Round One & Mexico's Subsurface

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    Jeremy Martin

    On September 30, the day the results from the second contract bidding of the Round One hydrocarbons auction process, Juan Carlos Zepeda (the President of CNH in Mexico) and I published an op-ed on the Institute of Americas website:

    We argue that despite being broadly perceived as a failure, the first set of contract bids announced July 15 was actually a success story without which the success of the second set of bids would have been impossible. Of the five blocks being tendered in this second phase of bidding, the majority received bids and two generated intense competition producing outstanding contract terms for Mexico. This outcome was the direct result of the much lauded process and transparency of the inaugural auction overseen by the CNH, and the willingness of the Mexican government to learn from its mistakes and adjust the rules for bidding to establish competitive fiscal terms as well as clear and unambiguous contractual obligations and terms. We also discuss the importance of information and analysis of the immense and underexplored oil and gas province that is Mexico.

    The implication is that the September 30 success combined with efforts to expand analysis and understanding of Mexico’s subsurface bode well for future bidding, especially for the all-important deepwater tracts to be auctioned off next year. Do you agree? Can the government legitimately expect the successful conclusion of the remaining Round One auctions? What developments might enhance the probability of this happy ending? What could spoil it?

    Jed Bailey

    Round One certainly received a much needed boost of confidence from the results of the second tender, but it is important to keep in mind that the remaining two tenders will be completely different from the first. The technical characteristics of–and, by extension, the companies involved in–the remaining tenders have little in common with those in the first.

    As I noted in a recent report to Energy Narrative clients, more than two-thirds of the companies that pre-qualified for the second tender had also pre-qualified for the first,bringing valuable experience to the process. For the upcoming third tender of onshore proven blocks, however, nearly 90 percent of the companies that have begun the pre-qualification process are participating for the first time. The fourth tender for deep water exploration will bring yet another completely different cohort of bidders, many of which are very familiar with Mexico but few of which placed bids in the first and second tenders.

    These profound technical and competitive differences suggest that both the Mexican government and bidding companies should be careful applying the experiences of the first two tenders. The coming tenders will pose unique challenges and opportunities, and measures that address lessons learned from the previous tenders may not necessarily apply. If companies and government fail to recognize these differences and their implications, they risk “fighting yesterday’s battle” and the outcome of remaining rounds may disappoint.

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