Mexico Adjusting Oil, Gas Contract Terms in Search of Bidders

By Emily Pickrell

Sept. 1 — Mexican energy officials have eased several key components of its energy auction to encourage greater interest from private investors, in response to the tepid participation for its first private auction earlier this summer, according to a senior energy minister.

The most significant change in future auctions will be to make public in advance the minimum threshold that a bidder must offer in order for the bid to be considered eligible, according to Lourdes Melgar, the undersecretary for hydrocarbons for the Energy Ministry, who spoke at the Mexico Upstream conference in Mexico City.

“We have heard the feedback from the industry and the criticism they have conveyed about the first auction,” Melgar said. “We had several bids for fields in the first auction that were below minimum value. Companies told us that if they had known the minimum value, they would have proposed it.”

The change comes in response to Mexico's first private auction in more than seven decades, which government officials and industry experts say fell short of expectations.

While the opening of Mexico's oil and gas sector had generated considerable industry interest, falling oil prices and uncertainty over elements such as the minimum required bids led to much lower participation in the July 15 auction. Only two of the 14 offshore shallow water fields on auction were awarded, while several fields did not receive a single bid. Four fields that were not auctioned off had received bids that were slightly below the minimum profit share that the Mexican government had required.

In hopes of encouraging greater participation, Mexico's Treasury Ministry plans to announce the minimum value bid that will be accepted on Sept. 14 for a second private auction to take place on Sept. 30, in which an additional nine offshore shallow fields and groups of fields will potentially be awarded. There are currently 14 companies and consortium groups that have been pre-qualified to bid on the fields, Melgar said.

Lower Guarantees

Other adjustments have been made to the auction process to further sweeten the pot, Melgar said, including lowering from $2.5 million dollars to $1 million the amount of the guarantee a bidder must make to participate in the auction, to increase participation from smaller companies.

Mexican energy experts say these kinds of adjustments will be critical in generating interest in Mexico's three remaining auctions for its first wave of private auctions, known as Round One, to take place in the coming year. (A fourth auction for unconventional fields has been indefinitely postponed.)

“The results did not match the expectations,” said Pablo Zarate, a former senior energy official and consultant with FTI Consulting in Mexico City. “It was a combination of low oil prices and fiscal and contractual terms that might be less competitive than what the world has to offer right now. Going forward, the industry will be looking at any signs that they will adopt more competitive terms.”

The government was slow to factor in the industry's reaction to the proposed contracts in it first auction, Zarate said, because of relatively rigid transparency rules, which largely prohibited companies from individually meeting with the energy regulators. While these rules are valuable in protecting the auctions against corruption, Zarate said, an alternative forum for communication, such as a townhall meeting, was not established, making it difficult to have two-way discussions about potential problems with the offered terms.

But while companies have complained about being limited to listing their concerns through a public website, saying it decreased their ability to provide needed feedback, Melgar emphasized the Mexican government's commitment to responding to the comments, noting the adjustments that have been made for the second phase.

She also noted that the process—which was designed to protect it against potential insider deals and corruption—has provided a buffer against companies asking for special deals.

“We have had companies that have sent us messages telling us to change certain qualifications so that they can participate,” Melgar said. “If we had done this, we would have created a lot of uncertainty over the rules, which flies in the face of everything we have been trying to accomplish since we began this process.”

Waiting on Deepwater Schedule

The schedule for the remaining contracts has also been slightly delayed: while the upcoming auction will take place on Sept. 30, the date of the deepwater auction is still up in the air. The energy ministry still plans to announce the official call for bids at the end of September. However, it is still completing its plans for the sites and contract details, Melgar said, and for this reason, and the exact date for this auction is still pending.

“I would prefer to assume the cost of the delay rather than having a proposal that is not feasible, especially in the context of knowing there are other investment options (for companies) around the world that are competitive,” Melgar said.

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