Mexico´s Oil And Gas Reform Gains MomentumContexto UDLAP Admin
Mexico’s past experiences in transferring strategic state-owned assets to private companies has often delivered mixed results, with telecommunications and banking being two of the most revealing examples. In these two cases, Mexicans have endured the consequences of market concentration and high prices, while on the part of investors the outcome has been handsome profits. Thus, it comes as no surprise that decision to open the energy sector in 2013 was hugely controversial. But while the reform drew a lot of skepticism, many strongly believed that it was the way forward to reverse years of oil and gas sagging output and start shaping up a more competitive industry.
Years, if not decades, of political gridlock came to an end when Peña Nieto took power in December 2012, leading to constitutional changes that allowed the participation of private players all along the energy value chain. But it was not until July 12, 2017 when the bold reform gamble delivered better-than-expected outcomes. And the good news keeps coming as media outlets, pundits, and companies comment on the significant hydrocarbon discovery announced by Sierra Oil and Gas, Talos Energy and Premier Oil; the success of Mexico´s Rounds 2.2 and 2.3 where 21 out 24 blocks were awarded; and ENI´s media release stating that resources found in its Gulf of Mexico field are significantly larger than anticipated.
All this signals that regulatory changes put in place four years ago have been attractive enough to help turn things around. The Mexico´s oil and gas reform has gained momentum.
A Sluggish Start Full of Fortune
For the first time in almost eight decades, Mexico carried out a bid round to auction oil and gas blocks to private firms on July 15, 2015. Twenty-five bidders showed interest (18 individual firms and 7 consortiums) but low prices of crude put off most of them. With the price for the Mexican blend averagingat $49.71 per barrel in the first 6 months of 2015, down from $95.10 per barrel in the first semester of 2014, only 2 out of the 14 blocks were awarded. However, this context did not discourage the international consortium of Sierra Oil & Gas (Mexico), Talos Energy (U.S) and Premier Oil from (UK), which narrowly outbid Texas’ Hunt Overseas Oil Company for Block 2 and Norway’s Statoil for Block 7.
On July 12, 2017, almost two years after placing a winning bid on Block 7, the consortium made public that “estimates for the Zama-1 well are in excess of 1 billion barrels”, which according to Pablo Medina, an industry analyst for Wood Mackenzie, “is one of the 20 largest shallow-water fields discovered globally in the past 20 years”.
Without a doubt, these figures are music to the ears of the firms involved and of the Mexican government. For example, shares of Premier Oil, which holds a participation of 25% in the venture, increased up to 38% on the London Stock Exchange on July 12th. In relation to the Mexican government, the National Commission of Hydrocarbons (CNH in its Spanish acronym) estimates that the country expects to capture up to 83% of the profits generated by this discovery.
Rounds 2.2 and 2.3
The July 12th announcement of discovery of oil resources in Block 7 coincided with successful new bidding rounds 2.2 and 2.3. The rounds were mostly focused this time on Mexico’s natural gas resources as Mexican policy makers recognized significant and growing dependency of the country on foreign suppliers.
Last year, according to Adrian Lajous, a former CEO of Pemex, around 45% of Mexico’s gas demand was met through domestic production, while the rest of it was captured by foreign suppliers, with the United States being by far the most important one. The dependency on U.S. natural gas is believed to increase farther. A rise in output that led to a glut in the US along with falling prices is proving to be a combination that favors this relationship. The American Petroleum Institute estimates that the US capacity to sell gas to Mexico is set to double in the next three years as more pipelines come online.
Thus, this month’s bid rounds oriented to eventually increase natural gas output in Mexico are beyond wishful thinking, they are a necessity. Out of the 24 blocks auctioned in Round 2.2 and Round 2.3, 21 were awarded to participating firms despite what some have seen as forces discouraging investment: the low price of natural gas in the US and security issues in Mexico.
Important to highlight is also that all blocks were secured by Mexican firms, acting either as part of a consortium or alone. Two firms to keep an eye on are Monterrey`s Jaguar and Newpek. The former is a newcomer and was able to secure six contracts in association with Canada`s Sun God in Round 2.2. In Round 2.3 Jaguar was able to acquire five more blocks, this time on its own. Experienced in shale play development, Newpek (subsidiary of Grupo Alfa, one of Mexico`s largest conglomerates) teamed up with Verdad Exploration from the United States to win two blocks in Round 2.3.
Another firm that found its way into Mexico’s energy sector is Carso Oil and Gas. Backed by the country`s richest mogul Carlos Slim, the company secured its first two onshore blocks in Round 2.3. Three more blocks in Round 2.3 were awarded to Mexico`s Sicoval and Nuevas Soluciones, which bid along China`s Shandong, while Iberoamericana and PJP4, also from Mexico, secured three blocks, one in Round 2.2 and two in Round 2.3.
All in all, it seems that Round 2.2 and 2.3 were successful not only because 21 out of 24 blocks were awarded, but also because domestic Mexican companies responded to regulatory changes in a desired way. By placing successful bids they were able to ensure their presence in each and every single block.
From Milan with Love
ENI, the state-controlled Italian oil and gas firm, has found in Mexico the venue to expand operations internationally. The European giant has realized the potential embodied by the country`s shallow waters, which drove its participation in the bidding process.
In September 2015, after a fierce competition among nine bidders, ENI managed to beat Russia`s Lukoil to secure Block 1 in Round 1.2 – a shallow water area off the Tabasco coast in southern Mexico. ENI got it right this time but, similarly to the Sierra/Talos/Premier Oil consortium, the company had to wait for the rewards to materialize.
About one and a half year later, on March 23, 2017, the Italian firm made public the discovery of meaningful reserves after drilling its Amoca-2 well. But this statement fell short in comparison to the announcement on July 12, 2017 when ENI put a number to its estimates: the new find was in the range of 1 billion barrels of oil equivalent.
Together with Premier Oil discovery, the ENI announcement speaks abundantly of the untapped resources waiting to be exploited by either Pemex or private players in subsequent bidding rounds.
It is hard to imagine that, in light of recent events, interest in Mexico’s oil and gas industry is going to fade in the near future. Latin America’s second largest economy is set to become one of the hottest spots in the world’s energy landscape, and Mexican regulators as well as future potential bidders are well aware of that.
To take advantage of this context, the Ministry of Energy (SENER) just announced that Round 2.4 will take place on January 31 next year – a month later than originally planned. It is understood that the reason for postponing the auction is to give more time to potential bidders to better grasp the magnitude of the opportunities arising offshore.
In Round 2.4, thirty deep-water blocks are up for grabs and, if all are awarded, total investment could reach up to 135 billion dollars, according to media reports that use data from the Mexican Ministry of Energy. But potential benefits are not only investment-related, Round 2.4 may attract a larger number of bidders including domestic and international oil and gas companies that did not participate – or have not secured contracts – in previous auctions. This, in the eyes of the global oil and gas industry, can be seen as a huge step in crafting the new energy industry in Mexico.
Today, there is little doubt that a renewed interest to participate in future rounds is clearly looming. Can we expect aggressive bets on the thirty deep water blocks on January 31st? That seems likely. The Mexico´s oil and gas reform has gained momentum. Let`s hope it lasts.
Acerca del autor: Adrian Duhalt is a postdoctoral fellow at the Baker Institute for Public Policy’s Center for Energy Studies and the Mexico Center. He is also an associate professor at Universidad de las Américas Puebla (UDLAP) in Mexico.
Profesor Adscrito del departamento de Administración De Negocios Internacionales, UDLAP