Following the historic energy overhaul passed by Mexican Congress in December 2013, the Mexican National Hydrocarbons Commission (CNH) took further significant steps towards the liberalisation of the country’s oil and gas industry in December 2014 by launching Round One of tendering for the exploration and development rights for Mexico’s hydrocarbon reserves.

Ahead of the outcome of the tender, the Mexican government has announced changes to the fiscal and economic terms of Round One production sharing contracts to be awarded in July and September 2015. In light of the slump in the global price of oil, more favourable tax and economic provisions have been introduced to incentivise higher bids for the nation’s resources. 

Round One comprising 21 shallow water blocks is expected to be the first set in a series that will revolutionise oil exploration and production in Mexico. Production sharing contracts for the exploration and development of onshore, deep water, shale and extra-heavy oil blocks are set to follow later this year. Further details relating to these blocks have yet to be announced, with industry interest set to intensify on the potentially more lucrative deep water assets. 

The changes

Adjustment Mechanism. Amendment has been made to the adjustment mechanism within all production sharing contracts currently up for tender. The mechanism is designed to facilitate a progressive increase in tax revenue for the state, usually in circumstances where a large discovery is made or following a sustained rise in the price of oil. It stipulates an increase in the tax payable by any oil company whose pre-tax profits exceed a defined level. Previously, where the pre-tax profit margin of the oil company reached 15 per cent, the adjustment mechanism would be triggered. This has now been raised to 20 per cent allowing for a significantly larger percentage of profit to be realised by the oil company.

Contractual Price. The pricing for hydrocarbons within all production sharing contracts will be determined by the market price reported by the oil company or the state trader. The pricing formula in production sharing contracts will only be applicable if no market prices are observed. Additionally, mechanisms have been introduced to allow the contractual price to recognise the costs associated with transportation of hydrocarbons from the metering point to the delivery point.

The government had been publically encouraged to improve the terms of the production sharing contracts by a number of key industry figures, including BP’s CEO Bob Dudley, with further pressure from Occidental Petroleum Corporation and Alfa SAB. With only three months until the production sharing contracts are awarded and fearful of low bids, the government has responded to industry pressure. 

Liberalisation

The country’s move towards energy liberalisation will see the break-up of the 77 year old monopoly held by state controlled oil company Pemex. A key motivator for the reform is the attempt to raise oil producing output, which had fallen to a 20 year low in the fourth quarter of 2014.

The first call for production sharing contracts will be awarded in July to preferred bidders seeking the right to explore for and develop the 14 offshore oil and gas blocks in the Gulf of Mexico. CNH will then award 5 production sharing contracts for the remaining 9 blocks on the second call in September 2015.

Meanwhile, the Mexican government continues to show willingness by listening to the international players’ concerns and following common practices of the industry worldwide.