Mexico: Exciting times for oil and gas licensing

As we reported in July, Mexico is in the midst of overhauling its oil and gas industry through Round One of tendering for exploration and development for both onshore and offshore fields. The country’s move towards energy liberalisation has seen the break-up of the 77 year old monopoly held by state controlled oil company Pemex. Round One comprises five phases of tendering, two of which occurred earlier this year.

Phase 3

On 15 December 2015, exploration and production contracts were awarded for Phase 3 of Round One. Phase 3 consisted of 25 onshore blocks located throughout the country. 80 companies pre-qualified and 51 companies participated in the auction for this phase.

Due to market conditions, the Mexican Hydrocarbons Commission (CNH) was not overly expectant of Phase 3 previously stating that the award of 5 out of 25 contracts on offer would be considered a success. However, all of the 25 production sharing contracts were awarded, far exceeding any expectations.

The tendering process for Phase 3 was split into two stages. In the first stage, companies competed for 4 onshore blocks with proved, probable and possible reserves greater than or equivalent to 100 million barrels of oil equivalent (boe). Compañia Petrolera Perseus, Servicios de Extracción Petrolera Lifting de Mexico, Diavaz Offshore and a consortium led by Canamex Dutch were successful in this stage. The remaining 21 contracts were awarded primarily to Mexican companies.

Phase 3 of Round One has been considered a resounding success by analysts. Despite global uncertainty in the hydrocarbons industry and record-low oil prices, participation was highly enthusiastic. Considering Phase 1 of Round One resulted in the awarding of 2 out of 14 shallow water exploration blocks and Phase 2 of Round One resulted in awarding 3 out of 5 production blocks in the Gulf of Mexico, the fact that all 25 contracts were awarded will provide significant benefits for the Mexican hydrocarbons industry and economy as a whole.

Phase 4

Following the latest stage, on 18 December 2015, the CNH has released further information regarding the next phase of the tendering process. Phase 4 of Round One comes with the highest expectations to date. The CNH announced that 10 deep water exploration and production blocks will be tendered in the auction, 6 located in the Cuenca Salina de Istma and 4 in the Cinturón Plegado de Perdido, both areas in the Gulf of Mexico. CNH is expecting attention from the supermajors such as ExxonMobil, BP, Chevron and Shell, given the scale and lucrativeness of the deep water blocks.

Timeline

It is anticipated that the tendering process will begin on 6 January 2016. Until 15 April 2016, companies are able to register for the bidding round, in order to gain access to the data room containing information about the blocks being offered.

From 14 June 2016 to 1 July 2016, registered companies are able to submit the requisite documents to the CNH in order to prequalify for Phase 4. Only companies that have prequalified are able to participate in the bidding round.

In the third quarter of 2016, the CNH will publish the date on which proposals may be submitted by companies for the blocks and the date on which successful bidders will be awarded the blocks. It is expected that the date of awarding contracts for the exploration and production blocks will be around 90 days from the announcement.

Participation Criteria

Companies may prequalify as either operators or non-operators, either individually or as part of one or more consortia. However, companies may not submit more than one proposal for the same block, either individually, as part (directly or indirectly) of a consortium, or through group companies exercising control over another bidder.

Operators may be Mexican or international companies and must meet both the technical and financial requirements.

The technical requirements include:

1. Exploration and/or extraction experience in deep waters at a depth of more than 1,000m within the last 5 years;
2. Capital investments in exploration and/or extraction projects of more than a total of US$2 billion; and
3. Industrial security and environmental protection experience in deep water projects within the last 5 years.

The financial requirements include:

1. Equity of at least US$2 billion for operators and US$250 million for non-operators; or
2. Total assets of at least US$10 billion and an investment grade credit rating from an internationally-recognised ratings agency (only applicable to operators).

Licensing Terms

An important feature of Phase 4 is the use of Licence Contracts as the contract model rather than production sharing contracts which were used in Phases 1 and 2.

Timeline

CNH has indicated that Licence Contracts will be awarded for up to a maximum of 50 years. Licence Contracts will be split into exploration, evaluation and development stages:

• exploration period for an initial 4 years extendable for an additional 6 year period, first additional period of 3 years and a further additional period of 3 years;
• evaluation period for 3 years following a discovery; and
• development period for an initial 22 years from the approval of a development plan and extendable for an additional 15 year period, first additional period of 10 years and a further additional period of 5 years.

Each stage of the Licence Contract will include specific minimum national content requirements. This will ensure sufficient benefit is brought to local economies in Mexico.

Financial Elements

Government take under the Licence Contract will mainly consist of a tax on gross income, with an adjustment based on profitability. Unlike under the production sharing regime, there will be no mechanism for cost recovery.

Insurance

The CNH requires insurance to be placed with international insurers for the risks associated with exploration and production activities, including coverage for well control services and/or specialised services. This insurance coverage will be approved by the Security, Energy and Environment Agency in Mexico and will form part of the requirements in relation to industrial security, operations, health in the workplace and environmental protection.

With the opening of data room access requests less than one month away, the supermajors in the international oil and gas industry will undoubtedly be preparing themselves for the latest stage of the tendering process. Phase 4 will provide the most lucrative and high-yielding exploration and production opportunities. The high technical and financial thresholds mean that this will tempt only the largest international players, as the Mexican hydrocarbons industry opens its doors on a truly global scale.