[Premium] Asian Upstream Cos Eye Mexico's Third Round (Correction)

(Corrects basic royalty rate to 7% and adds average tax take in para 8; clarifies deep and shallow water F&D costs, para 3)

Asian upstream companies are registering their interest in Mexico's upstream as the north American country plans its third round next March, said the president of the hydrocarbons regulator CNH Juan Carlos Zepeda Molina. In that round, 35 production sharing contracts will be offered for three regions offshore in the Gulf of Mexico.

In an interview with NGW in London December 4, he said Malaysian state Petronas and Thai PTT E&P were among the new companies to pre-qualify; and he said oil exporters had to look at the countries that were the largest importers of hydrocarbons. "We have noticed growing interest from Asia," he said, with Chinese and Indian companies also on the list: "With the US self-sufficient, Asia is the most important market for oil exporters." 

At its narrowest point, Mexico is just 200 km across, so bringing oil and gas across from the country's Atlantic to the Pacific coast and onward to Asia is a short journey.  The recovery in oil prices could stimulate further interest, as Mexico's existing finding and development costs average $35/barrel in deepwater and $20 in shallow water, he said. "Companies are comfortable with that level, fields are profitable," said Zepeda Molina.

Mexico's oil production has been falling, with Pemex planning to produce about 1.9mn b/d for the next few years, although output should rise from about 2022. It imports about 84% of its gas, nearly all of which comes from the US either by pipeline or as LNG. Two subsea pipelines are being built from the US that could bring another 2bn ft³/day, debottlenecking supplies, he said: "Gas is the most important fossil fuel for the coming decades, to meet the twin demands of growing electrification and lower carbon dioxide emissions."

Most of Mexico's gas production comes from conventional reserves onshore, in the hands of local companies. No shale gas rounds have been launched so far, although he said the technical regulations for that, including a national water commission, are in place. The energy ministry has the authority to launch bidding, and this is expected next year.

So far there have been 72 licences issued in 11 sub-rounds or farm-ins and 106 exploration wells drilled, leading to "a couple of good discoveries," he said, "but it will take time to get results." Assuming a 30% success rate from those licences, he said the state could expect to receive about $60bn over their lives, most of it coming in the first decade. No commitment wells are necessary in the first licence phase so he is pleased to have so many drilled.

Rounds 1 and 2 each had four sub-rounds and Pemex sought partners for three discoveries, a process that CNH also handled on the state's behalf. Big oil and gas finds include Trion, in the Gulf of Mexico. Predating the opening up of the upstream in 2015, the field lies on the Mexican side of the Perdido area, and BHP Billiton farmed into it with 60%. More recent is the Zama find, made by Houston-based Talos (as operator), UK Premier and local Sierra, which Talos won in 2016.

Bidders identify the blocks, the work commitment, the extra royalty they are prepared to pay on top of the basic 7% and the bonus payment, and on bid day the regulator announces the winners. There is a ceiling on the additional royalty: if it is too high, it will be difficult to find buyers once the original winner decides to leave and the assets remain in the ground, Molina said. However the size of the bonus payment can compensate for that if bidders are keen to have a block. The average overall tax take is 72%.

While the bid round is open, commissioners are banned from meetings with the prospective bidders, who must conduct their investigations online, which are also visible to third parties. All in all, Molina said, it was among the most transparent systems that he knew of anywhere in the world.

Practically the last country in the world to liberalise its upstream, formerly the monopoly of state Pemex, the country has been able to learn from the mistakes and best practices elsewhere. The CNH is even enshrined in the constitution as an independent licensor and regulator, which he said was unique. This makes it very difficult for any new government to wrest back control. That said, the finance ministry has been able to influence CNH a little.

"We have gone through the learning curve," he said. "Since round two, we have given more weighting to the work commitment." He said that was the work of the finance ministry and the process now works very well. 

"It is very unlikely that a single political party could reverse the reform process," he said, referring to the elections next July. The lead candidate, Andres Obrador, or Amlo, is a leftist nationalist with a messiah complex who wants to return Mexico to the past, according to the FT. But it is a two horse race: the other candidate, Jose Meade, comes from the ruling PRI and lagging with 20% in the polls, to Obrador's 30%.