Mexico's Round One a learning experience

THE RESULTS of the first phase of Mexico's Round One bid process were disappointing, even if not particularly surprising. The results are in part a reflection of the fiscal and contractual terms developed by the government of Mexico earlier in the process during a period of high oil prices, which were not modified prior to the initiation of bids despite the serious and rapid deterioration in global commodity prices and economic uncertainty in China and Europe that rattled commodity and equity markets.

The Mexican government offered 14 contract areas located in the shallow waters of the Gulf of Mexico, but only two were awarded, both to the same consortium. Moreover, of the 14 blocks offered, eight blocks received no bids and four bids fell short of the government's previously undisclosed minimum take of 40% pre-tax profits. The fact that more than half of the 14 blocks up for bid on July 15 did not receive any bids also hints that the industry did not believe the blocks had high potential, at least in the current price environment.

Nevertheless, the results of Phase One have been a learning experience for both oil companies and the Mexican government, since this is Mexico's first incursion into private participation in 80 years. A natural learning curve has been anticipated in this process to allow the government to adjust fiscal and contractual terms for future bidding phases, most particularly for the ultra-deep water blocks, which will require significantly larger investments from oil companies and which are likewise expected to have the greatest economic potential.

Therefore, and in reaction to the disappointing Phase One, the Mexican Secretary of Energy (SENER) published additional modifications to the bidding guidelines for Phase Two of Round One on August 4 and August 25.

As announced by the SENER press releases on those dates, the main revisions include:

• lowering corporate guarantees - a $2.5 million bid security guarantee will cover all contracts a bidder is awarded and will not need to be provided for each separate block;
• prior disclosure of the minimum operating profit-sharing requirements (two weeks before the bidding process, on September 14), in order to increase the certainty to the process and to permit more accurate calculations of anticipated field economics;
• the inclusion of definitions of "fault" and "willful misconduct" with the purpose of giving more certainty with respect to the controversial "administrative rescission" process;
• the designation of the Secretary General of the Permanent Court of Arbitration at The Hague as the nominating authority, in case of arbitration;
• the specification of the amounts of the coverage for the required insurance - $1 billion in damage from spills or accidents; and
• the creation of more flexible rules for the formation of consortiums and their participation - the company acting as an operator in a group bidder may now simultaneously participate as an individual bidder for contract areas where the consortium does not submit a proposal.

These modifications bring the Mexican process more in line with international best practices and have the purpose of fostering competitiveness and transparency and creating stability of the long-term contracts. These changes aim to give more certainty to the bidders and, consequently, increase investors' participation in the coming phases of the bid process.

Mexico's next oil auction round was scheduled for September 30 (after this issue of OGFJ goes to press). The auction includes production blocks, unlike the blocks offered on the first phase of Round One, that were only exploratory. This next phase will confirm if the changes implemented by the Mexican government were sufficient to address investors' main concerns and, as a result, attract appropriate participation and investment in Mexico's resource-rich hydrocarbon plays.

ABOUT THE AUTHOR

Dallas Parker is leader of Mayer Brown's Mexico Energy Reform Initiative and serves as leader of the Corporate & Securities practice in the firm's Houston office. He represents clients in a wide range of corporate and securities law matters with a career-long focus on the oil and gas industry. Parker earned a BA from Vanderbilt University and a JD from The University of Texas School of Law.