In a sign that interest is warming in the Gulf of Mexico, nine companies vied for the lease to a block thought to hold more than 700 million barrels (bbl) of oil in the shallow-water Gulf of Mexico’s Pliocene sands.

Another block attracted five bidders.

One key difference in this round: bidders knew what Mexico’s terms were. In July, some terms were not disclosed.

Both blocks were among three awarded production-sharing contracts during the second phase of Mexico’s historic Round One auction. The third block received only one bid, and the remaining two had no takers. Still, Mexico’s officials said they were pleased with the results.

With lower commodity prices, which have fallen to about $45 from more than $100/bbl due to an imbalance in supply and demand, investors are spending cautiously.

Referring to other countries that have attracted less interest, Juan Carlos Zepeda, commissioner of Mexico’s National Hydrocarbons Commission (CNH), said the second phase was “clearly a success” with 60% of the blocks awarded. He noted that the exploratory risk is practically non-existent because the blocks contain fields that have already been discovered.

“The results are very satisfactory. It’s a great result for Mexico,” Zepeda said.

The three blocks awarded Sept. 30 were all located in shallow-water Gulf of Mexico’s Southeast Basin near the mature Ku-Maloob-Zaap and Cantarell fields.

  • Competition was the fiercest in Block 1, which contains the Amoca, Miztón and Teocalli fields. The high bidder was ENI International, which offered 83.75% of pretax profits to the state. The bid was well above the minimum 34.8% requirement for the block. The next highest bidder was Lukoil Overseas at 75.1%.
  • Block 2 in the Tertiary trend also saw plenty of action with five bids. The top bidder for the block, which contains the Hokchi Field, was the consortium of Pan American Energy and E&P Hidrocarburos y Servicios. The duo offered 70% share of operating profit, double the required minimum for the block, edging out the consortium of Fieldwood Energy and Petrobal by 5 percentage points.
  • Only Fieldwood and partner Petrobal were interested Block 4, site of the Pokock and Ichalkil fields. The consortium was the lone bidder for the block.
  • Blocks 3 and 5, home of the Xulum as well as the Mison and NAK fields, were declared void after receiving no bidders.

Mexico’s CNH had said it would consider the phase a success if two or more of the blocks awarded.

But success can also be viewed in terms of the diversity of companies that have entered Mexico.

The second phase saw the entrant of a major company, another private equity backed company in a consortium with a Mexican conglomerate, and a Latin American independent, said Ivan Cima, director of Latin American research for Wood Mackenzie.

“Overall this can be considered a success,” he said.

The auction is being conducted in a series of multi-phased rounds that will also include deepwater and unconventional blocks aimed at reversing the country’s declining oil production trend.

Deputy Energy Minister Lourdes Melgar told reporters that the awarded blocks are expected to have a peak production of at least 90,000 bbl/d to help reverse the downward trend.

The results were considered an improvement from the first phase on July 15. In that round, eight of the 14 blocks offered received no bids and four were bids thrown out for failing to meet Mexico’s minimum requirement of 40% pre-tax profits.

Two bidders missed out on winning blocks by five percentage points, not knowing beforehand about the government’s undisclosed minimum 40% cut, Cima said.

In the Sept. 30 auction, the government was pragmatic, listened to feedback and decided to disclose the minimum requirements in advance to companies this time.

“Round One was successful in attracting interest, but the terms were set to where the result itself was not successful,” Cima said.

“Despite the fact that all three bids were significantly above the minimum, at least the industry knew what terms and conditions they were dealing with. There were no surprises.”

But Fieldwood and partner Petrobal’s Block 4 offer piqued Cima’s interest. “The bid of 74% clearly reflected that the companies were very bullish on this acreage,” he said.

Mexico’s decision to open the blocks offered up for exploration in addition to extraction led to a more successful auction, said Oscar Lopez Velarde, an EY Mexico oil and gas leader.

“The auction today proved that when Mexico offers attractive fields, the industry will bid—even at high prices,” he said.

Interest is expected to be greater when Mexico offers deepwater acreage. But industry experts warn further adjustments to terms may be needed.

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

Velda Addison can be reached at vaddison@hartenergy.com.

Offshore