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Mexico’s bidding round will remain competitive despite low oil prices

Precise brings you the latest press release from GlobalData that discusses Mexico's position in the oil market.

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With Mexican oil open to private investment for the first time, the country’s initial bidding round is expected to remain competitive despite low oil prices, delays and a number of uncertainties, according to research and consulting firm GlobalData.

The company’s latest report* states that the first bid round, which began on 11 December 2014 by offering 14 shallow-water exploration blocks, is currently scheduled to offer additional areas, including unconventional and deepwater opportunities, in the first half of 2015.

Adrian Lara, GlobalData’s Senior Upstream Analyst for the Americas, states that no indication has been given of the expected levels of biddable profit oil in the shallow-water Production Sharing Contract (PSC). Furthermore, full details of the other contract models are yet to be released.

Lara comments: “With the international crude oil price having dropped from nearly $110 per barrel (bbl) in the first half of 2014 to its current price of below $50 per bbl, the government has already been forced to deviate from its original schedule.

“In the past week, the government has admitted that it may need to further delay high-cost areas, such as unconventionals. On top of this, the new schedule appears ambitious for a regulatory agency organizing its first ever licensing round.”

Despite these delays, Will Scargill, GlobalData’s Upstream Fiscal Analyst, notes that the lower oil price should not significantly affect the competitiveness of bidding on the shallow-water exploration blocks, as the adjustment of royalties to prevailing prices and profit shares to profitability mean that it should remain possible for investors to achieve attractive rates of return.

Scargill explains: “Comparison of the regime with that applicable to shallow-water areas in the US Gulf of Mexico at oil prices of $60 to $80 per bbl suggests that bids offering the government an initial 20% share of profit oil may be competitive. When discovered fields are offered, the government take is likely to be higher due to the lower risk.

“For deepwater areas later in the round, the government is expected to offer royalty and tax licenses, reflecting the high costs and risks associated with this type of exploration and development. Although the full details of this contract model have not yet been disclosed, it is expected to use a similar adjustment mechanism for the biddable additional royalty to that used in the PSC.”

Reference: GlobalData