When the Mexican congress approved a historic constitutional reform to open the country’s energy sector in 2013, critics warned that the vultures of international capital and Big Oil would soon be circling. Yet the first auction of blocks, held in July, was an embarrassing flop.
The first round of bids for exploration and drilling concessions saw only two out of fourteen blocks auctioned amid low energy prices and investor doubts over terms and conditions. Only one company, a Mexican-British-U.S. consortium known as Sierra Oil and Gas, purchased tenders.
Ironically, public protests against the opening of the sector had carried the slogan “The Nation won’t be sold”, but as one analyst quipped on Twitter following the first round, “It looks like nobody wanted to buy it.”
Drilling for oil?
A massive symbol of national independence, Petroleros Mexicanos (Pemex) faces private competition in the oil and gas industries for the first time in nearly 80 years. The recent energy bill is one of a slew of reforms signed by President Enrique Peña Nieto since he took office in 2012 designed to stir the Mexican economy out of its slumber.
Oil represents Mexico’s largest industry and facilitated much of the country’s twentieth century development. Roughly a third of the federal budget is made up of energy revenues in a nation where non-oil revenues constitute merely 10 percent of GDP.
The nationalization of Mexico’s oil industry in 1938 by iconic left-wing president Lázaro Cárdenas del Río was an enormously patriotic moment and became a pillar of the ambitious welfare system built by consecutive governments following the Mexican Revolution. Yet declining reserves, low levels of investment, and a historic fall in prices have all left the national company hamstrung in recent years.
A second round of bids, held yesterday, proved decidedly more successful than the first. Concessions for five shallow-water blocks in the Gulf of Mexico were up for auction with the government selling three. Italy’s ENI, a consortium led by Argentina’s Pan-American Energy, and another group comprising U.S.-owned Fieldwood Energy and Mexico’s Petrobal came out as winners.
“The fields up for grabs in the second round were considerably lower-risk,” Dwight Dyer, a business analyst based in Mexico City, told Latin Correspondent. “The government also sweetened the deal. The terms they were asking for in July were incredibly optimistic under the circumstances, and they were also inflexible on some bids.”
Key to the success of the latest round was a raft of new rules announced by the Ministries of Energy and Finance in August, including lower financial guarantees, more clearly defined contracts, enhanced arbitration measures, and an increase in the size of the blocks on offer.
Worth the hype?
So far, only shallow-water fields have gone up for bidding, attracting mainly smaller companies and consortia. Supermajors are expected to enter the process in the fourth round when concessions for potentially lucrative deep-water fields will be sold, yet many remain cynical about the ultimate benefits of the reform for Mexico.
“There are two ways of looking at it,” says Dwyer. “One is that the recent reforms were inevitable; Pemex was virtually bankrupt. Another is that as far as boosting investment, the reform is unlikely to live up to the hype.”