Mexico Awards Its First Deepwater Blocks; What Comes Next?

Abstract

Mexico’s historic public tender for its deepwater real estate resulted in the awarding of eight out of 10 blocks on offer. Held last December in Mexico City, the event marked the fourth and final auction of the country’s Round One, which reopened doors to foreign oil and gas investment for the first time since the country’s energy sector was nationalized almost 80 years ago. The awarded blocks went to 13 companies whose exploration and production operations are expected to generate around USD 34 billion over the next 15 years. The winning bids also committed to drill at least eight deepwater wells. All four blocks offered in the deep-water Perdido area were awarded, including two to Chinese Offshore Oil Corporation (CNOOC) and one to a consortium of Chevron, Pemex, and Inpex—Japan’s largest oil company. An additional four blocks in the Salina Basin were contracted to three different consortiums, including one formed by Statoil, BP, and Total. Another block encompassing a deep-water discovery known as the Trion field was awarded as a farmout agreement between BHP Billiton and Mexico’s state-owned oil company Pemex. BHP will acquire 60% of the project’s interest under the terms of the contract, which it won through a tie-breaking offer of a USD 624 million cash bonus to Mexico’s petroleum fund. BP was the losing bidder. Including the three previous onshore and shallow-water auctions, Mexico has awarded 39 exploration and production contracts to companies from nine foreign countries. In a press conference following the auction, the government said it expects to receive close to 60% of the combined profits from the eight blocks and the lone farmout. Mexican officials also said they are hoping the deepwater contracts eventually will yield 900,000 B/D of crude, a volume that would help stem the country’s declining production from existing fields. Government officials added that first production from Trion might be reached within 6 years, while it is expected that the other areas will need up to a decade to be developed. What’s Next? According to many observers, the production potential that the deep water holds for Mexico was the chief driver behind the country’s sweeping energy reforms that became law in 2013. But now that a number of the prime blocks have been allocated, what comes next? For the companies that have already signed offshore contracts, their next steps are likely to include the expansion of Mexico’s port facilities to accommodate the arrival of larger deepwater vessels and rigs. Some expect the small port town of Dos Bocas to become a deepwater hub because of its proximity to the southern Salina Basin blocks.