The following letter was published by Eliecer Palacios, CEO of PetroRock Energy LLC and provides a detailed overview of the recent bidding round in Mexico.
Eliecer Palacios writes:
We wanted to share our perspectives on this week’s bidding round in Mexico (14 shallow water exploration blocks, aka Round 1.1). While an extremely disappointing outcome, we see an opportunity for regulators to review future contract terms and conditions and make Mexico oil & gas investments more appealing to industry participants in light of the current global market environment.
The Mexican government definitely “left money on the table” during this process as more blocks could have been awarded if more attractive terms would have been offered and more information made available ahead of bidding. The old adage of “one bird in hand is better than seen hundreds flying” is a perfect analogy here. With 6 blocks out of 14 receiving bids, and 3 of those 6 blocks bid close to government’s minimum take requirement, the industry appetite for Mexico is here.
However, further adjustments to contract terms and conditions as well as pre-qualification requirements must be adjusted to maximize government take and successfully open the sector to foreign investment.We would like to highlight 8 relevant issues critical to consider for this and future bidding rounds:
1. Bidding Outcome Review: 6 out of 14 blocks received bids (or a decent 43% interest across all blocks). At total of 11 bids were received. Only 12 companies submitted bids (either individually or in consortia). Some useful stats: 42% of the bids were submitted by US companies and US private equity-backed operators, another 42% of bids were submitted by NOCs. Other pre-qualified companies never had the intention to bid in the first place as they were mainly looking to “get ready” for future rounds.
2. State Participation: Government total take is still high when adding royalties and corporate taxes. Minimum state participation was 35% across all 14 blocks. Block 2 and 7 yielded 52% and 63.7% government take, respectively. Not bad for the state, however, operators still have to add more taxes on top, thus for them, the outcome doesn’t look as bright.
3. Minimum Capital Requirements: Requesting at least $10bn in assets or $1bn in equity capital was an obstacle for success and evidenced by the absence of many independents that usually participate in many offshore provinces around the world. Many successful independents with worldwide offshore expertise were ruled out of this process. NOCs bids were notable, however, we think Round 1.1 would have been the domain of independents, same applies to Round 1.2. We are extremely concerned that minimum capital requirements could be raised even higher for the deepwater round that would unable the best and most successful independents to participate in this process.
4. Pre-qualification Requirements: Several items could be adjusted such as: a) eliminate cumbersome translations of documents, b) extend deadlines for dataroom requests and pre-qualifications and, c) increased flexibility in deadlines to form consortiums. Tight participating rules are forcing operators to make decisions in a difficult market environment, the easiest way is not to participate and watch from the sidelines.
5. Corporate Guarantees: The government require operators to provide unlimited parent company guaranty and a substantial letter of credit on top of that. This burden are a deal-breaker for many operators who see this as an unnecessary sacrifice. Other parts of the world don’t require such guarantees allowing easier flow of capital into the country. A less stringent, yet effective, method to implement gross negligence and oil spill response would be more attractive for participants. With severe above-ground-risks across many onshore producing regions, offshore development is the preferred choice for many participants.
6. Contract Terms: Leaders of industry have been very public about the lack of attractiveness of contract terms vis-a-vis the rest of the world. We are in a new oil price environment where Mexico needs to compete with other equally, if not more attractive resource provinces. The government must take a hard look at those terms if they want to attract the right amount of investment in a very difficult environment for the industry that threatens to last longer than expected.
7. Geology/Seismic Data: Operators were forced to make decisions not only under tight deadlines and pre-qualification requirements, but also while looking only at old seismic data. Out of the 25 companies pre-qualified only 12 submitted bids, perhaps signaling that the blocks offered were not as prospective. There was no time for reprocessing of existing data or even shooting new seismic using latest technology. When it came down to rocks, the prospectivity wasn’t obvious. Despite this, operators were still interested in at least 6 of the 14 blocks, which was very positive.
8. Private Equity-backed Ventures: Sierra’s success should be an eye opener for regulators and local and international institutional investors that there’s an opportunity to allocate private capital into new oil & gas ventures focused on Mexico and deliver investments into the country (remember the “bird in hand”). We are in a market of record multi-billion private equity fund-raising where liquidity and technology are commodities. Government shouldn’t focus on attracting only IOC/NOC, most successful developments have been driven by the independents.
Please reach out with any questions or comments.
PetroRock Energy LLC
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