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Mexico Sweetens The Deal In Offshore Lease Auction

Mexico Sweetens The Deal In Offshore Lease Auction

In Mexico’s upcoming auction for oil and gas leases, it has moved to sweeten the pot in an effort to avoid another disappointing result.

In order to attract more interest, Mexican regulators have said they will publish a minimum level of profits that they will seek ahead of the auction, which is set to take place on September 30. This way bidders have an idea of what they are getting into. In the previous round, companies may have unwittingly submitted bids below the minimum threshold. Regulators think by announcing the minimum ahead of time, it could create more clarity and lead to more contracts successfully awarded. Related: Some Small But Welcome Relief For WTI

Also, in early August, Mexico’s Comision Nacional de Hidrocarburos (CNH) – the oil and gas regulator – decided that for the second round it would lower the corporate guarantee, which is money that the companies would have to pay in the event of an accident. The move is seen as sweetening the terms for the private sector in order to attract more bids.

In the first phase held in mid-July, the auction results fell short of expectations. Only two bids were awarded, despite the fact that 14 were offered. Many of the tracts did not even receive any bids at all, and a single consortium was the only winner of the two blocks. Related: A Winter Of Discontent For Russia

The next round in September will consist of five contracts with nine shallow water oil fields. These will also be located in the southern Gulf of Mexico just like the first round. Twenty companies have qualified for the auction, including Chevron and Royal Dutch Shell, two oil majors that sat out the first go around.

Of course, the timing of the auctions couldn’t be worse. The collapse of oil prices likely led to dramatically worse results in the July auction than if oil prices had been much higher. Even worse, the upcoming auction in September could be held at a time when oil prices are even lower than they were in July. Related: Why Today’s Oil Bust Is Not Like The 1980s

Offshore oil fields, even if they are in shallow water, are something that could be out of reach for firms that are battening down the hatches. And as capital expenditures get slashed, exploring in new areas where the geology is less known is not something many companies are willing to risk.

On the other hand, oil has already been discovered in the blocks that will be auctioned. The Mexican government’s latest sweeteners could entice a few more companies off the sidelines, perhaps just enough to make the second round a bit more successful than the first.

By Charles Kennedy of Oilprice.com

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