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Mexican Oil Reform

Reports • October 28, 2015

The collapse in global oil prices since mid-2014 and the current price outlook have drastically affected the investment climate in the international oil industry. While the decline in oil revenues has naturally  translated into pain for all major oil economies, for Mexico it has also complicated the energy reform plan, as energy companies are postponing upstream oil investments and exercising greater fiscal discipline.

In a new paper for the Center on Global Energy Policy, Fellow Adrian Lajous, who served as CEO of PEMEX from 1994 to 1999, explains why it is critical that Mexico’s government take time to examine the lessons that can be gleaned from the experience of its first two bidding rounds and move carefully in the bidding process for oil fields open to foreign participation. Critically, he argues the Mexican government must be highly selective in the acreage that it will bid out in the coming months, cautiously sequence and pace tenders, and carefully consider a number of deferrals. The key findings are below and the full study is available here (PDF).


Key Findings:

  • The government should make a rigorous postmortem evaluation of the first two bidding cycles. It should take into consideration the effect of allowing Pemex to place bids and then withdraw them at the last minute in the first auction, as well as the impact of modifying a number of bidding guidelines and contractual clauses that were questioned by private parties, and critically, the loss of appetite for exploration risk under current market conditions. However, it should go forward with the next leg of the Round 1 bidding process on December 15, 2015, for onshore acreage, which could provide additional information that may help decision-making for the next tenders, which are more important for Mexico.
  • Projects at the higher end of the global cost curve, including a significant part of the assets that Mexico will put up for bid, are at greater risk of being deferred in the current oil price environment. If Mexico is to go ahead with opening them up for bid at the present time, it must have evidence that these assets are economically more attractive than other global projects due to lower costs, greater expected production volumes, better contractual terms and conditions, or lower government take.
  • The fourth bidding round announced in August 2015, which includes ultra-deepwater blocks,  deepwater natural gas assets, and extraheavy offshore oil fields, Pemex farmouts, and contractual conversions, is startling in size and will find Mexico competing against itself in a highly constrained market. It would be far more prudent to separate these very different and critical assets into a well-ordered sequence to test the market, better understand market conditions, and learn from each new invitation to bid.
  • It is crucial that the open bidding process and potential farmouts—which would allow Pemex to take on joint venture partners to develop fields into which it has already sunk substantial capital
    resources—are logically sequenced to ensure maximum results. Deepwater and extra-heavy crude farmouts must be appraised in conjunction with other properties that will be put out to bid in Round 1. Given their vicinity, potential common infrastructure, and similarity, their value might be affected positively by either joint operations or joint planning.
  • In addition, defining who may be the operator in farmout agreements is a key decision that will have to be resolved. Ownership, control, and other governance issues have to be dealt with as contracts are structured and guidelines for shareholder and operating agreements are adopted. These have to be attractive to investors in order to incent them to participate in the bidding of these production sharing contracts.
  • In cases where the government has also authorized Pemex to convert some of its current service contracts to production sharing agreements in order to better serve the interests of both parties and to share some of the same benefits to be derived from the proposed farmouts, a fair market value should be attributed to existing contracts.

Download and read the full study here (PDF)

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Mexican Oil Reform

Reports • October 28, 2015