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Mexico 2.1 Shallow Water Lease Sale Unloads 10 of 15 Blocks

Ten of the 15 shallow-water blocks on offer in the first auction of round two of Mexico’s 2013-2014 energy reform were snapped up Tuesday in what at times was fierce bidding.

All of the blocks had potential for crude production, many with a significant proportion of associated natural gas. But all but one of the five with gas potential in the Tampico-Misantla Basin were left on the shelf in the bidding.

The attraction for bidders was further south in the Gulf of Mexico, where the Sound of Campeche produces two-thirds of Mexico’s crude oil production and which has an abundance of infrastructure that Tampico-Misantla lacks, said Energy Secretary Pedro Joaquin Coldwell during a post-auction press conference.

The results of the 2.1 auction exceeded the government’s expectations, and Joaquin Coldwell predicted that it would lead to $8.2 billion in investments. That amount of investment is roughly what the government is planning to spend for an airport for Mexico City, the nation’s single biggest public works project currently on the table.

Italy’s Eni SpA was the big winner on the day, winning one block on its own and two more in consortium. Eni made history recently with a discovery on a block that it won in round one, the first private-sector oil find made under the terms of the energy reform.

Petroleos Mexicanos, or Pemex, Mexico’s state-owned oil company,  was awarded one block with Ecopetrol of Colombia, and another with Germany’s DEA Deutsche Erdoel. Given the financial difficulties facing Pemex that have slashed budgets in refining and elsewhere, upstream investing could be seen as risky.

“But Pemex needs to invest in its future and it has a strong track record in shallow waters, not to mention its vast local experience,” analyst Arturo Carranza of the Mexican Institute of Public Administration told NGI.

Other winners included Russia’s Lukoil, Royal Dutch Shell plc, Mexican upstart Citla, Sierra Oil and Gas also of Mexico, PC Carigali of Malaysia, and the UK’s Cairn Energy.

Joaquin Coldwell emphasized the “healthy industrial eco-system” now established by the country’s energy reform, with bidders for blocks by the largest of the oil majors to the smallest of newcomers, and a geographical spread that ranges across Australia, Asia, Europe and the Western Hemisphere, including  -- but not at all dominated -- by the United States.

From a lame beginning in the first upstream auctions of round one, the reform has become more bold, with a successful deepwater auction that completed round one on a high note, and now the first in shallow waters for round two.

The change has been achieved by inviting the industry to propose the areas and the dimensions of blocks that it prefers for the auctions.

“In the early auctions of round one, we offered blocks on a ‘take it or leave it’ basis. Now we’re listening carefully to the companies and that has paid dividends,” said Juan Carlos Zepeda, president of the National Hydrocabons Commission (CNH).

Even so, David Shields, editor and publisher of Energia a Debate, urged caution. In the current financial climate for the industry, “it’s hard to imagine some of the 60-89% of the government take that the winners of the auction have promised in view of the drilling costs that they face.

“Will they be able to recover their investment? That’s the big question,” Shields told NGI.

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