Mexican Oil Reform: The First Two Bidding Rounds, Farmouts and Contractual Conversions in a Lower Oil Price Environment

Lead PI: Adrian Lajous

Unit Affiliation: Center on Global Energy Policy (CGEP)

October 2015 - Ongoing
Central America ; Mexico
Project Type: Research Outreach

DESCRIPTION: In a new paper for the Center on Global Energy Policy, Fellow Adrian Lajous, who served as CEO of PEMEX from 1994 to 1999, explains why it is critical that Mexico’s government take time to examine the lessons that can be gleaned from the experience of its first two bidding rounds and move carefully in the bidding process for oil fields open to foreign participation. Critically, he argues the Mexican government must be highly selective in the acreage that it will bid out in the coming months, cautiously sequence and pace tenders, and carefully consider a number of deferrals.

Key Findings:

• The government should make a rigorous postmortem evaluation of the first two bidding cycles. It should take into consideration the effect of allowing Pemex to place bids and then withdraw them at the last minute in the first auction, as well as the impact of modifying a number of bidding guidelines and contractual clauses that were questioned by private parties, and critically, the loss of appetite for exploration risk under current market conditions.

• Projects at the higher end of the global cost curve, including a significant part of the assets that Mexico will put up for bid, are at greater risk of being deferred in the current oil price environment.

• The fourth bidding round announced in August 2015, which includes ultra-deepwater blocks, deepwater natural gas assets, and extraheavy offshore oil fields, Pemex farmouts, and contractual conversions, is startling in size and will find Mexico competing against itself in a highly constrained market.

• It is crucial that the open bidding process and potential farmouts—which would allow Pemex to take on joint venture partners to develop fields into which it has already sunk substantial capital resources—are logically sequenced to ensure maximum results.

• In addition, defining who may be the operator in farmout agreements is a key decision that will have to be resolved.

• In cases where the government has also authorized Pemex to convert some of its current service contracts to production sharing agreements in order to better serve the interests of both parties and to share some of the same benefits to be derived from the proposed farmouts, a fair market value should be attributed to existing contracts.