and transparent for the Mexican public to accept the energy reform. “They have set these minimum levels and if they were willing to go below, it would send a signal that they were selling out,” Monaldi says. “It’s not a fire sale.”
Monaldi says the Ministry of Finance’s thinking behind high standards started before the oil price collapse so they had a higher expectation of what they could get for these leases, but if they didn’t receive it, Mexico could always choose to auction them again later.
Historical view
Monaldi says when Mexico’s first round is weighed against other Latin American countries first leasing rounds, the outcome is about the same.
“The first time Venezuela opened, it wasn’t particularly successful either,” he says. “Colombia had higher participation, but with that round Ecopetrol was the lead player.” Monaldi says it was a similar story in Brazil’s first round.
“The fact that Pemex did not participate, it changes the picture, because if you took Ecopetrol and Petrobras out of the equation, international participation was low (in Brazil and Colombia’s first rounds).”
What can be done?
In addition to offering better tracts, Mexico working fast to improve conditions. Monaldi says Mexican officials are clarifying the cancelation of contracts, the role of arbitration, increasing the flexibility of the participation of companies outside of the consortia, and cutting the corporate guarantee so it is less costly to participate.
Additionally, CNH recently announced on 25 August that it will make the minimum level of profits entitled to the government known prior to the next auction to be held on 30 September. The next round will include five production-sharing contracts covering nine shallow water oil fields along the southern edge of the Gulf of Mexico, off the states of Tabasco and Campeche. So far, 14 companies either individually or in consortia have pre-qualified including IOCs such as Shell, Chevron, ENI, and Lukoil, as well as NOCs such as CNOOC, ONGC Videsh, Petronas, and Statoil.
Mexico’s future
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| Mexican President Enrique Peña Nieto greeting workers. Photo from Peña Nieto's Flickr. |
The energy reform is to be one of key highlights of Mexican president Enrique Peña Nieto’s legacy. Many will be watching to see how the reform is regarded in three years when the next presidential election rolls around.
Monaldi says according to recent polls opposition PRD party leader Andres Manuel Lopez Obrador is polling above Mexico’s former first lady Margarita Zavala, who intends to run as a PAN candidate for president in 2018. The PAN had teamed up with the PRI, Peña Nieto’s ruling party, against the Mexican leftist party PRD to pass the energy reform in December 2013.
Whether the PRI can maintain power ultimately depends on whether Mexicans view Peña Nieto’s reforms as a failure or a success.
“Mexicans are very suspicious about corruption,” Monaldi says. “If there’s a perception that the (energy) reform has been a failure, he [Lopez Obrador] might have a political flag there.”
Currently, Peña Nieto’s own popularity is down among Mexicans, and Monaldi argues that people could see the reform as a failure due to unfulfilled campaign promises. “He offered things that were not possible. He said production would go up 500,000 barrels from what it was. The probability that it will reach that goal is close to zero.
“Politicians always say things that people don’t pay attention to, but this will be a measure by which he will almost certainly not be successful,” Monaldi says.
He continues: “One of the reasons Mexico opened its oil sector was due to the collapsing oil production. So it might be that Pemex’s cash-strapped production goes down, and they might offer more attractive areas for farm-outs, and that would be where it could be a success. But, it opens the door to criticism from the Left about opening the best areas up to foreigners.”
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