Repsol-YPF offers $2.4 billion in Mexico's first MSC bid

By OGJ editors

HOUSTON, Oct. 16 -- Repsol-YPF SA has bid over $2.4 billion to be the first foreign oil and gas company to explore for and develop hydrocarbons in Mexico since nationalization in 1938.

The Spanish-Argentine giant's bid kicks off the most highly anticipated exploration and development license tender process in recent memory: the award of multiple service contracts (MSCs) in Mexico's gas-prone Burgos basin.
Mexican state oil company Petroleos Mexicanos is scheduled to announce at 6 p.m. this evening, via live webcast at www.csm.pemex.com, its decision on whether to formally award the MSC to Repsol-YPF after reviewing its $2.437 billion economic proposal.

Bids received
Pemex Exploration & Production, the state company's upstream unit, on Wednesday received Repsol-YPF's technical proposal and approved it today.

Both proposals cover the development of nonassociated gas reserves on the Reynosa-Monterrey block of the Burgos basin under the MSC program. They also cover development of infrastracture and maintenance of production for 20 years. The economic proposal includes the value of goods and services to be provided over the 20-year contract.

The Reynosa-Monterrey block is one of the largest of eight Burgos basin blocks that are being tendered under the MSC process. The Repsol-YPF bid kicks off a bidding process that will last through mid-November. The schedule for the remaining bid award announcements is Cuervito Oct. 23, Mision Oct. 30, Corindon-Pandura Nov. 6, Ricos Nov. 13, and Fronterizo and Olmos both on Nov. 19.
Contract negotiations then follow, with the final contract awards for all blocks to be signed by yearend.

Background
Pemex has projected that the MSCs could result in incremental production of 1 bcfd of natural gas and net as much as $10 billion of foreign investment in Mexico.

The giant state oil company devised the MSCs as a means to draw foreign investment to its upstream sector without running afoul of constitutional prohibitions against foreign ownership of Mexico's hydrocarbon reserves—often referred to locally as "la patrimonia," or the national patrimony. Because no ownership of Mexican resources is involved, foreign-owned supply and service companies have operated freely in the country for decades.

But Pemex is grappling with soaring demand for natural gas and is capital-constained in terms of being able to fund the level of gas reserves development needed to meet future demand. In 1997, the company launched a $6 billion Burgos basin exploration and development initiative, pushing output to a current 1 bcfd. The Burgos MSCs are expected to result in double that volume.

In essence, the MSCs allow foreign operating companies to participate in Mexican E&D on a contractor basis with an assured return on investment but without the government conferring ownership of reserves or production.
The economic proposals are built upon a series of reference prices for various products and services that Pemex has detailed in bid specifications, with the MSC operator performing all the work on a turnkey basis and receiving a monthly cash fee (OGJ Online, June 10, 2003).

Even with skirting constitutional concerns, the MSCs have drawn a great deal of political fire, as opponents of the administration of reformer President Vicente Fox have labeled the MSCs as a back-door way to privatization—a term that is virtually a political death knell in Mexico.

Pemex has offered a mix of large blocks, such as Reynosa-Monterrey, which covers several thousand square kilometers, and smaller blocks covering only a fraction of that area, to attract both large and small companies alike.
The basin's reserves potential is pegged at 4.4 tcf, a substantial portion of which is proven.

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