To comply with its requirements under the North American Free Trade Agreement of 1993 to open government procurement to international public tenders, Mexico adjusted its public works law to treat the lowest quoted price in a public tender as a measure of the best terms and conditions. Mainly because of the requirement to take the lowest price, Pemex's experience with this type of system for awarding contracts has not been a happy one. A best-value procurement approach, which would consider qualities and dimensions other than price, would make public tenders much fairer to Pemex and bidders.
The first test case for the current system occurred in 1997 in an award to a South Korean-led consortium for reconfiguration of the Monterrey refinery in Cadereyta at a price of $1.9 billion, including installation of a coker. The completion period of 3 years turned into 5—then 6. The total cost to Pemex was twice the original budget—exclusive of the costs of bankruptcies and lawsuits.
Another Pemex tender called for a 1.2 bcfd nitrogen-injection program for offshore Cantarell oil field. There were three bidding consortiums, two with upstream partners that could have advised Pemex on reservoir management and pressure-maintenance projects involving nitrogen, thereby increasing the likelihood that the project would succeed. The tender, however, was awarded to the one consortium, BOC Group, that lacked this capability.
By 2000, public law and government procurement practices had settled on the public tender as the preferred vehicle for major projects. All did not go well, however. Pemex Gas in 2001 partially succeeded in organizing a private tender for an LNG terminal in Altamira, but, in the summer of that year, backed away from the project. When the Federal Electricity Commission (CFE) stepped into the picture in late 2002 with its public tender for the same project, there was only one bidder, a unit of Royal Dutch/Shell Group, which insisted on a US pricing mechanism for gas deliveries.
In the summer of 2003 the offshore contracting unit of Pemex Gas (known as MGI) began direct negotiations with a US pipeline company for new gas deliverability into the El Paso area (the gas would be used to fuel power plants in Chihuahua). At some point Pemex Gas was told to go the route of a private tender. The problems with the definition of the project, compounded by the alternative benefits that each route offered, brought the effort to a standstill. CFE, meanwhile, seeks to take over much of Pemex Gas's role in the procurement of not only gas but also of gas deliverability; unlike Pemex Gas, however, it has yet to see the curves ahead in the road of public tenders.
In the summer of 2003 the long-awaited first round of public tenders for the Burgos multiple service contracts were published. Great care had been taken to attract major oil companies and to show the Mexican and international public that a successful upstream development model had been invented in Mexico. But two of the seven blocks received no bids, and no major international oil company participated. The goodwill of company managers toward Pemex could not overcome the inherent drawbacks of the contract: no posting of reserves (itself a deal-breaker), no upside potential based on market conditions, and clear evidence of public perceptions, in Congress at least, that neither the companies nor the contracts were welcome in Mexico.
Repsol YPF SA's costly—and embarrassing—experience in having to respond a year later to the demand by a federal judge in Mexico City to explain the legality of each of the clauses of its 2003 Burgos contract with Pemex is not one that will attract international oil companies to Mexico. It is likely that only a favorable Supreme Court ruling will satisfy critics.