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Mexico Sets Royalty Caps for Bidders in Upcoming Deepwater Auctions

The Mexican government has set the final fiscal terms for next year’s auctions of deepwater oil and natural gas assets in the Gulf of Mexico (GOM).

The Finance Ministry (SHCP) earlier in November published the minimum and maximum additional royalty fees for round 2.4, which is to offer 29 blocks across three GOM basins, and the Nobilis-Maximino farmout in the Perdido Fold Belt. Operators must also pay the state a basic royalty whose formula is price-indexed and varies depending on the type of hydrocarbon being extracted, along with several taxes.

Mexico is holding the two auctions concurrently, with an award date scheduled for Jan. 31. The auctions would be the country’s second batch of deepwater tenders since the energy reforms began in 2013, following the Trion farmout and Round 1.4 auction,held jointlyat the end of 2016.

The new auctions have garnered significant interest from local and international oil and gas companies.

The additional royalty is part of the economic bids that companies would submit for the Round 2.4 blocks and the Nobilis-Maximino farmout. In each auction, bidders may also offer a cash signing bonus, which often determines the winner. When the maximum royalty is bid, the cash bonus automatically becomes part of the economic offer, whereas in past tenders it was used exclusively for tie-breakers.

Bidders competing for the Round 2.4 blocks may also commit to drilling zero to two exploration wells as part of their economic offers.

For Round 2.4, the Finance Ministry set a minimum royalty fee of 3.1% for the 10 blocks in the Cordilleras Mexicanas basin and 5% for the remaining 19 blocks, which are divided between the Perdido and Salina basins. All of the blocks are capped at 20%. The cash signing bonus is to be paid into Mexico’s sovereign oil fund, the Fondo Mexicano del Petroleo (FMP).

The ministry capped the royalty fee for Nobilis-Maximino at 4%, with a minimum of 3%, “taking into account the technical characteristics of the blocks and the technical, operational and work requirements for the project’s development as requested by” state oil company Petroleos Mexicanos (Pemex), which owns the asset.

Under the terms set by SHCP, 10% of the winner’s bonus payment would go to the FMP and the remaining 90% to Pemex as an additional cash carry.

Last week, the upstream regulator, the Comision Nacional de Hidrocarburos (CNH), also approved reducing Pemex’s stake in Nobilis-Maximino to 40% from 49%, as well as cuts to the contract’s cash carry and minimum work program. The winning bidder would now hold a 60% operating interest in the project.

The changes were made at the request of Pemex. At a public meeting on Nov. 23, Pemex officials told commissioners the cuts were based in part on feedback from the companies during data room visits and were intended to make the farmout more attractive to potential partners.

In industry comments on previous Pemex projects, “we’ve also been told that for deepwater and other highly complex projects..., due to the considerable financial burden involved, operators would want a somewhat larger stake so that they can set up consortiums and distribute reasonably sized interests among the different participants,” said Pemex’s Cesar Fernandez, deputy legal director for projects and business. “So we’re also taking that into account.”

Under the new terms, the 35-year contract for Nobilis-Maximino now has a carry of $632 million, versus $812 million previously. The minimum work program is indexed to Brent crude oil prices.  At $60-65/bbl, the program would entail a $181 million investment, compared to $263 million under the previous bidding terms.

Nobilis-Maximino has an estimated 220 million bbl of mostly light oil and 524 Bcf of natural gas in proved, probable and possible, i.e. 3P reserves, as well as various prospective resources, according to CNH. The 29 blocks on offer in the 2.4 auction are estimated to hold a combined 4.23 billion boe in risk-adjusted resources.

Twenty-nine companies are registered for the prequalification process, which wraps up in December. The list of interested bidders is a who’s who of the global oil and gas industry, with most of them already working in the U.S. portion of the GOM.

Included are U.S.-based majors and independents ExxonMobil Corp.; Chevron Corp.; Murphy Oil Corp., and Hess Corp. The international players include BP plc; China National Offshore Oil Corp.; Italy’s Eni SpA; Lukoil of Russia; India’s Oil and Natural Gas Corp. Ltd.; PTTEP of Thailand; Qatar Petroleum; Spain’s Repsol SA; Royal Dutch Shell plc; Norway’s Statoil ASA, and Total SA of France.

Australia’s BHP Billiton Ltd., which won the deepwater Trion farmout in 2016, has also registered to participate, as has Pemex and a handful of local Mexican operators.

CNH expects to announce the prequalified companies on Dec. 21 and publish a final list of bidders in January.

Marketer Tender Restart

Earlier in November, the CNH relaunched a tender to hire a marketer for the hydrocarbons that the Mexican government receives from oil and gas operators with production-sharing agreements (PSAs).  A previous tender was declared void on Nov. 6 after it failed to draw any bids.

The auction is to offer two marketing service contracts -- one for oil and liquids, the other for natural gas. The contracts would replace a short-term agreement with a Pemex marketing subsidiary that expires at the end of this year.

CNH said the new tender included several adjustments to the bidding terms and contract models. However, the marketing fees for the three-year contracts remain capped at 25 cents/bbl for oil and 2.5 cents/MMbtu for natural gas.

In related news, President Enrique Pena Nieto appointed Nestor Martinez Romero to a second term as a CNH commissioner. Martinez’s previous stint was from May 2012 to May 2017, while the new term lasts until 2023. With this reappointment, the CNH now has a full seven members on its governing board.

Martinez has an engineering background. Prior to joining the CNH, he worked for Pemex and the Mexican Petroleum Institute and has also taught at the National Autonomous University of Mexico in the federal capital.

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