Oil majors set to bid for Mexico deepwater blocks

Some of the world’s best-known oil majors are expected to compete in a long-awaited auction for deepwater contracts in Mexico on Monday that marks a key opening of the country’s energy sector.

ExxonMobil, BP, Royal Dutch Shell and Chevron and China’s Cnooc are set to be among bidders for blocks in the Gulf of Mexico that have been off-limits to private investment for nearly eight decades.

”It is the start of the big oil game” in Mexico, said Pablo Medina, analyst at Wood Mackenzie, an energy consultancy.

The auctions will be the first big test of investment appetite in Mexico since Donald Trump romped to victory in the US election with populist pledges including renegotiating the North American Free Trade Agreement.

His Nafta pledge could, if realised, bump up exploration costs in Mexico if imports of heavy equipment needed for drilling were subjected to tariffs

Mexico has been opening up its energy sector to private investment under a sweeping reform programme and has already tendered shallow-water and onshore blocks in recent months. But the deepwater contracts that will be awarded on Monday are considered the crown jewels of the auction process so far because of the prospects for big discoveries.

Whereas the US side of the Gulf is chock-full with rigs and accounts for 17 per cent of US crude production, the Mexican side is still largely a blank slate.

Mexico is auctioning off four blocks in the Perdido Fold Belt, some 320km south of Texas, that show geological similarities to the US side and are close to important pipeline infrastructure. Six more larger blocks are on offer in the largely unexplored Salina Basin in the south of the Gulf of Mexico.

“If you want to shoot for the stars, that’s the Salina basin,” Juan Carlos Zepeda, head of the National Hydrocarbons Commission (CNH), which is running the tender, told the FT.

Eight individual companies and seven consortiums are expected to take part.

In addition, companies can also bid to partner with Pemex, Mexico’s financially troubled state oil company, in the deepwater Trion field, the first joint-venture in the company’s 78-year history.

Pemex is teaming up on Monday with Chevron and Japan’s Inpex, and has also qualified to bid individually. The CNH has not said which blocks companies are bidding for.

Pedro Joaquín Coldwell, energy minister, said success would be to award four of the 10 fields, which would not start producing for a decade if oil is found.

However Steve Otillar, an oil and gas partner with law firm Akin Gump in Houston, saw the prospect of “virtually all if not all being tendered. There are some great opportunities there and it’s a 10-year window — most people see prices recovering . . . they could be $80 per barrel by then”. 

Prospective resources are nearly 11bn barrels of oil equivalent in the Perdido and Salina blocks, and potentially as much as 485m barrels of crude equivalent in Trion, according to the CNH. 

While prospective bidders have applauded Mexico for making extensive seismic data available, that data showed the opportunities “are not as obvious as many companies thought”, said a senior official at one international company planning to bid.

Pemex is hoping that the 60 per cent Trion stake will bring in a total of $11bn in investment, while Mr Medina estimated investment of $3bn to $10bn per field in the case of discoveries.

With oil companies’ cash flows squeezed, the auctions come “in a very difficult pricing environment”, albeit “the sector is seeing light at the end of the tunnel”, said an executive at one company that is preparing a bid.

“Most of the ones that pulled out are midsized — they’re the ones that are struggling [in this price environment]. This is going to be a cash flow game,” said a senior official at a major that will take part.

Initially, 26 bidders, between consortiums and individual companies, had pre-qualified for the Perdido and Salina blocks and 10 had lined up for Trion, but a raft of companies, including Noble Energy of the US and Japan’s Mitsubishi Corp, India’s ONGC Videsh, Petrobras of Brazil, PetroCanada and Galp of Portugal, have dropped out.