Mexico's historic oil auction falls short of goal

Auctioning oil fields in shallow water of Gulf of Mexico worth $17 billion, Mexico fails to command top prices due to low oil prices and Iran nuclear deal

Photo by: AFP
Photo by: AFP

Updated Jul 28, 2015

Mexico's historic first oil auction fell short of expectations on Wednesday, with only two of 14 offshore fields awarded as the world's biggest firms shunned the inaugural sale.

The government offered 14 oil fields in shallow water of the Gulf of Mexico worth a total of $17 billion, the first sale in an energy reform that ends the 77-year monopoly held by state-run firm Pemex.

The auction was the climax of President Enrique Pena Nieto's top economic reform, which was enacted last year after a heated debate in Congress, with leftist parties warning against giving up a symbol of national sovereignty.

Energy Minister Pedro Joaquin Coldwell had played down expectations of a big sale, predicting that between four and seven blocks would be awarded.

But nine blocks received zero offers while three others were not awarded because the offers fell short of government demands.

The group led by one of Mexico's new independent firms, Sierra Oil & Gas, was the only one to make acceptable bids for two blocks. The consortium includes US company Talos and Britain's Premier Oil.

Seven consortiums and 18 individual companies had qualified for the auction, but only nine participated in the end.

"It didn't have the desired boost, but it's a start, with a firm step," National Hydrocarbon Commission president Juan Carlos Zepeda told a news conference, blaming the lackluster result on falling oil prices.

US giants ExxonMobil and Chevron, Anglo-Australian firm BHP Billiton, France's Total and Russia's Lukoil decided to skip the shallow water projects.

"It's terrible. It's a failure," David Shields, a Mexico-based industry analyst and director of the magazine Energia a Debate, told AFP.

"It was the worst week because oil prices are very low and because of the (nuclear) deal" between Iran and world powers on the eve of the auction, Shields said.

Analysts had warned that the auction could be affected by the nuclear deal because it will cause oil prices to slide further as sanctions on Iran's oil exports are dropped, adding 1.5 million barrels of crude per day in the market.

Mexico's government will now look ahead at four more auctions that include more complex deep-water oil fields and onshore drilling, which are expected to draw more interest from industry giants.

"International companies have their eyes set on deep waters, where they are much more competitive," said Juan Francisco Torres Landa, a Mexico-based energy expert for global law firm Hogan Lovells.

"This is the first chapter of a story that will have many more events. We can't judge it based on the first chapter," he said.

- Indian, Malaysian bids fail -

The government estimated that each block was worth $1.3 billion. Those not awarded on Wednesday will be offered again at later auctions.

Of the three blocks not awarded, India's OGNC Videsh was the sole bidder for two blocks, falling short of the minimum required by the government.

A team comprising US firm Murphy Worldwide and Malaysia's Petronas also underbid a block.

Sierra's consortium outbid Italian giant ENI and Norway's Statoil for one of the blocks off Tabasco state, offering the government 69 percent of the proceeds in a production-sharing deal.

It won another block off Veracruz by offering nearly 56 percent.

The underwhelming result adds to a bad week for Pena Nieto following the embarrassing fallout of the weekend jailbreak of the country's most powerful drug lord, Joaquin "El Chapo" Guzman -- his second escape in 14 years.

- Revive production -

The reform breaks the monopoly on drilling held by state-run firm Pemex since the industry's 1938 nationalization.

While Pemex qualified for the auction, it sat out this time and could participate in future contests.

Pena Nieto hopes the reform will reverse years of declining production -- from 3.5 million barrels per day in 2004 to 2.3 million now -- and give a boost to the economy.

Oil auctions are a new thing for Mexico and officials wanted to make them the most transparent in the world. The event was shown on a live Internet broadcast.

Analysts say the government made an effort to create a transparent system to ease any concerns over the country's poor track record when it comes to corruption.