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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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The Shocking Truth Behind Mexico’s Recent Offshore Oil Auction

How much cash would you give up to get a foothold in the world's newest oil play?

That was the question answered by E&Ps last week. In one of the most watched global petro-plays to open up over the last decade.

Mexico.

According to reports from the Wall Street Journal, the Mexican government has awarded three new shallow-water oil and gas fields to foreign E&Ps (and their domestic partners). Part of a strategy to open up the country's energy sector to outside investment. Related: Second Oil Auction Goes Much Better For Mexico

Winning bidders included multinational major Eni. Along with smaller players such as Argentina's Pan American Energy and private equity-backed U.S. offshore specialist Fieldwood Energy.

This was the first successful bid round carried out since the opening of Mexico's petroleum sector earlier this year. Three of out of five blocks being offered were tendered -- with the remaining two receiving no bids.

That's a much higher hit rate than Mexico's initial bid round in July. When just two out of 14 blocks were awarded. And this round thus gives the first real look at what terms would-be producers are willing to give the Mexican government in order to get into this play. Related: Shell’s Loss Is Eni’s Gain

Bidders were asked to prescribe the amount of profit -- as a percentage -- they will pay to the government. And the results show that the winning firms were very motivated to get a deal done.

Pan American Energy got the best terms, offering the government 70 percent of profits. Fieldwood upped the stakes, bidding 74 percent of profits. And Eni went all the way up to 83.75 percent.

Of course, these three blocks all came with proved reserves -- previously identified by Mexico's PEMEX. But the fields aren't massive by any means, with proved reserves ranging in size from 21.3 million barrels (Pan American) to 62.8 million barrels (Eni). Related: Africa Banking On Nuclear Power

The relatively high profit shares thus show that some E&Ps are still very motivated to get into Mexico. In fact, the government's overall take will be even higher than the percentages above -- with taxes and royalties likely bumping the share of proceeds as high as 90 percent.

Geologists, engineers and business analysts are okay to pay up for the potential here. Next step: see what these fields can do once they start pumping (as early as 2018) and growing through development drilling.

Here's to getting in early,

Dave Forest

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