Mexico: Second Call For Bids Of Round 1: Progress In The Energy Reform

Last Updated: 3 November 2015

On September 30th, 2015, 9 bidders presented their proposals for the second set of Hydrocarbons Extraction Contracts tendered by the National Hydrocarbons Commission ("CNH"); the outcome was remarkable and should dissipate the negative opinions that the results of the First Call for Bids cast on the Mexican Energy Reform.

Indeed, the first great act of opening of the Mexican E&P industry to the private sector, which took place on July 15th, 2015, was underwhelming, to say the least. The First Call for Bids of Round 1 resulted in only 2 out of 14 blocks being awarded, and both to the same consortium formed by the Mexican company Sierra Oil & Gas, S. de R.L. de C.V. (interestingly enough, a Mexican company), Talos Energy LLC and Premier Oil PLC. The main cause behind these unremarkable results was the fact that the Ministry of Treasury and Public Credit ("SHCP") set forth certain minimum values for the bidding variables which were not available to the bidders prior to the bid presentation date. Thus, 4 blocks were declared deserted because the bids presented by the participants were below the minimum economic values for the bidding variables determined by the SHCP, which were not previously disclosed. Were it not for the spreads between the bids and the minimum set values, 42% instead of 14% of the blocks would have been awarded.

Now, for the Second Call for bids, 14 participants prequalified as bidders (10 individual bidders and 4 consortiums). Out of those prequalified participants, 9 turned up to present their corresponding bids, which resulted in 3 out of 5 blocks being awarded: a 60% success rate.

The most notable block among the ones tendered in this phase was Block 1 which received proposal from all 9 bidders. This block encompasses 3 fields with 2P reserves of over 107 MMbbl of oil and 69 Bcf of gas. The bids were very competitive, but the block was ultimately awarded to ENI International, B.V., an Italian company who offered 83.75% of the operating profit to the State along with a 33% increase in the minimum work program.

As for the rest of the blocks, Block 2 was awarded to the consortium formed by Pan American Energy LLC and E&P Hidrocarburos y Servicios, S.A. de C.V, which had Mexican, American, and Argentinian capital, and Block 4 was awarded to the consortium formed by Fieldwood Energy LLC and Petrobal, S.A.P.I. de C.V., with both American and Mexican participation. Blocks 3 and 5 were declared deserted from not receiving any bids.

One of the main drivers behind the success of this Second Call for bids was the publication by the SHCP of the minimum values for the bidding variables 2 weeks prior to the proposal presentation date. This governmental authority published these figures in order to prevent a reprise of the unexceptional results of the First Call, which resulted in the avoidance of the disagreeable surprises of the previous tender, as no bidder presented a proposal that was below the previously disclosed minimum values. The authorities have learned from their mistakes and acted accordingly, a good sign for future potential investors.

There is reason to celebrate the Second Call for bids of Round 1 after the mourning period that came with the results of the First Call for bids; however, the Mexican authorities still have a lot of work to do going forward. The Third Call for bids for the awarding of hydrocarbons exploration contracts onshore will culminate with the proposal presentation act on December 15th of this year. This next phase of Round 1 is especially important for the future of the Mexican E&P industry, as it contains a total of 25 onshore blocks that have existing infrastructure and are therefore ready to commence operations within a few months of being awarded. Furthermore, it is worth mentioning that the prequalification criteria for this phase are less stringent that the ones applicable to the first two Calls of Round 1. This makes for a very attractive tender for which 96 companies have shown interest, 84 of them have had access to the corresponding Data Room, and 60 different participants have begun the prequalification process. If the Third Call for bids is successful, the Mexican E&P sector will have a radically different face in 2016 than the one it has had for the past 75 years.

Finally, the Fourth Call for bids for deep waters hydrocarbons exploration and extraction contracts is still pending to be issued by the CNH. Due to the nature of these contractual areas, the corresponding contracts and bidding guidelines have an added degree of complexity, which justifies the CNH taking a greater amount of time to issue the bidding documents; however these documents were supposed to be issued in July, and their publishing has been delayed for several months. The latest statement by the Ministry of Energy estimates that they will be published on the last week of November. If the Mexican Government intends for Round 1 to continue being an attractive investment alternative, they need to keep the momentum gained by a successful Second Call, and for that, these documents should be published as soon as possible, but definitely before the end of the year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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