Tuesday 6 December 2016

A range of international oil and gas operators gained footholds offshore Mexico in the country's first-ever deep-water bid round held Monday, with industry enthusiasm crystallising into awards for eight of 10 blocks on offer.

Regulators who worked on the process for more than two years were visibly delighted with the results, which brought in Asian players such as China National Offshore Oil Corporation Ltd and Malaysia's Petronas.

The process also awarded blocks to four of the world's five supermajors in Chevron, ExxonMobil, BP and Total, with Norway's Statoil and a handful of independents also making their mark.

The so-called Round 1.4 brought the biggest contenders yet following Mexican reforms passed in 2014 to end the monopoly of state oil company Pemex and bring in private companies, a push to increase investment and technology.

'Great happiness'

Mexico energy secretary Pedro Joaquin Coldwell praised the turnout despite the volatility in international crude prices.

“We can say with great happiness that Mexico won,” he told reporters after the event wrapped up.

“It is believed that Mexico is a very competitive country in the hydrocarbons industry.”

While Mexico's initial forays into bidding shallow-water and onshore acreage made for relatively modest overall numbers, the big companies showed up to chase major volumes with major dollars.

On the eight blocks awarded - plus the Pemex partnership with BHP Billiton awarded earlier in the day - the investments have the potential to reach $40 billion over the life of the contracts, Coldwell told reporters.

Over the next 10 years, the deals could add an estimated 900,000 barrels per day of oil production. Drilling was not a mandatory part of the minimum work programme, but companies agreed to take additional commitments equivalent to eight exploration wells among them.

Estimated resource is in the neighbourhood of 10 billion barrels.

Appetite

"It's an exciting day because it shows a vote of confidence from the industry towards Mexico," Pablo Medina, Latin America research analyst with Wood Mackenzie, stated after the event.

"You see companies with all different backgrounds going for Perdido in some cases, going after the southern (Salina) basin as well. So you see there is a lot of appetite for Mexico even though we are in a very tough market."

Bidding shaped up differently, however, in the two sub-regions on offer - the Perdido fold-belt and Salina basin.

CNOOC Ltd made a surprise show of strength as a solo bidder in the Perdido area, taking contractual areas 1 and 4 with aggressive bids.

The region is the better-known of the two deep-water areas featured in the round, and has been explored by Pemex as well as produced from the US side by a Shell-led consortium at the Perdido spar.

On the first area, CNOOC Ltd offered 17.01% additional royalty to the state, the key bidding variable of the day, as well as a commitment to drill two wells. On the second, it bid unopposed with a royalty of 15.01% and a one-well commitment.

US giant Chevron and Inpex of Japan joined with Pemex in an uncontested bid to take contractual area 3 with a more conservative offer, a 7.44% additional royalty but with no well comittment.

For the state-led oil company, it marked its first win in a competitive bid round and second-ever upstream partnership following the farm-out award to BHP Billiton hours earlier-- both milestones for a company that had gone it alone for nearly 80 years.

Strategic partner

In a telephone interview, Ali Moshiri, president of Chevron Africa and Latin America Exploration and Production company, said the explorer was "very happy" for the opportunities for the reform, and that an alliance with the state oil company was part of its plan.

"We always considered Pemex as our strategic partner," he said. "We always said we will partner with Pemex if they will accept us, and they did."

Total of France and US player ExxonMobil also came to play in Perdido in a more measured fashion, teaming up to take contractual area 2 with a 5% additional royalty and two-well programme and notching their first entry into the sector.

Interest also surged for the more southern Salina basin, which has been barely explored as a deep play but has attracted a flurry of seismic activity.

A consortium made up of Statoil, BP and Total went on the hunt in the area and took two blocks uncontested - areas 1 and 3, with a 10% additional royalty offer and one-well commitment for each.

The Norwegian player had been outbid in some earlier rounds, but finally was successful in making its mark in Mexico, with BP also joining in for its first plunge into the country's deep waters.

“Mexico’s opening presents the industry with great opportunities, so we are pleased to secure an early position," said Tore Loseth, Statoil’s vice president for exploration in the US and Mexico.

"The award grants Statoil access to significant frontier acreage in an underexplored part of offshore Mexico. The blocks are virtually untested, with considerable subsurface uncertainty, but with play-opening potential”.

But the competition really heated up for contractual areas 4 and 5 in the basin, where consortia led by Malaysia's Petronas and private equity player Sierra Oil & Gas vanquished rivals on two blocks.

Petronas and Sierra alone took area 4 with an aggressive bid of a 22.99% royalty but no well commitment, beating out a third offer from the Statoil-led groups.

Petronas and Sierra expanded their alliance to include US independent Murphy Oil and London-listed Ophir Energy in a bid for contractual area 5, besting three other offers with a 26.91% additional royalty and one-well committment.

In a statement, Murphy said it would operate the block with a 30% interest, with about 23% for each of the remaining partners.

An aggressive offer from US independent Anadarko and Anglo-Dutch supermajor Shell came close to beating them, with a 19.11% additional royalty and two-well work programme proposed.

Statoil also bid alone for the block, offering a 10.39% royalty with no well committment. A joint bid from Italy's Eni and Russia's Lukoil also rounded out the fray, proposing a 3.5% additional royalty and two-well work programme.

Interest fell short, however, when it came to areas 2 and 6 in the Salina area, which did not receive any bids.