The liberalisation of Mexico’s oil and gas market is continuing apace with the blocks to be auctioned in Round 2.1, the next stage in the tendering process, revealed last week. SENER, Mexico’s energy ministry, announced the auction of 15 shallow water areas covering an area of 8,908km² off the coast of Veracruz, Tabasco and Campeche. This adds to the momentum created by the 10 deepwater blocks in Round 1.4, to be awarded on 5 December this year.

There are total prospects of 587 million barrels of crude equivalent on offer in Round 2.1, from which wet gas, light oil and (to a lesser extent) heavy oil may be extracted. The blocks are almost double the size of those auctioned in Rounds 1.1 and 1.2.

Production Sharing Contract

The method of contracting is an important feature of this Round 2.1. Under a Production Sharing Contract (“PSC”), the contractor agrees to carry out exploration at its own cost and risk and will receive consideration for a proportion of the production area.

Stages of the PSC:

  1. Exploration period of 4 years, plus an additional period of 2 years; 
  2. Evaluation period of 2 years following a discovery; and 
  3. Development period of 22 to 32 years, with extensions depending on continuity of production.

Requirements

According to Juan Carlos Zepeda, President of the National Hydrocarbons Commission (“CNH”), it is hoped that each block will attract investment of US$750 million, bringing a total investment of US$11.25 billion for all the contracts. As such, it is important that participants have the required technical and financial experience to successfully fulfil the contract terms.

Participants who wish to participate in the auction must be able to show, among other requirements, that:

  1. they have participated in at least three projects between 2011 and 2015 and have capital of US$600 million (operators only); or 
  2. they have total capital investments in exploration and/or extraction projects of more than US$1 billion (other participants).

Structure of bidders: Interested parties may prequalify and bid as individuals or as part of consortia in up to four contracts, but may not bid more than once for the same block.

Local content: In order to ensure that growth is stimulated within Mexico, there are local content requirements of 15-35%, depending on the stage of the contract.

Performance guarantee: Contractors must present an irrevocable letter of credit in favour of CNH to guarantee the work promised during the exploration period.

Corporate guarantee: Contractors must have the backing of their parent company or affiliates authorised to guarantee compliance with the terms of the contract.  Plans and Programmes: Exploration and Development Plans, Work Programmes and Budgets must be approved by the CNH.

Timeline

The auction will take place on 22 March 2017 and include some areas not awarded during Rounds 1.1 and 1.2, importantly with more and better quality information. Data room access will open on 1 August 2016 and the prequalification process will run from 15 December until 1 March 2017. As with previous phases, only pre-qualified companies can participate in the auction, and they may do so alongside PEMEX, Mexico’s national oil and gas company. The result of the auction will be announced on 24 March 2017.

The CNH and SENER are hoping for even greater participation in the latest stage of the tendering process. Following high levels of interest in Round 1, particularly in the deepwater blocks of Round 1.4, it is hoped that the investment levels will match their predictions. It has been said that this level of investment would directly result in 30,000 more jobs, and 80,000 jobs indirectly.

The overall requirements for submitting technical and financial information have been relaxed to attract more bidders. With signs that the worst of the oil price slump may be over, Mexico’s oil and gas industry looks set to take advantage of increased international investment.

Derek WoodhouseLuis Fernández