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Oil Majors Are Eyeing Up Mexico’s Next Oil Auction

Amid growing interest from international oil companies, Mexico is launching the second round of auctions for offshore oil blocks early next year.

The auctions are set to attract new foreign direct investment to the sector and reinvigorate energy output.

The country has seen oil production decrease from a high of 3.5m barrels per day (bpd) in 2006 to its current rate of 2.16m bpd in July, with Pemex – the state-owned energy firm and only active oil producer in the country – expecting to average 2.13m bpd for 2016, according to press reports.

The prospects for the new auction boosting output are good, as the new blocks are primarily deepwater non-conventional reserves, which account for 76 percent of Mexico’s prospective resources.

Reforms fuel investment

Starting in 2014, after the passage of energy reforms the previous year, multiple auctions have been held to assign exploration and production contracts, while also ensuring that Pemex retains control of some blocks.

Round one has so far consisted of four separate auctions for shallow and deepwater resources in the Gulf of Mexico. Despite high expectations, the first auction in the round coincided with the fall in global oil prices and saw only two out of 14 blocks awarded.

The following two auctions, however, resulted in approximately $7bn in investment, with over 30 contracts assigned to local and multinational companies, demonstrating a marked improvement from the first sale.

The next auction includes 10 deepwater exploration and production blocks located in the Gulf of Mexico. These contracts will be awarded in December and have a lifetime of up to 50 years. According to press reports, oil majors such as Shell, Chevron, ExxonMobil, BP, Total, Repsol and Statoil are among the 21 companies registered to bid for the blocks.

Round two will be launched thereafter, tendering 15 shallow-water sites covering 8908 sq km in the Gulf of Mexico, off the coast of Campeche, Tabasco and Veracruz. Government estimates put the contents of these blocks at a total of 587m barrels of crude.

Pre-qualified companies will have until March to submit documentation and participate in the first auction in this round.

Fiscal scenario raises alarms

While greater openness and competitiveness is expected to promote investment in the critical technology needed to exploit new fields, the industry has raised concerns over delays in investments, as well as the financial health of Pemex.

For the past 10 years, oil revenue has accounted for an average of 33.5 percent of Mexico’s federal budget. By last year, however, this had fallen to 13 percent due to weaker production and lower oil prices.

In an effort to provide support, the government increased its net federal contributions to Pemex by MXN60bn ($3.3bn) in 2015, according to the company’s filing to the U.S. Securities and Exchange Commission. Meanwhile, Pemex experienced a 36.3 percent reduction in capital and operating expenses in 2015, and has budgeted a further 21 percent cut this year, Ministry of Finance data shows. Related: Is Elon Musk Taking Advantage Of Solar City Investors?

Budget cuts have hindered investment in exploration, which is likely to result in production numbers falling in the future. Last year, Pemex investment stood at $23.1bn, but this has been reduced to a projected $16.3bn for 2016.

Pemex’s exploration rig count fell from 163 in October 2009 to 14 as of May, a nearly 91.5 percent drop compared to a 78 percent decline in the U.S. over the same period, according to data from Baker Hughes.

Pemex’s refineries have also been working at around 60 percent of their capacity on average, with 35 unscheduled stoppages in the first quarter of the year. In some cases weather has had an impact, with the Cadereyta refinery, which produces 275,000 bpd, halting operations in July due to reduced water flow from the nearby Ramos River.

Additionally, according to press reports, Pemex plans to close 142 units for maintenance work this year, more than double the number of planned stoppages in 2015.

Private sector participation

Given the company’s current inability to fund the necessary exploration and production, Pemex and government authorities are increasingly looking to the private sector to provide the support Mexico needs to boost its oil output.

“In spite of the obvious challenges that exist on various fronts, Mexico is an ideal country to invest in, especially in the oil industry. The key to gaining the confidence of these investors is providing them with attractive contracts and access to the large local refining and distribution capacity owned by Pemex for a fair price, " José Antonio González Anaya, CEO of Pemex, told OBG.

At the same time, industry stakeholders are advocating for speedier farmouts –agreements that allow third parties to perform a specific activity, such as testing or operating a part or all of an oil block.

“Farmout agreements can be the solution and path forward for Pemex, especially if it engages in farmouts with the best deposits and resources it possesses,” Luis Vielma, managing director of CBM, an exploration and production firm in Mexico, told OBG.

“However, to engage in successful farmouts, Pemex will need the authority and flexibility to carry out these negotiations. It must be clear that the farmout process belongs to Pemex,” he said.

By Oxford Business Group

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