WoodMac: New minimums for Mexico's Round One are 'internationally competitive'

Sept. 28, 2015
Newly announced minimum acceptable bids for the shallow-water development phase of Mexico's Round One are internationally competitive, according to analysis from research and consultancy firm Wood Mackenzie Ltd., which adds that two thirds of the qualified companies could place bids.

Newly announced minimum acceptable bids for the shallow-water development phase of Mexico's Round One are internationally competitive, according to analysis from research and consultancy firm Wood Mackenzie Ltd., which adds that two thirds of the qualified companies could place bids.

Mexico's Finance Ministry announced the minimum acceptable bids on Sept. 14, just weeks ahead of the shallow-water phase's Sept. 30 closing.

WoodMac's analysis highlights that the minimum government profit share for the five areas on offer ranges 30-36%. There is no minimum work commitment. The bidding formula remains unchanged with 90% of each bid weighted towards government profit share and the remainder towards additional work commitment.

"Ultimately, we think this will result in at least three of the five areas on offer to be awarded," commented Pablo Medina, WoodMac research analyst for Latin America upstream oil and gas.

"In the previous phase, the government kept the minimum acceptable profit share bid secret," Medina explained. "Companies bid under the minimum by just 5% on three of the blocks. Only two out of 14 blocks on offer were awarded, so this is why the government decided to disclose the minimums 2 weeks ahead of the second phase closing. Companies now have time to reconsider their bidding strategies based on the government's announcement."

He also noted that Round One's second phase was initially viewed as unattractive given the small field size averaging 68 million boe/bid area.

Highlighted points

WoodMac highlighted the following key points:

• There is a strong case for submitting bids for AMT, Hokchi, and Mison-Nak.

• Ichalkil-Pokoch could be an attractive opportunity for some companies, but its returns could be lower than the top three areas.

• Xulum looks less attractive due to its small reserve size, heavy crude, and distance from infrastructure. Based on WoodMac's assumptions, Xulum will struggle to generate a reasonable rate of return under the announced minimum profit share.

• The hurdle rate that bidders employ for these opportunities will be a critical factor in developing a bid strategy. A bidder using a 15% IRR hurdle rate might be prepared to offer around a 70% government profit share bid for Hokchi, but a company applying a 20% hurdle rate would only bid up to around 55%.

• Risk factors such as higher costs, lower production, and lower long-term crude oil prices will also influence bids.

• Consortia will be particularly aggressive given that most are backed by private equity or a large Mexican conglomerate. These backers are not exposed to low oil prices and may view the current environment as a lower-cost entry opportunity.

• The opportunities available are arguably not material enough for most majors. However, it is possible that they see offshore Mexico as an area of strategic interest and that these smaller fields could serve as an entry foothold to position them for later opportunities. Majors could gain operational experience in Mexico without the security concerns associated with onshore acreage, and for a low entry cost relative to the later rounds.

• Asian national oil companies could be looking at Mexico with a long-term perspective. The delays with the Pemex joint ventures have created a notion that there is a lack of material opportunities on offer, making these discovered resource opportunities appear more interesting. WoodMac believes that these shallow-water fields could provide a chance for the NOCs to spearhead their entry into Mexico with assets that could be onstream before the end of the decade.

• For some independents, Round One could be a way to enter a resource-rich country that has lower above-ground risk than other countries in their portfolio. For others, Mexico could be a way to expand their Latin American presence.