The first tender of Mexico’s Round One, which took place on the 15th of July, has made many appearances in recent news next to unflattering adjectives such as “disappointing” or even “catastrophic”. While the first phase of Round One, Round L-01, did not meet expectations that oil companies would jump at a chance to explore Mexico’s hydrocarbon potential, it is not the failure some make it sound like. Mexican President Enrique Peña Nieto hailed it as a learning experience.
Admittedly, Round L-01, failed to retain sufficient interest. The standard of success of the tender process set by the Mexican authorities considered that a relative successful bid would imply allocating over 30% of the auctioned blocks. Actual figures are at 14%, as only two out of 14 blocks were allocated. Most of the blame has been assigned to the Mexican authorities and the process itself. Critics claim that the Mexican Government failed to adapt to current market conditions. They argue that the government was too inflexible with regards to pre-tax profits when accepting bids, rejecting proposals for four blocks on the basis that the bids did not meet the minimum profit-sharing requirement. This requirement was set at 40% and reports indicate that a few bids were only 5% below. For one of the blocks, Norway’s Statoil bid 65%, slightly below Mexico’s Sierra Oil and Gas’ winning bid of 68.99%. Although Statoil’s bid was lower, the fact that the government chose Sierra Oil and Gas over an acknowledged, world-class offshore operator with vast technical expertise at its disposal raises questions about the selection criteria.
Rather than dwell on gloomy results, the Mexican Government has taken the right approach, using Round L-01 as a learning opportunity. In fact, keeping the most attractive opportunities for later (deepwaters oil are included in phase 4) allows the government a maximum amount of learning so the last blocks may be processed smoothly and flawlessly. The Minister of Energy, Pedro Joaquín Coldwell, has already postponed the critical fourth phase to allow the government and companies more time to pour over details. He expects the bids to be launched by the end of September. The fifth phase has been frozen altogether until future evaluation.
Certain changes have already been made in preparation for the second phase of Round One, which will take place on the 30th of September. This bidding round offers five contracts for nine oil fields in shallow waters in the Gulf of Mexico, with proven reserves of light crude oil. The National Hydrocarbons Commission (CNH) estimates they contain 355 million boe. Changes in bidding rules include the removal of the obligation for consortiums bidding on oil blocks to have one member act as a guarantor with shareholder equity of at least US$6 billion, a regulation intended to protect the State’s interest in the event of a major accident. As of the second phase of Round One, the corporate guarantee for consortiums will be set at 18 times the value of the minimum work commitment mandated by each contract. This lower guarantee is aimed at making the investment more attractive and luring more bidders. In order to better serve investors, the government should also seek to understand exactly what the former are looking for. In Round L-01, CNH had identified four blocks which it ranked as the most interesting, yet the two blocks awarded were entirely different to the ones predicted. There may be a common profile among them that investors are avoiding.
Before throwing in the towel and calling Round One a failure, it is important to notice that Round L-01 only offered exploratory blocks, which, given current oil prices, might be the least interesting ones for profit-seeking companies. As a matter of fact, the success rate for the blocks in Round L-01 was estimated to be between 20-40%. Oil companies have cut back on spending and are keeping their cash for other bidding rounds they might deem more attractive. Even PEMEX withdrew from the first phase and is unlikely to appear in the second one.
The main issue with the current unraveling of the first round is the diminished credibility over Mexico’s Energy Reform success. The decision to tender the least interesting blocks first offers the Mexican Government an opportunity to learn, but failure to attract sufficient bids puts a cloud on the attractiveness of the entire reform. Despite these discouraging results, the Mexican Government received well-deserved praise for its successful efforts to make the process as transparent as possible, rendering future bidding opportunities increasingly attractive to both local and foreign oil companies.