Mexico recently concluded Round One of a series of ongoing auctions to sell off prime Mexican oilfield blocks and gas fields to private companies, both foreign and domestic. Results fell short of expectations on the initial try.

The Auctions

Eight decades ago, Mexico nationalized the energy industry and expropriated foreign holdings. Recent energy reforms in the NAFTA partner country have dramatically changed things in the increasingly progressive country. Energy reforms have been historic, deep and impressive. As part of this new direction, the country has designated some 670 exploration areas and 244 Mexican oilfield blocks that are already in production for auction over the next several years. This first round was set to sell off 14 blocks, but at bidding’s close, only two blocks had been awarded.

The Cause

The cause for this tepid showing is almost universally believed to be the dramatic decline in oil prices in recent months. With crude prices hovering round $50 a barrel, oil companies are exercising extreme caution when considering new investment and exploration opportunities. Mexico’s own PEMEX declined to bid, as did many other industry leaders, including Exxon Mobil, Chevron, Royal Dutch Shell, and Total of France.

There were other factors that contributed to the disappointing results of the first Mexican oilfield blocks auction, however. Several potential investors expressed concern regarding the terms, including the provision to terminate contracts in the event of spills or accidents. Most likely, however, the location of the sites offered played a larger role in the less-than-expected outcome. The blocks were shallow rather than deep water. There is a general consensus that future auctions will do much better when more-desirable deep water Mexican oilfield blocks and gas fields are put out to bid.

Oscar López-Velarde, Ernst & Young’s Mexico oil and gas tax leader, and an adviser to several of the bidders, summed up the situation: “We were starting to hear from many of the industry participants that some of the Mexican oilfield blocks were not ideal, not as attractive as people were expecting at the beginning.”

The Winners

Several companies placed bids on the blocks up for auction, including Nexen Energy Holdings of China, Statoil of Norway, Eni of Italy, ONGC Videsh of India, and Hunt Overseas Oil Company. But many of the bids fell short of the minimum bids set by Mexico. However, two blocks did sell, both to a consortium consisting of Sierra Oil and Gas, a Mexican company; Talos Energy of Houston, Texas; and Premier Oil of Britain. According to the terms, one block will yield 56% of operating profits to the Mexican government while the other block will yield 69%.