Energy Reform Takes Hold in Mexico

Three years after its historic approval, with the conclusion of Round One and the first farm out of Pemex, Mexico’s energy reform in the upstream—the exploration and production sector—is beginning to consolidate itself. 

On December 5, for the first time in Mexico’s history, international and national oil companies bid competitively for blocks in the deep waters of the Gulf of Mexico. Eight out of the ten blocks offered received bids. Earlier that morning, the tendering took place for Trión, a discovery of Pemex in the Perdido Fold Belt for which Mexico’s state-owned petroleum company needed partners to share the risk and get the know-how to bring it to commercial development. In a context of volatile oil prices and uncertainty regarding US policies toward Mexico, the outcome of Round One’s Fourth Bid is the result of a process three years in the making, which generated credibility and confidence to invest in Mexico’s upstream sector.

In December of 2013, Mexico’s Congress approved President Enrique Peña Nieto´s energy reform at the constitutional level. By August of 2014, Mexico had enacted secondary legislation and conducted Round Zero, the act by which Pemex was granted its entitlements: 83 percent of 2P reserves—the sum of proved and probable reserves—and 21 percent of prospective resources. Round One was announced on August 13, 2014, when oil prices were still above $100 a barrel. The round was ambitious in breath and in its timeframe: five bids of diverse geological resources to be awarded by July of 2015. However, the collapse of oil prices and the challenges of designing balanced oil contracts redefined the scope and timing of bids. At every stage, policy makers took advantage of elements included in the reform to fine tune the terms and conditions of the contracts. The five-year plan for exploration and production, the nomination of areas by interested companies, and the wealth of geological data gathered as seismic activity uncovered the Gulf of Mexico generated valuable information. In addition, each bid provided lessons, as well as certainties, that would build confidence in Mexico’s transparent and competitive bidding processes.

The First and Second Bids of Round One offered production-sharing contracts in the shallow waters of the Gulf of Mexico, whereas the Third Bid presented license contracts for small mature fields. Thirty contracts have been signed thus far; thirty-eight companies from eight countries are working in Mexico today, where a local oil industry is emerging. Despite the activity and the expected investment in the order of $7 billion, the litmus test for the upstream reform lay in the deep-water assets, a tender aimed at attracting the “majors”—the oil companies with the financial, technological, and managerial capabilities to develop such resources.

Today, Mexico can claim success: the Fourth Bid of Round One attracted the top oil companies in the world, most in first-rate consortia, with experienced operators to undertake the trials of producing hydrocarbons at depths of 1,500 meters to 3,000 meters. Of the four blocks auctioned in the Perdido Fold Belt (close to the US maritime border), two went to China National Offshore Oil Corporation (CNOOC), one to the consortium formed by Total and Exxon, and another one to the consortium of Chevron, Pemex, and Inpex of Japan.

In Cuenca Salina, four out of six blocks were awarded—two to the consortium of Statoil, BP, and Total; one to Petronas Carigali of Malaysia and Sierra Oil and Gas of Mexico; and the last one to the independent operator Murphy Energy Corporation in a consortium with the British Ophir Energy, Petronas Carigali, and Sierra Oil and Gas.  Of the majors, the only one absent among the winners is Shell, which made an offer in association with Anadarko, and lost.

The expected investment in exploration and production activities is $41 billion and 400,000 direct and indirect jobs will be created.  Promising geology, a balanced competitive license contract, a transparent bidding process based on additional royalty, as well as an OECD liberal democracy with a vast array of international treaties generated the confidence to attract significant players to Mexico’s oil industry.

December 5 marks a turning-point for Pemex as well, as the company was able to attract competitive bids for its first farm out, partnering in Trión with BHP Billiton from Australia. The tender showed the viability of the peculiar process, established in law, for Pemex to migrate entitlements to the new contracts and find partners through a call for offers. Both BP and BHP Billiton made equal offers in terms of additional royalty and investment, the winner was declared after opening the envelop with the cash bonus. In addition, Pemex successfully took part in the Fourth Bid forming a consortium with Chevron as operator. Giving Pemex the possibility of entering into joint ventures to share risk and gain access to technology and know-how is one of the raisons d’être for energy sector reform.

Due to the long-term nature of deep-water projects, it will take several years to get oil from these projects. Success at this time cannot be measured in terms of barrels or billions of cubic feet.

Mexico conducted a highly professional and transparent bidding process, attracting key players in the industry. Energy reform is already transforming the landscape of its oil and gas sector. The positive results of the latest auctions provide hope for a brighter future for Mexico.

Lourdes Melgar, a Wilhelm Fellow at the Massachusetts Institute of Technology, is Mexico’s former deputy secretary of energy for hydrocarbons.

Image: Jose Antonio Gonzalez Anaya, chief executive officer of Pemex, Mexico’s state-owned petroleum company, attended an event in Mexico City on November 3 to discuss the company’s business plan. (Reuters/Henry Romero)