An opportunity that many have been awaiting for almost 80 years is finally knocking. Since December 2013, when Mexico’s energy reform was signed into law after 76 years of a state monopoly on the industry, E&P players have been eager to see what the reform will look like in practice. And if the first phase of Round 1 is any indication, interest in what the country has to offer is high despite low oil prices—and Mexican regulators are working to keep it that way.

Rounds 0, 1

In Round 0 Pemex had the chance to request resources and was tasked with proving it could explore and produce them in a competitive and efficient way; the state company was awarded entitlements that cover about 90,000 sq km (34,750 sq miles). The company maintains control over 20,589 MMboe of 2P reserves and 23,337 MMboe of prospective resources, according to the Secretaría de Energia (SENER). It will maintain its current oil production levels for the next 20.5 years.

On Dec. 11, 2014, Comisión Nacional de Hidrocarburos (CNH) launched the first phase of Round 1 by publishing the bidding and contract terms for 14 oil and gas exploration areas in shallow water off the coasts of the states of Veracruz, Tabasco and Campeche in southeast Mexico. Both Mexican and non-Mexican companies, as well as Pemex, may participate in the bidding round; production-sharing contracts with three- to five-year exploration terms will be awarded for these 14 areas. These exploratory areas have prospective resources that are expected to contain light crude oil with low production costs, according to SENER, and each has different minimum investment obligations.

In the first stage of bidding in Round 1, which ended March 17, 41 companies requested access to the data room. These interested parties include the Mexican counterparts of major players like BP, Chevron, Shell and Statoil as well as smaller companies such as Sierra Oil & Gas, a startup established to pursue opportunities in Mexico. As of March 26, 33 companies had begun the next stage—the technical and financial prequalification stage—CNH said.

The publication of final bidding guidelines for the shallow-water exploration phase is expected at the end of May, with bid submission and announcement of winning bidders in mid-July, according to the CNH website.

CNH published the second invitation to bid Feb. 27, which involves bidding on five areas in nine fields for the extraction of hydrocarbons in shallow water.

As of a CNH update on March 26, 14 companies had shown interest in this second invitation and 13 requested access to the data room. Nine of the companies had been authorized to access the data room, and two companies had begun the prequalification process. Future phases of Round 1 will include onshore (with an invitation to bid expected in April), deepwater and unconventional areas.

Long-term potential

The interest in the bidding rounds thus far indicates that low oil prices aren’t keeping players away from the potential in Mexico’s waters.

“I think companies that are looking at Mexico have a medium- to long-term perspective, and in that sense, spot prices at the time that the opportunity is evaluated may not be that relevant,” Gabriel Salinas, senior associate at Mayer Brown, said. “More relevant are the long-term prospectivity, the geographic location, the strategic nature of the opportunity and the resource base, the latter of which is probably the most important factor that companies are looking at when they look at Mexico.”

The bidding guidelines provide opportunity for more than just operators to get into the game in Mexico. Service companies—who before only had the opportunity to work with Pemex—can participate as part of a joint bidding group, Salinas said. “They can meet these criteria on a joint basis, so as long as there’s an operator that meets the technical criteria, you can have other players such as service companies or even purely financial partners participating in a joint bidding group that, if selected, could jointly be the contractor with the CNH,” he said.

Positive modifications

As part of the bidding process, companies have the chance to ask questions and give feedback to the Mexican regulators, and this feedback mechanism is already resulting in favorable changes for participating companies and those that end up signing the contract.

“As you look at the contract, there are some modifications that are very much welcomed by companies,” he said. “One that is very important is the adjustment mechanism of the contract.”

In Annex 3 of the contract, there is an adjustment mechanism that says that the state may capture extraordinary profitability from contracts, which means that as the price of oil goes up and volumes of oil go up, the state can capture more of the share. “The regulators have modified that mechanism so it’s more favorable for the contractors, and the adjustment is not as severe,” Salinas said. “It’s a more favorable adjustment mechanism that leaves the contractor with more of the production share after the adjustment than it did according to the prior adjustment formula.”

The corporate guarantee provided by contract companies or consortium members has also seen some changes; there is now more flexibility on which company can provide the parent company guarantee assuring the obligations under the contract. In the original version, Salinas said, the requirement was that the guarantor needed to be the ultimate parent company. It can now be any parent company subject to other criteria to be included in the contract.

Other clarifications involve how the contract price is determined by referring specifically to market prices, the process that is applicable upon the administration rescission of the contract, and what counts as minimum work program and national content.

Under the guidelines, there will be at least two revised versions of the bidding guidelines and the contract, but the important thing to take from the changes that have been made is that the feedback mechanism of the bidding process is working and leading to changes that are good for the contractors.

“You can see here that the regulators have listened to some of the industry feedback and have reacted accordingly and in a favorable and positive way,” Salinas said.

This goes hand in hand with the transparency that has been achieved so far in the Round 1 process. “Round 1 is a complete success in terms of transparency and public nature of information,” Salinas said.

Preparing to participate

Participants in the bid rounds still have to be mindful that Mexico is a country with high corruption levels. In 2014, Mexico ranked 103 among 175 countries (where 175 is the worst) in Transparency International’s Corruption Perceptions Index, which ranks countries based on how corrupt the public sector is perceived to be. Mexico ranked worst among Organization for Economic Co-operation and Development countries. Security is also an issue.

“This is something companies need to take into account and try to mitigate,” Salinas said. “But oil and gas companies are used to participating and working in countries with much harder terrain than Mexico in terms of security. In addition, the government is making a very good effort to provide security in the areas that will have oil and gas activities and also in important cities. In terms of corruption, there’s been a very noticeable effort at the legislative branch to push forth anticorruption laws and statutes. Mexico still has challenges in those sectors, but this seems to be a top priority in Mexico now.”

And though the Mexican energy sector has only just opened for foreign investment, most other sectors in the country have been open for foreign participation with plenty of success stories.

“There’s homework to be done, of course,” Salinas said. “There’s prep work and planning to be done, but there’s also a long and solid foreign investment protection history and culture in Mexico that is favorable to investors.”

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