Critical lessons for Mexico's future licensing phases

 

We review the first phase of Round One and discuss key observations the government should consider to ensure future success.

On 15 July 2015, the first phase of Mexico's Round One concluded with the award of two of the 14 exploration blocks on offer in the shallow waters of the Bay of Campeche. Prior to closing, the government defined success as awarding between four and six blocks.

There were four unsuccessful bids for other blocks. In three cases, the profit share bid was 5% below the minimum acceptable to the government. However, if it had set its minimum profit share marginally lower, a total of five blocks would have been awarded and the round would have been deemed a success by the regulators.

Government minimum

One of the most exciting moments of the licensing round was the competition for Block 7, which the government had not considered to be among the most attractive acreage. This demonstrates that the industry is willing to offer high government profit shares for acreage it considers geologically attractive.

The government's phased approach to Round One means it will be able to incorporate lessons learned from this closing. The results  clearly reflect a mismatch of expectations between the government and industry, and the reasons for this should be identified and addressed.

It should also be acknowledged that it is a buyer's market for new exploration licenses. Allowing the market to value these opportunities by setting lower minimum bids would have resulted in more awards. The government should reconsider its policy of establishing secret minimum requirements before the next phase closes.

Cash Flow

Using our Global Economic Model (GEM), we evaluated an 80 mmboe shallow-water field, assuming US$22.50/boe in total costs, under different government profit share bid levels and without considering exploration risk. The 69% scenario represents the winning consortium bid on Block 7. 

Overall, it's clear that while this first phase was not a success in terms of blocks awarded, it was not a failure either. There were some encouraging signs for the future, including a diversity of participants and potential for competitive bidding for attractive blocks. 

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Mexico's Round One – shallow-water exploration results: critical lessons for future licensing phases [Subscription required]

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Mexico webinar – On 27 August, Wood Mackenzie analysts will hold a webinar to analyse the initial Round One results and discuss the creation of a corporate landscape for Mexico's upstream sector. Register here 

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