Mexico fine-tuning deepwater bidding process to revive interest

Many American companies sitting out Round 1 because of unattractive terms set by Mexico government

Mexico needs to attract significant interest to salvage a bidding round hampered by delays and low oil prices, with Phase 4 of the current Round 1 licensing process offering the country’s first deepwater assets, according to research and consulting firm GlobalData.

MexicoThe company’s latest report says that a total of 13 exploration blocks will be open for bidding, together with several deepwater discoveries, with the general expectation that the assets will be offered under a royalty/tax contract called a license.

Adrian Lara, GlobalData’s senior upstream analyst, said in a press release that evolutionary evidence from shallow-water terms suggests that the Mexican government is likely to change the adjustment mechanism to reduce the maximum additional royalty rather than accepting lower bids.

“To account for higher costs and exploration risks in deepwater areas, the additional royalty will need to be lower than that envisaged onshore,” said Lara.

“While this would ease the overall tax burden for potential investors, the government may still be able to mandate a reasonable minimum additional royalty rate.”

GlobalData’s report also found that exploration and production companies with over 1.6 million barrels of oil equivalent per day of production may no longer be restricted from partnering, and changes to unpopular corporate guarantee rules are also being considered.

Despite these attempts to make the current phase more attractive, Round 2 is expected to be more popular amongst bidders.

“Many companies are happy to wait to invest in Mexico if the Round 1 terms are not right, as a number of blocks in the Perdido area for Round 2 are possibly more attractive than those on offer this time around,” said Lara.

She says the more important element of licensing in Round 1 is the farm-out of deepwater discoveries Exploratus, Trión and Maximino in the Fold Belt, which could contribute production within a much shorter time frame.

“Outside of the farm-outs, the government only risks the political capital it has invested if the terms are deemed unattractive,” the analyst concludes,” she said.

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