Mexico's first licensing round of major oil and gas auction attracts interest

Announced in 2013, Mexico’s energy reforms were the centrepiece of President Enrique Peña Nieto’s strategy to revitalise the national economy and reverse the decline in hydrocarbons production that has been in evidence over the past decade. Central to these efforts was ending the monopoly of Petróleos Mexicanos (Pemex) on the exploration, production, refining, distribution and sale of oil and gas. Having laid the groundwork through constitutional change, legislative action and institutional development, licensing rounds began in 2014, coordinated by the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH). Late 2016 saw a significant change, with the momentum of the implementation of reforms picking up following the completion of the final deepwater phase of the first licensing round for private investors in the country’s oil and gas fields.

Setting Up Shop

In 2014 the Ministry of Energy (Secretaria de Energía, SENER) set the ball rolling with Round Zero, the purpose of which was to determine which oil fields would be opened up to private investment. During the round, it was decided that Pemex would retain control and responsibility for 83% of the country’s proven and probable reserves as well as 21% of potential reserves, totalling an equivalent of 22.2bn barrels of oil, while the remainder would be offered to private investors in a series of multi-phase licensing rounds through to 2018.

Upon meeting pre-qualifying criteria, participants in the bidding process could then make closed bids comprising investment commitments and a rate – above a minimum set in advance of bidding – at which the government could participate in the venture’s profits in addition to the taxes and royalties that would be paid.

First Sale

According to local press reports, the first round of bidding got off to an inauspicious start in July 2015, with only two of the 14 shallow-water oil and gas fields in the Gulf of Mexico offered in the first phase attracting winning bids, both being taken up by a single multinational consortium made up of the Mexican firm Sierra Oil and Gas, the US company Talos Energy and UK-based Premier Oil. These discouraging results were attributed to a combination of factors, including low oil prices and stipulations that were perceived as onerous by potential investors in terms of minimum investment and government profit participation.

Growing Interest

However, the results of the second phase, held in September 2015, were more promising, with three of the five fields also in shallow waters in the Gulf of Mexico attracting winning bids. The winners included Eni International, from Italy, a consortium comprising Pan American Energy ( Argentina) and E&P Hidrocarburos y Servicios (Mexico and Argentina), and another consortium consisting of Field-wood Energy (US) and Petrobal (Mexico). The greater success of this phase was attributed in large part to a significant reduction of the minimum government profit participation rate from 40% to a range of 33.7% to 35.9% for the winning bids. However, the winning bids offered profit participation rates ranging from 70% to 83.75% – far above the minimum.

Onshore Action

The third phase of Round 1, comprising 25 onshore oil and gas fields spread across three regions, proved far more successful when the results were announced in December 2015. All 25 fields attracted winning bids, 22 of them from Mexican firms or consortia with the remaining three fields going to Canada’s Renaissance Oil Corporation.

Among the Mexican firms, Geo Estratos was awarded four fields, as part of a consortium with Geo Estratos Mx Oil Exploración y Producción. The winning bids offered additional government profit participation ranging from 10.6% to 85.7%, with the state expected to benefit with 63% of gross revenues on average. These contracts were expected to generate $1.1bn in investment and more than 220,000 jobs over the course of 25 years, with some $623m in investment anticipated over the 2016-20 period. These results were seen as having exceeded expectations, particularly at a time of ongoing oil price weakness and cutbacks in hydrocarbons investment globally. Together, phases 1.2 and 1.3 involved auctions of reserves amounting to approximately 528m barrels of oil.

Deepwater Phase

On December 5, 2016 the results for the fourth and final phase of Round 1 were announced. This was the first opportunity for investors to bid on Mexico’s deepwater resources, with four contracts on offer in the Perdido area of the Gulf of Mexico, and a further six in the Cuenca Salina areas. It was also the first phase since Round Zero in which Pemex participated, offering its first farmout joint venture in the Trion field, which contains 500m barrels of oil equivalent of proven, probable and possible reserves.

Eight out of 10 contracts on offer attracted winning bids, while Pemex secured a farmout agreement with BHP Billiton of Australia. Unlike previous phases, round 1.4 attracted some of the biggest global names in oil and gas, with BP, Chevron, ExxonMobil, Statoil and Total among the winning bidders. China National Offshore Oil Corporation was particularly successful, securing two of the eight contracts as a sole bidder.

Moreover, the eight winning bids offered additional government profit participation, ranging from 5% to 26.9%, with the state’s total take expected to average 66.1% of gross revenues.

Referencing the increased interest of Asian investors and companies in the auctions, Alberto Galvis, CEO of oil company Citla Energy, told OBG, “The global interest in these rounds is highly indicative of the significance they have for the international oil market, especially from players that haven’t before had Mexico on their radar.” Some $344m is expected to be invested in these eight projects over the 2017-20 period. In addition, the farmout on the Trion field offered additional government profit participation of 4%, as well as an initial payment of $624m, while Pemex and the state are together expected to gain a share of 72.4% of total revenues from the field. Trion is expected to generate a further $2bn in investment during the project’s lifespan. In total, the nine fields are expected to generate approximately $41bn over the course of the contracts.

These results greatly exceeded expectations, and provided the implementation of Mexico’s energy reform with some much-needed momentum going into 2017. Many industry leaders link the success of these farmouts to the long-term health of Pemex and the oil and gas sector as a whole. “To engage in successful farmouts, Pemex will need the authority and flexibility to carry out these negotiations,” Luis Vielma Lobo, president and CEO of domestic oil company CBM Ingeniería Exploración y Producción, told OBG. “It must be clear that this process belongs to Pemex and SENER, and CNH must help the national company to move forward with this process successfully.”

As well as boosting government coffers, bringing in foreign investment and generating jobs, the exploitation of these hard-to-reach deepwater reserves will bring considerable know-how and technology to Mexico. This will be of particular benefit to Pemex, which will be able to use knowledge gained from exploiting the Trion field in the exploitation of its other deepwater reserves in the future. Participation by leading global oil companies for the first time in this fourth phase was also a clear vote of confidence in the energy reform and bodes well for future rounds.

Future Rounds

Looking forward, further multi-phase licensing rounds are anticipated, with at least one taking place each calendar year until 2018. These are expected to follow a similar sequence to the first round, with the initial shallow-water phase followed by one or more land-based phases. It is also expected that a deepwater phase will be included in the future rounds, particularly after the strong appetite displayed by investors for such projects in Round 1. The inclusion of non-conventional shale reserves is also under active consideration for later rounds.

Preparations are already at an advanced stage for Round 2. The first phase is scheduled for March 22, 2017, with 15 contracts on offer for light and heavy oil fields in shallow-water fields off the Gulf coast in the regions of Tampico-Misantla, Veracruz and Cuencas del Sureste. The authorities expect these contracts to generate $750m in investment, on average, over the projects’ lifespan, which would see some $11.25bn invested if all fields attract winning bids.

The results of two onshore phases – 2.2 and 2.3 – are scheduled for announcement in July 2017. Round 2.2 will entail 12 contracts primarily for gas fields, with a potential investment value of $5bn. Nine are in Cuenca de Burgos, two in the Cinturón de Chiapas and one in Cuencas del Sureste. Round 2.3 will see 14 contracts offered in Cuenca de Burgos, Tampico-Misantla, Veracruz and Cuencas. These contracts are expected to generate investment in the region of $1bn, with production of oil and gas to begin in 2018. It is possible that a further deepwater phase will be added to Round 2, to take place later in 2017, while Rounds 3 and 4 are expected to take place in the second half of 2018.