Pemex to Decide on Second MSC Round by mid-2004

Mexico's state oil company Pemex will decide on which blocks to include in its second round of multiple service contracts (MSCs) by the end of the first half of 2004, a Pemex source told BNamericas.

"We are in the process of defining what is the best area of the country and the size of the blocks, and the areas which are the most attractive under this scheme," the source said. Pemex could include blocks in the Burgos basin, or in the southern states of Veracruz and/or Tabasco, the source said.

The company plans to launch the second round at the end of 2004, "but those plans could change." Although the tender will be held under the existing MSC mechanism, Pemex plans to improve the rules for the tender to make them more attractive, the source said.

Pemex awarded four of the seven Burgos blocks included in the first round - Cuervito, Reynosa-Monterrey, Fronterizo and Mision - to companies including Spain's Repsol YPF, Brazil's Petrobras and Argentina's Tecpetrol. Tenders for two other blocks, Ricos and Corindon-Pandura, were declared void but Pemex plans to try again in 1H04.

"Basically we are in an evaluation process - we think that by the middle of next year we will re-launch the tender for those two blocks," the source said.

Pemex is still studying the appropriate mechanism for the new tender, but it will likely divide them into smaller blocks in order to attract smaller Mexican companies, newspaper Economista quoted Pemex's MSC director Sergio Guaso as saying. So far only US-based Lewis Energy consortium has bought bidding rules for the seventh block, Olmos, but Pemex plans to award the block on January 15 and sign the contract by February 20, the source said.

The first round was "successful because the scheme proved to be attractive and competitive," the source said. "The fact we didn't attract some of the major players doesn't mean the scheme doesn't work." Most analysts agree the first round of MSCs was a good start for Pemex and Mexico, but not the windfall some large companies had hoped for. "The MSCs generated huge amounts of public interest because they are very symbolic, but once companies came in and looked at the terms they weren't exactly enthralled," Matthew Shaw, senior Latin American energy analyst with consultants Wood Mackenzie, told BNamericas. MSCs neither allow companies to book reserves nor offer an operating upside. They are " very much pure service contracts," Shaw said. "It's low risk and it's low reward - there's no linkage to production."

The Pemex source admits that MSCs are not for everyone. "They don't have the profit margins that projects in other parts of the world have because they are service contracts and not participation contracts," the source said. However, the upside is that the contracts are "a foot in the door" for foreign energy companies in Mexico, Shaw said. "The attraction of this round has been less economic, and has been more strategic."

"The good is the chink in [Pemex's] armor," because the contracts are "a recognition by Mexico that it needs help, and not only from the financing point of view," Shaw said.

Looking towards the second round, "there is considerable space to improve the contracts under the same scheme to make them more attractive and administratively less complicated," the Pemex source said. The number and size of the blocks in the second round will depend on the need to substitute gas imports. "The need exists, the demand exists, and what we have to do is reduce our dependence on gas imports."

Mexico's strategic gas plan aims to increase gas production from 4.4 billion cubic feet a day (bcf/d) to 8bcf/d over six years. Of that, the MSCs were supposed to provide 1bcf/d, but those signed to date will only provide 400 million cubic feet. "That puts it in perspective - Pemex still has a lot of work to do in other areas of the country by itself," Shaw said. About Business News Americas: Business News Americas is a multilingual news and business information service that covers the most important original stories in 11 different business sectors throughout Latin America everyday. Visit BNamericas to access our real-time news reports, 7-year archive, Fact File company database, and latest research reports.

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