Shallow-water acreage will be first up on the menu of E&P blocks being offered by Mexico following the country’s historic decision to deregulate its oil and gas industry, according to plans presented by Mexico’s top energy officials this week.

The country has opted to take a staggered approach to the Round 1 tender, which will make available 169 blocks covering about 28,500 sq km (11,004 sq miles) with more than 18 Bboe in prospective resources and proven and probable reserves. Plans for the geologically diverse round include not only shallow water, but also extra-heavy oil, unconventional and deepwater assets, which will be offered last with awards expected in October 2015.

Following the shallow-water blocks, companies will have an opportunity to vie for extra-heavy crude assets, then acreage in Chicontepec and unconventionals, ending with the deepwater Gulf of Mexico (GoM). Most of the blocks, according to Mexican officials, involve crude ranging from light to heavy, while most of the natural gas will be likely in unconventional areas and some blocks offshore.

“Mexico has a lot of resources. We selected those areas where we saw the conditions being most promising for doing the development at this stage,” Lourdes Melgar, undersecretary of hydrocarbons for Mexico, said during a press conference Oct. 20 before the start of Round 1Executive and Technical Sessions in downtown Houston. “We are working on developing the infrastructure in other parts of the country so in the future we can have them as part of the rounds. So in this regard, we are [coordinating] with the different states so they can build the roads, the pipelines or even the facilities for people to live etc. so we can have those developments.”

Juan Carlos Zepeda, president commissioner for the National Hydrocarbons Commission of Mexico, explained that blocks will be offered in the Tampico-Misantla Basin—as opposed to the Burgos Basin, which is a continuation of the prolific U.S. Eagle Ford Shale and also because the former is mainly oil at 90%.

“Under the current gas prices, we believe we should focus right now on oil,” Zepeda said. “The second thing is the Tampico-Misantla is right there in Veracruz, which is the traditional oil region of the country, so we have plenty of infrastructure and services.”

In addition, the Tampico-Misantla shale formation—an area that already has infrastructure in place— overlaps other resource plays, including the Chicontepec tight oil play and some conventional resources.

“The blocks that will be awarded there will allow companies to explore, drill and produce oil at all levels and all layers. So we will not be bringing any restriction on the depth,” Zepeda added. “It is very attractive because oil companies will be able to produce from three different types of reservoirs: conventional, nonconventional and tight oil.”

Already, companies have been expressing interest in shale formations such as the Tampico-Misantla; however, they are also buzzing about the potential for more discoveries near the Perdido development in the U.S.-Mexico transboundary area. Interest also has piqued in another part of the GoM.

“There is an important subsalt formation in the center of the gulf in the deep waters, and we are expecting light oil there,” Zepeda said. “Several of the comments that we have been receiving from oil companies is that that is a very promising area, and actually they have been recommending us to bring in some more blocks for the first round, so we are studying that.”

This means there is a possibility that blocks could be added.

Currently, of the 169 blocks being proposed, 109 are exploratory assets, while 60 blocks are extraction blocks with 2P reserves. At the same time these blocks are being bid, Mexico will be taking bids for 14 blocks (part of 10 contracts) that Pemex decided to farm out.

“The areas that have been proposed for Round 1 are not definite,” Zepeda said. “We are in the process of receiving feedback from the industry. It might be that the ministry of industry could decide to bring in more areas in the north. But that is something that has to be studied and decided in the following weeks. Some additional blocks could be included in the north. … As the new gas pipeline infrastructure is finished in the following months, it will also make it more attractive to bring forth further blocks for future rounds in the north.”

He later added that Mexico’s block selection followed an approach that aimed to make clusters of development around Pemex infrastructure.

Speaking to a standing-room only crowd in downtown Houston, Zepeda said Mexico will make public the terms and conditions for the shallow-water package in November. At this time, specifics about the contract model, fiscal terms and prequalification requirements will be released. Prequalification, which will be required to assess the data room, will finish by January with awards in May.

Seismic data, both 2-D and 3-D, are available for offshore areas identified for Round 1. In the past, Pemex—which will be allowed to partner with and compete against others for blocks after securing assets during Round Zero—has identified prospects or areas where there is a potential reservoir. Additional 3-D seismic is being shot for shale oil formations in Chicontepec as well as formations closer to the Texas border and in Tampico-Misantla.

Three types of contracts will be available: license, production-sharing and profit-sharing. The first two stipulate that payments be made in kind, while the latter requires cash payments. Another major difference between the contract types is that license contracts will be revenue based, and the other two types of contracts will be profit based, said Eduardo Camero, head of the nontax revenue policy unit, Secretariat of Finance of Mexico.

“We will be able to use different types of contracts for different types of fields,” Camero said. “License and production-sharing contracts will be offered in Round 1.”

Mexico followed common international best practices, he said, noting for instance that requirements include corporate income tax, surface rate payment, state/municipality tax and royalty. Awarding variables will take into consideration government take and the work program, aiming to maximize the state’s revenue.

“One of the advantages that we have in opening up so late to the industry is that we already have a good base of knowledge of what works in other countries,” Camero added, noting that transparency will also be key. “So we believe that most of this should be well known by the industry and should be readily understood.”

Local content requirements for E&P companies doing business in Mexico will gradually rise from 25% next year to 35% by 2025. This mandate excludes deepwater and ultradeepwater developments, an area in which local expertise is admittedly lacking.

Jorge Piñon, director of the Latin America and Caribbean Energy Program at the University of Texas at Austin—which cohosted the event with the Greater Houston Partnership—said some people see local content as a limiting factor.

“When we look at Mexico’s content rule versus Petrobras or Brazil for example who went very, very high at the beginning and actually created a bottleneck, we welcome the way that Mexico introduced its content rule because it gives the industry room to grow with the Mexican industry to build that cadre of Mexican companies that in five or eight years are really going to be able to supply a lot of service to the major oil companies,” Piñon said. “It is not a limiting factor. It is opening the door for Mexican companies to partner with U.S. companies to provide services to the industry.”

Round 1 is the first of what is expected to be many more to come.

The government plans to have rounds more or less annually with a five-year program set to be announced next year, Melgar said.

“An important point is the fact that there are some really interesting areas that we are not putting in Round 1 at this point in time because we need to make sure that we have the needed infrastructure,” Melgar said. “When companies go to a place to start development, they want to make sure that they have the roads to get there, and in some cases we don’t have any.

“Mexico is fortunate in the sense that we have oil resources, so we are doing a selection of areas. We put in Round 1 the areas where activity can begin sooner than in other areas. If you look at the size of Round 1, it’s quite a good size for a first round,” she said.

Contact the author, Velda Addison, at vaddison@hartenergy.com.