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Oxford Business Group

Oxford Business Group

Oxford Business Group (OBG) is a global publishing, research and consultancy firm, which publishes economic intelligence on the markets of the Middle East, Africa, Asia…

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Mexico Opens Last Round Of Oil Bidding Before Election

Mexico

The latest round of open bidding for exploration rights in Mexico’s energy sector received mixed interest, with two further rights sales to take place later in the year.

Of the 35 shallow offshore blocks on offer in the March 27 auction, 16 were sold, with the strongest interest seen in blocks in the Sureste Basin – in the south-eastern portion of the Gulf of Mexico – where all eight offerings found buyers.

Mexico’s state-owned oil producer, Petróleos Mexicanos (Pemex), won seven of the blocks on offer, one in its own right and six more in partnership with overseas energy firms.

Fourteen oil majors were pre-qualified to bid alongside 22 consortia. France’s Total was the biggest winner in the Sureste Basin, coming away with the largest share of three blocks coverin­­g a total of 2342 sq km. It received two of these as part of a consortium with Pemex, and one with BP and Pan American.

The Ministry of Energy estimates that developing and operating the 16 blocks will require investment of $8.6 billion over the lifetime of the deposits.

Related: How High Can Trump Push Oil Prices?

Overall response to the auctions was slightly muted, with local and international majors showing some caution when making offers, partly due to the upcoming presidential election in July 2018, which has sparked concerns about potential changes to energy sector policy and rising supply in the market.

Auctions for shale deposits set for September

Indeed, the March auction was the first of up to three rights sales to be staged this year, with the remaining two land bids scheduled for late July and early September. The former will cover a total of 37 contractual areas in Burgos, Tampico-Misantla-Veracruz and the Sureste Basin.

The September round of bidding will be particularly notable, as it will be the first time that development rights for shale deposits have been auctioned off in Mexico.

Depleting natural gas reserves and high potential for shale – the country has 545trn cu feet of technically recoverable sources of shale gas, according to the World Resources Institute – have driven Mexico to accelerate development of the industry.

Early last month the energy sector regulator, the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH), called for bids on nine blocks in the Burgos Basin – located in the state of Tamaulipas, in the north-west of the country – to be auctioned off in September.

The blocks contain an estimated 1.1 billion barrels of oil equivalent (boe), and winning bidders will have the right to conduct exploratory work for conventional oil and gas, as well as any shale deposits identified.

Energy reform supports private sector development

The successive rounds of auctions for exploration and production rights are the keystone of Mexico’s energy reform policy. Launched in 2013, the reforms ended Pemex’s upstream and downstream monopoly, and offer the country the potential to generate $1trn of foreign direct investment by 2040, according to the Mexican Association of Hydrocarbons Companies.

Related: Can Saudi Arabia Afford Its Megaprojects?

Since 2014 there have been a series of series of licensing rounds, including the first auctions of deepwater blocks off the Mexican coast, opening up vast new reserves for the industry to tap.

According to Rogelio Vélez, former CEO of Compañía Perforadora México – the infrastructure division of the mining and railway company Grupo México – domestic energy reforms have improved transparency in both the public and private sectors, which has made the investment climate more attractive.

“So far in the upstream sector, the bidding processes have been largely transparent and, although newly created, the regulatory framework is comprehensive and forms a solid foundation for the rest of the reform,” Vélez told OBG.

The effects of these changes are already being felt throughout the industry, and particularly in the upstream segment, according to Ivan Sandrea, CEO of independent upstream and midstream energy firm Sierra Oil and Gas.

“In 2018 the private sector could be as active as Pemex in terms of exploration and drilling,” Sandrea told OBG in an interview late last year. “This shows how, in a relatively short period, energy reform has enabled the private sector to be as competitive as the national oil company.”

Private sector activity accelerated last month, as operators moved into the exploration and production phases on some previously awarded blocks.

BP announced plans to begin exploratory drilling on an offshore block it won the rights to develop in Mexico’s first deepwater oil bids in 2016, located in the Salina Basin in the southern region of the Gulf of Mexico.

In late March CNH signed off on the plan presented by BP and its partners –Total and Norway’s Statoil – for a four-year exploration programme for the block. Initial drilling is scheduled to take place in the third quarter of 2020, with a total investment of $199.5m and up to 75m boe anticipated.

By Oxford Business Group

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