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Mexico finds success in second oil auction

After a disappointing first auction, Mexico’s historic oil opening regained momentum with a successful second bid round on 30 September

After a disappointing first auction in August, Mexico’s historic oil opening regained momentum with a successful second bid round on 30 September that saw highly competitive bidding and three of five blocks awarded, including one to Eni.

The second bid round followed the blueprint Mexico’s oil reformers had envisioned when they passed the historic oil liberalisation legislation. They hoped a series of bid rounds would attract a diverse set of international and domestic players to invest in Mexico’s oilfields to help boost fading production. In August, it looked like the low oil price and regulatory missteps had knocked the reform process off course. The second auction has put it back on track.

The winners were: Eni, a global major; a consortium led by Pan American Energy, a Latin America-focused independent producer; and Fieldwood Energy, a small private-equity backed explorer that bid alongside a newly established Mexican independent Petrobal.

The fields put up for bidding in the second phase of Round 1, as the initial oil auctions are known, were relatively small shallow-water Gulf of Mexico fields that had already been discovered by state-owned Pemex. That meant that they were a low-risk but also low-reward proposition. More than anything, many companies likely saw it as a safe entry point into Mexico’s post-reform oil sector.

Eni won the rights to develop a cluster of fields that includes the Amoca, Mizton and Tecoali fields, which together hold proved and probable reserves of 122m barrels. It was the largest reserves base on offer and the most hotly contested block. The fields drew nine bids, including proposals from Statoil, China National Offshore Oil Corporation (Cnooc), Malaysia’s Petronas and Lukoil. Eni won by putting forward an aggressive bid, which included 83.75% of the field’s operating profit and a commitment to invest 33% more than the minimum work programme. It was the only block Eni bid on, and the company seemed determined to win.

Pan American, which is owned by BP and Argentina’s Bridas Energy, won the rights to develop the Hokchi oilfield, which holds 67m barrels of reserves. The company beat out Statoil and Cnooc with a bid that will give the Mexican government a 70% participation in the field, nearly double the required minimum. The winning bid gives BP and Cnooc, which owns a stake in Bridas, a foot in the door in the early stages of Mexico’s oil opening. Both companies will undoubtedly be looking at the deep-water blocks that will be put up for bidding early next year.

Fieldwood Energy and its partner Petrobal jointly won the rights to develop the 86m barrel Ichakil and Pokoch fields. Fieldwood is a newly formed US-based explorer backed by private-equity firm Riverstone Holdings. Petrobal is backed by mining magnate Alberto Bailleres and run by Carlos Morales Gil, who headed up Pemex’s exploration and production business. The companies, though, appeared to badly misread the competition for the block. It was the only bidder for the fields, yet it offered a 74% state participation, more than double the 33.7% minimum that would have won the bidding.

Combined, the fields should add around 90,000 barrels/day (b/d) of production at their peak, deputy energy minister Lourdes Melgar said. That will likely not come until the early 2020s. State-owned Pemex, which hasn’t taken part in the first two bid rounds, produces around 2.3m b/d of crude, down more than 1m b/d from a peak of 3.4m b/d in 2004.

Eni, Pan American and Fieldwood will join Premier Oil and Sierra Oil and Gas, a Mexican independent, which won the only two blocks awarded in the first round, in Mexico’s growing competitive landscape. Both Statoil and Petronas have put forward bids in both rounds, but both have come up empty.

The success of the latest round stood in stark contrast to the disappointment of the first round. Policymakers can thank some important improvements to the terms on offer, and crucially the decision to publish the minimum bid requirements two weeks before the auction. In the first round, the minimum bid requirements weren’t released in advance, which led to several bids being dismissed even though they were within 5% of the minimum. It was a costly mistake.

The second round, however, has shown that in spite of the low oil price there is still strong interest in Mexico’s oil opening. It has also shown the industry that Mexico’s policymakers have been flexible and responsive to their complaints and suggestions. It bodes well as Round 1 continues with an onshore bid round in December and the flagship deep-water round in early 2016.

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