In what could be called its most successful auction yet, Mexico’s third call for bids attracted 40 companies willing to invest in oil and gas acreage despite today’s rough market conditions. All 25 of the onshore areas on the table were awarded.

The competition for some of the mature fields, which combined span more than 800 sq km in the states of Chiapas, Veracruz, Tamaulipas, Tabasco and Nuevo Leon near and along the Gulf of Mexico coastline, was strong with some fields getting more than a dozen offers. The next auction—for deepwater acreage—is expected to generate even more interest from companies worldwide.

“We are quite pleased with the results from this round of bids,” Juan Carlos Zepeda, commissioner of Mexico’s National Hydrocarbons Commission (CNH), said during a late-evening news conference. “Looking at the international picture, these levels of success are not being seen in any other country. … We are highly satisfied with the results.”

The bidding round was held Dec. 15 as commodity prices remained depressed and the day brought news of more companies cutting budgets and reports of bankruptcies—the result of a worldwide supply-demand imbalance. Expectations were low going into the latest bidding phase with Mexican officials saying they would call this round a success if at least five contracts were assigned.

It became apparent that Mexico would likely reach that goal by the time the bidding committee took its first afternoon break. Winners were declared for all four of the Type 2 contracts—blocks with more than 100 million barrels of liquid hydrocarbons—offered.

‘It’s Amazing’

Unlike the previous round, which was based on the production-sharing contract model, the latest round offered license contracts. The financial terms included the standard royalty plus an additional royalty based on gross revenue.

The first Type 1 contract, areas with less than 100 million barrels of liquid hydrocarbons, offered shortly afterward attracted 17 bidders each wanting a chance to develop oil and gas in the Mundo Nuevo, or New World, area. Pledging to give Mexico 80.69%, Renaissance Oil was declared the victor, edging out Diavaz Offshore which offered 78.9%.

By the time the process ended that evening all areas were awarded.

“25 out of 25 assigned. Even pure natural gas plays. It’s amazing, all with at least two bidders with back up in case one bidder decides not to sign the contract,” Alfredo Alvarez, EY's Mexico Energy Sector Leader, told Hart Energy.

This round in particular has special meaning for Mexico. Nineteen of the fields offered during this round are already producing oil and gas, so the “first barrels of oil, which are the product of the energy reform, will come from this third round of bids,” Zepeda said.

Production from the fields is expected to reach 77,000 barrels of oil equivalent per day within three years. Upon signing the license contracts awarded, companies are required to present plans on how they will maintain production and later give an evaluation plan detailing how they will increase production. Mexican officials say they don’t anticipate production to be suspended at any time for the fields that are already producing, currently under the watch of stated-owned Pemex. The state will pay Pemex for existing infrastructure at the fields.

Sowing Seeds

In addition, Deputy Energy Minister Lourdes Melgar pointed out that one of the objectives of this bidding round was to “sow the seeds to create new Mexican oil enterprises. In this regard, we may say that today’s results have fully met these objectives.”

Eighteen Mexican enterprises participated, and some of them were awarded more than one field. Melgar noted that some of the Mexican companies have decades of experience in the country’s oil sector and have worked as Pemex contractors.

Most of the fields offered were smaller and required less investment compared to offshore fields, putting them within reach for many smaller companies. In all, there were 40 bidders—26 individual companies and 14 consortia.

Although private Mexican oil and gas operators dominated, the round attracted companies from beyond Mexico’s borders—including Armour Energy, GDF Suez E&P, Pacific Rubiales, several U.S. firms and Canada’s Renaissance Oil Corp., which won development rights for three fields. The majors were absent.

The round’s biggest winners included the Geo Estratos consortium from Mexico, which won four contracts; Mexican start-up Strata Campos Maduros, three; and Diavaz Offshore claimed two contracts.

As the process unfolded, Alvarez called the results amazing and pointed out that most of the royalties offered above the regular royalty on gross revenue far exceeded the minimums of zero to 10%.

Miguel Messmacher Linartas, assistant minister of income for Mexico, said the average additional royalty was 56% of total revenue.

Moving Offshore

Combined, the fields are expected to attract about $1.1 billion in investment.

The companies pledged to give between 10% and 93% to the state. When asked whether companies on the higher end would be able to make a profit considering some of the fields may require secondary or tertiary recovery methods, Linartas pointed out that the basic royalty is based on commodity prices. Moreover, companies placed their bids based on knowledge, including that gained from data rooms, he added.

The auction was the third offered by Mexico as part of its inaugural multiphase bidding round known as Round One. The first two offered shallow-water acreage offshore. Next up is deepwater.

Reuters reported on Dec. 16 that tenders will be offered in 10 deepwater areas in the Gulf of Mexico, including in the Perdido Fold Belt. No date has been set yet.

Mexican legislators opened the door to private investors after approving constitutional reforms in December 2013. The move ended state-owned Pemex’s decades-old monopoly on the sector by allowing licenses, production-sharing contracts, and profit-sharing contracts to be initiated either by the government, private investors, or Pemex itself. Hopes are for the change to boost declining production while stimulating the Mexican economy.

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