Mexico onshore tender christens local oil industry

OREANDA-NEWS. December 18, 2015.   Mexico awarded all 25 onshore blocks on offer in its third upstream tender, with new local firms scooping up most of the acreage.

In two previous auctions for shallow-water blocks in the Gulf of Mexico, the government awarded only 14pc and 60pc of the blocks. Since then, oil regulator CNH sweetened the terms and conditions to attract more participants.

The historic tenders are the cornerstone of a comprehensive energy reform that ended the monopoly of Mexico's state-run Pemex.

Pemex did not participate in yesterday auction.

The bidding was "very aggressive," one of the participants told Argus. Additional royalties offered to the government averaged 55pc, with a high of 85.7pc, well above the 1-10pc minimum required by the finance ministry. Each block attracted at least three bids.

Once additional taxes are included, the government's take should average 73pc of the blocks' total profit, deputy finance minister Miguel Messmacher said after the event.

Numerous bidders and analysts expressed doubt over profitability with such high percentages, in light of current oil prices. But the CNH estimated the average production cost in the 25 blocks at no higher than \\$14/bl.

Most of the blocks are mature areas with limited remaining reserves, designed to appeal to independents rather than big oil companies looking for a significant upside.

Among the biggest winners was Mexico-focused Canadian independent Renaissance Oil, which won Mundo Nuevo in Tabasco state, and Top?n and Malva in Chiapas. Renaissance Oil offered the government pre-tax profit shares of 57.4pc–80.7pc.

"We knew we had to be aggressive in this auction, but we're very happy to have won Topen and Mundo Nuevo, the two crown jewels," chief financial officer Craig Steinke said, adding that the company hopes to share infrastructure. "Being able to put them together, it makes economic sense."

Mexican firm GEO Estratos Mxol Exploraci?n y Producci?n won four blocks, more than any other single company, all located in Veracruz state. The firm bid 61.5pc–68.4pc of pre-tax profits for the blocks.

Mexico's Strata Campos Maduros won three blocks. Diavaz Offshore, one of the country?s longstanding independents, won two blocks in Tamaulipas and Chiapas.

Other winners included a consortium led by US Roma Energy Holding, with Block 16, and another consortium led by the Dutch firm Canamex, which offered 85.69pc to the government for Block 14, which drew a total of 11 bids.

The tender offered 25-year upstream licenses, rather than a more complex production-sharing contract model offered in the two previous tenders.

"The primary objective was to sow the seeds and spark the creation of Mexican companies," deputy energy secretary Lourdes Melgar said after the high-profile event.

Total estimated investment in the 25 blocks is \\$1.1bn over the life of the contract, and the government expects total production will reach a peak of 77,000 b/d in three years, Melgar said.

Out of the 25 areas, 19 are already in production, currently under the supervision of Pemex. The winning bidders must maintain production from the day they sign the contracts in a maximum of 140 days. In the meantime, winners must present temporary production plans to the CNH.

Overall, 40 participants had qualified to take part in the auction, either individually or in consortiums, of which 32 were either Mexican or had a Mexican partner.

Last month Pemex offered to market oil from onshore blocks, allowing companies to transport, store and market hydrocarbons through Pemex's international marketing arm PMI. Several winning bidders said they were considering this option.

Mexico next tender under its first staggered round is expected to cover deepwater blocks that will appeal mainly to big oil companies capable of assuming the risk and capital requirements. Further details on the blocks should come out in an extraordinary session held by CNH today.