Mexico aims smaller with its latest oil and gas property auction

Mexican President Enrique Pena Nieto applauds after signing into law a historic energy reform bill at the National Palace in Mexico City, Monday, Aug. 11, 2014. (AP Photo/Rebecca Blackwell)
Mexican President Enrique Pena Nieto applauds after signing into law a historic energy reform bill at the National Palace in Mexico City, Monday, Aug. 11, 2014. (AP Photo/Rebecca Blackwell)

HOUSTON — Mexico’s latest tender in its historic opening of the country’s energy industry likely won’t attract some of the most recognizable names in the industry, but it could be a chance for smaller companies to get in on the action.

Last week’s auction included 26 mostly smaller properties onshore in the Burgos, Tampico-Misantla and Salinas-Sureste Basins. Along with the properties, regulators unveiled a new model contract and eased the requirements  that companies must meet before they’re able to participate in bidding. Combined, the steps will make the bidding round more attractive to smaller players and could offer some newly established private Mexican drillers a way into the industry, observers said.

“If this round was set up with the purpose of allowing smaller Mexican backed or operated E&P companies access into Mexico, then certainly it will provide that,” said Ivan Cima, an analyst at energy consulting firm Wood Mackenzie.

Mexico’s exploration and production sector has long consisted of only Petróleos Mexicanos. The state-owned company will remain the largest player in the country even after the energy sector is opened to private investment, but it will no longer have a total monopoly.

Specifically, the smaller fields in the recently unveiled auction might draw bids from new Mexican companies backed by private equity or partnering with others who have the oil and gas know-how to exploit the resources. Twenty-two of the 26 fields are designated as type one fields, which have less than 100 million barrels of oil equivalent in place. A handful of the fields — dubbed type two — have a larger estimated haul, but few can be considered high-potential, Wood Mackenzie analysts said.

“You might see some juniors and independents interested in some type 2 fields. We don’t see this as an opportunity for majors,” said Matt Blomerth, also an analyst at Wood Mackenzie.

The new auction is this third round of tenders that the Mexican government has undertaken since the country launched the privatization of its energy sector. Previously, the bidding had been limited to larger companies competing for offshore blocks governed by production sharing contracts, which generally have the producer pay for the right to drill with a portion of the oil and gas extracted. Those deals have largely been pursued by massive international companies who have the deep experience and pocketbooks needed to drill offshore.

In the latest round, regulators stepped back the requirements that companies must meet to enter the bidding process, said Gabriel Salinas, a senior associate at law firm Mayer Brown LLP.

Previously, regulators vetted participant’s financials and technical expertise, Salinas said. But in the third round, he said, companies will only need to demonstrate that their personnel have the required experience — potentially opening the process to new Mexican companies.

“This will enable Mexican companies, which have generally not had E&P experience, to be able to qualify for this round by hiring or by having within their personnel the experience that is required,” he said.

In addition, regulators sought to sweeten the deal by rolling out a new model contract companies will sign to access the reserves.

This round’s deals will be structured around licensing contracts, which generally let the producer keep all of the hydrocarbons they extract but pay royalties and other fees. Those are often preferred by the industry over production sharing contracts, Salinas said.

“It’s a much more flexible contract model, and it provides less oversight and less interaction with the government,” Salinas said. “It’s also a good way of sharing this contract model with the market,” he said, adding that regulators may choose to use a similar contract in later auctions for other properties.

The specific terms of the contracts will become clearer before the final bids on the 26 properties are due in December, he said.