After Oil Auction Snub, Mexico Sweetens Pot - But Is It Enough?

(Bloomberg) -- Mexico is sweetening the terms of its next oil-block auction in a bid to avoid a repeat of its failed earlier attempt at opening up the industry. The big question now: Is it enough?

Investors will answer that question in a sale on Wednesday of shallow-water exploration and production blocks, only the nation’s second since it nationalized its oil industry in 1938. After global energy giants Exxon Mobil Corp., Chevron Corp. and Total SA sat out the first auction in July, Mexico rewrote the rules. This time around, the blocks are bigger, the financial terms less rigid and the government’s slice of the profits smaller.

Even with the improved auction terms, Mexico is fighting global headwinds that could hurt the outcome, said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. Oil prices have slumped more than 50 percent in the past year and companies from ConocoPhillips Co. to Marathon Oil Corp. are slashing investments.

"The problem is timing -- it’s not right." Gheit said. "There’s not enough money around. It has nothing to do with the quality of the assets or the rules and regulations."

Crude oil rose 2 percent to $45.31 per barrel at 12:50 p.m. Tuesday in New York. It’s still down 26 percent from its 2015 high in June.

Another potential handicap is the fact that the deep-water gems that many of the oil majors have their eyes on are absent from this auction. While the first sale involved 14 close-to- shore fields holding at most a few hundred million barrels of crude each -- and Wednesday’s auction offers only a few hundred million beyond that -- it’s the deep water fields near the line dividing U.S. and Mexican waters of the Gulf of Mexico that are the most promising. Those assets won’t be up for grabs until next year.

Mexican President Enrique Pena Nieto is counting on foreign oil investments to bolster his flagging economy. His administration last year successfully lobbied for constitutional changes de-nationalizing the oil industry to help lure $62.5 billion in private investment and add at least 1 percentage point to Mexican annual gross domestic product growth by 2018.

In July’s auction, only two of the 14 blocks up for sale found buyers. Many attributed the disappointing turnout to a lack of attractive assets, as well as financial and contractual terms that may have caused U.S. and European explorers to balk.

‘Learning Experience’

National Hydrocarbons Commissioner Juan Carlos Zepeda in an August interview called it a “learning experience.”

Hoping for a better outcome, the government lowered the guarantee companies and groups must provide to $1 billion from $6 billion. The Finance Ministry and the National Hydrocarbons Commission also cut minimum royalties payments to between 30 percent and 36 percent of profit. In July’s auction, the government didn’t disclose its take ahead of time, essentially “hiding the ball” from potential bidders, said Tim Samples, a law professor and Mexican-energy analyst at the University of Georgia in Athens.

"Regulators seem to be really reacting to the market and to investor feedback," he said in a telephone interview. "Consortiums could get very aggressive in this next round."

Chevron, Lukoil PJSC, Statoil ASA and Royal Dutch Shell Plc are among 20 companies qualified to bid for five production contracts covering nine blocks in Wednesday’s auction.

Carlos Slim

Riverstone Holdings LLC-backed Sierra Oil & Gas and Talos Energy, two members of the only consortium to win in the July auction, could take part again. This time, they’re teaming up with billionaire Carlos Slim’s Carso Oil & Gas and Carso Energy. Another Mexican billionaire, Alberto Bailleres, joined his Petrobal with Fieldwood Energy.

Spokesmen for Statoil and Shell said in e-mails the companies are reviewing opportunities in Mexico without specifying if they’ll place bids come Wednesday. Exxon declined to comment while Chevron, Total and Lukoil didn’t immediately respond to requests for comment.

In total, there are four groups and 10 individual companies that qualified to bid.

--With assistance from Adam Williams and Ben Bain in Mexico City.

To contact the reporter on this story: Andrea Navarro in Mexico City at To contact the editors responsible for this story: Carlos Manuel Rodriguez at; David Marino at Jessica Brice, Carlos Caminada.

Copyright 2016 Bloomberg News.


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