by Adrián Lajous
On September 30 the results of the second invitation to bid on acreage for Mexico’s oil upstream from Round 1 were made public in what was an exceptionally transparent process. Government officials are rightly proud of this and are happy with the results of the bidding process. Assigning three of the five contracts that were auctioned was slightly above their stated expectations. Two contracts elicited significant competition as one had nine bidders and the other five. A third contract only received 1 bid. The government’s profit share of the winning bids was much higher than anticipated, as was the expenditure commitment above the minimum work program in one of the cases.
The profit share offered by three wining bidders was 84, 74 and 70 percent, respectively. The Ministry of Finance will be a bit embarrassed having set exceptionally low minimum acceptable bid values, which had been made public beforehand. They are obligated to explain the assumptions that led the government to fix such levels for what were low cost, shallow-water fields with certified reserves. Fortunately, the bidders payed little attention to the minimum bid levels as their offers were two or more times higher than the set minimums. Mention should also be made that important pre-qualified oil companies -Shell, Chevron, ONGC, CEPSA and Plains- dropped-out at the end.
Low government expectations were the result of the reading made by public officials of the disastrous first invitation to bid. They reacted by modifying contractual terms and conditions, fiscal terms and bidding guidelines in the second bidding process, in order to make them more investor friendly. Some, but by no means all, were needed improvements. Apparently, they did not fully comprehend the difference between exploration contracts and development ones, and more importantly the low prospectivity of the exploration blocks that were first put to bid. Their mistaken diagnosis was more generally conditioned by the apprehensive need of additional government revenues and foreign investment flows. Also, the low threshold of the government’s definition of success was politically motivated.
Of the three winning bidders only ENI is a substantial oil company with worldwide experience. Panamerican/Bridas is a regional Argentine oil consortium and Fieldwood/Petrobal is a consortium formed by a financial portfolio company and a recently established Mexican oil company owned by billionaire Alberto Bailleres, who chairs a diversified conglomerate. First production of the three contracts is expected in the second half of 2018 and an aggregate peak production of 90 thousand b/d could be reached three years later. Given minimum work programs, total capital expenditures are estimated around $3 billion over the life of these projects. Production costs are assumed to be $20 per barrel, so that they are economically viable at current and even lower prices.
The results of the second invitation to bid should have a positive impact on future upstream auctions. The third one, although open to international competition, is directed to medium and small Mexican companies. There appears to be ample interest in this bidding process. The fields that will be auctioned are mostly depleted and have been abandoned by Pemex. They are not materially important. More interesting will be the fourth auction, which will probably include shallow water extra-heavy crude oil fields, as well as a number of adjacent Pemex farmouts. Invitations to bid for these assets should be made at the end of October or in early November. Ultra deep-water oil fields would have to wait until early 2016. These are high cost, large-scale complex projects that are unequivocally affected by international market and oil industry conditions.
Pemex is facing difficult operating, budgetary and financial challenges. Crude oil production in the first three quarters of 2015 is down 8 percent; net natural gas production is down 7 percent in the same period; gas flaring has doubled; and a number of accidents have impaired upstream activities. Conditions in the downstream are not better. Gasoline output is down 11 percent in the first 7 months of the year, diesel fell 6 percent and high sulfur heavy fuel oil 14 percent. Pemex reduced throughput in its refineries because of excess inland supplies of fuel, which cannot be easily transported to export terminals, and increasing difficulties in meeting gasoline specifications. Accidents and downtime due to unplanned maintenance are up and gasoline stock-outs in the Bajío region in Central Mexico and in the North of the country have been exceptionally long. In addition, financial constraints associated to the significant drop in oil prices are affecting the company on many dimensions. This calls attention to the need to urgently implement planned farmout projects, which could provide needed capital and help increase production.
Adrian Lajous is a Fellow at the Center on Global Energy Policy. He is the former Chief Executive Officer of Pemex and has previously served as Chairman of the Oxford Institute for Energy Studies.
Table 1: Results of Second Bidding Round
Minimum bid: 34.8%
Winning bidder: ENI (83.8%)
Other bidders: 8
Lowest bid: Talos/Sierra/Carso (48.0%)
Bid average: 54.4%
2P Reserves: 121.6 Mboe
Minimum bid: 35.9%
Winning bidder: Panamerican/Bridas (70.0%)
Other bidders: 4
Lowest bid: CNOOC (50.2%)
Bid average: 62.0 %
2P Reserves: 66.7 Mboe
Minimum bid: 33.7%
Winning bidder: Fieldwood/Petrobal (74.0%)
Other bidders: 0
2P reserves: 85.8 Mboe
Minimum bid: 35.2%
Winning bidder: —
Other bidders: 0
2P reserves: 63.9 Mboe
Minimum bid: 30.2%
Winning bidder: —
Other bidders: 0
2 P reserves: 17.7 Mboe*
* Has not yet booked 1P reserves.
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