We cannot presume to know what Pemex’s expectations were for its third round of ISC contracts, but it’s not entirely unreasonable to assume they were disappointed by the results; after all, Pemex officials were quoted referring to the outcome as an “unforeseen scenario”: Of the six blocks offered, only three were successfully awarded (Humapa, Miquetla and Soledad, awarded respectively to Halliburton, Operadora de Campos DWF and Petrolite); the other three (Miahuapan, Pitepec and Amatitlán) were declared void. This technically represents the worst bidding performance since the ISC auctions began. Those in Pemex awaiting an enthusiastic turnout (especially from major new players like Repsol and Sinopec, who made a grand total of zero bids) must have gotten tired of reading several letters formally apologizing for not making an offer.

However, a couple of details and circumstances surrounding this third auction of ISC contracts would seem to suggest that what happened yesterday in Poza Rica (where the long-winded announcement was made) was not only predictable, but also not an entirely negative development.

The first thing to consider is the nature of Chicontepec’s fields. These are mature fields – all of them are over fifty years old – with consistently high reserves but wildly variable levels of current and total production. Pemex classifies them as unconventional resources, which make them low investment, low risk and low profit endeavors. Unfortunately, in this case, the “low investment” part of the equation has been under question since Chicontepec’s exploitation projects began, with a turn towards lower production in the past few years: in 2008 production was only 26,800 b/d, in 2009 it was only 29,500 b/d and in 2010, Pemex was forced to scale down its production target from 176,000 b/d to 48,000 b/d. This represents an obvious miscalculation with regards to the technological means necessary to increase production in a field that was no more than five years ago expected to be the best opportunity to offset the Cantarell production decline.

 In other words, Chicontepec fields are notoriously troublesome and hard to work with; it’s not difficult to imagine that Pemex was offering them with the full knowledge that many if not all bidders would hesitate to make an offer once they realized the full extent of the effort required to make these fields a worthwhile undertaking, especially at such low prices (none of which went above US$7.00 per barrel).

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Field in Chicontepec (picture courtesy of www.olmecadiario.com)

The second thing to highlight is the fee per barrel at which the successful contracts were awarded. At the time of the Humapa auction, Halliburton caused puzzled and bewildered reactions with its extremely low (and obviously successful) bid of US$0.01 per barrel and an investment factor of 1.25. However, as the auction continued it became obvious that Halliburton had not radically deviated from the norm but merely started a trend: Miquetla was awarded to Operadora de Campos DWF, S.A. de C.V. (a local chapter of Weatherford) for US$0.98 per barrel and an investment factor of 1.100, while Soledad was awarded to Petrolite for US$0.49 per barrel and an investment factor of 1.001. Industry experts echoed the questionable financial soundness of these bids; in his summary of the proceedings for Business News Americas (which you can read here), James Fredrick quotes John Padilla from consulting firm IPD Latin America as questioning the possible source for profit under this kind of terms.

Speculation as to the origin of this unusual tendency brings up two possible explanations  which are not mutually exclusive: either these companies have a technological strategy that allows them to see value in these fields that Pemex does not, or they are giving away their technological development capabilities to Pemex as a gesture of good faith to ensure a favorable position for themselves in the coming openness of a post-reform business climate.

A possible third interpretation is that these companies are not looking to make much of a profit on crude oil extraction at Chicontepec, but on the inevitable peripheral service contracts they will be asking Pemex to sign off on as part of their strategies to increase production: as the exclusive subcontracted developers in each block, these businesses are in a unique position to offer themselves as the best (and perhaps only) possible recipient for all the related contracts that Pemex will pay for in order to benefit their Chicontepec development plan.

In the end and regardless of hidden intentions or notable absentees, all of this could spell out great things for Pemex; it has acquired world-class assistance in the development of one if its most burdensome assets, and it has done so at great rates. Considering Chicontepec was a relatively hard sell, it is important to underline that the current perception of the Chicontepec auction as a failure might just be an incomplete picture of the entire ISC panorama (including its possible future as a development tool for offshore and shale ventures), especially after noting the low prices at which Pemex awarded the three successful contracts. In the end, calling the glass “half-empty” represents a simultaneously correct and limited portrayal of the auction’s results.

Edited: Updated article content


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