Mexico’s long-awaited oil and gas auction falls flat

The government of Mexico had eagerly anticipated that the recent reforms enacted by its Congress would attract consideration attention and badly needed investment capital from foreign oil companies, which had been banned from operating in that country’s oil and gas sector since the 1930s. Instead, investors showed a clear lack of interest during the July 15 auction.

Only two of 14 blocks drew interest as Mexico made its initial step in opening up the country’s oil and gas to outsiders. The two shallow water contracts that were awarded went to the same consortium comprised of Sierra Oil & Gas, Talos Energy, and Premier Oil. The remaining 12 offshore blocks received no bids.

In sum, the auction was a major disappointment for Mexico.

Some observers attributed the poor start to the current low-price environment, but others were critical that the so-called “reforms” didn’t go far enough. Attorneys with Vinson & Elkins in Houston and Von Wobeser y Sierra in Mexico City wrote in the June issue of OGFJ that Mexico’s new Hydrocarbons Law contains language that would allow the Mexican government to nullify contracts and more. This could have scared away potential investors. Others could be waiting for Mexico to sweeten the fiscal terms in light of lower prices and constrained investment budgets.

Coming as it did just after notorious drug lord Joaquin “El Chapo” Guzman’s escape from a maximum security federal prison in central Mexico, it was a bad week for Mexican President Enrique Pena Nieto’s government.

Prior to the auction, the energy ministry had said that five contract awards of the 14 being offered would constitute a successful auction. Blocks not awarded can be tendered again at a later date. The 14 contracts were for areas with an estimated 3.8 billion barrels of oil equivalent in proven, probable, and possible reserves.

 

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