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Mexico oil auction disappoints

July 16, 2015

Mexico's first auction of oilfields in over 75 years has only attracted two viable bids. The first in a series of oil and gas tenders is seen as a key test for President Enrique Pena Nieto's reform agenda.

Erdölförderung in Mexiko
Image: AFP/Getty Imag/O. Torres

In total, the Mexican government is trying to sell 169 oil and gas fields, both onshore and offshore.

On Wednesday, the government kick-started the process by offering 14 oil fields in shallow water of the Gulf of Mexico worth a total of $17 billion (15.5 billion euros). It was the first sale of an energy reform that ends the 77-year monopoly held by state-run firm Pemex.

But interest was tepid at best, with US giants ExxonMobil and Chevron, Anglo-Australian firm BHP Billiton, France's Total and Russia's Lukoil skipping the auction. Only two fields were sold, to a group led by one of Mexico's new independent firms, Sierra Oil & Gas. The consortium includes US company Talos and Britain's Premier Oil.

The other 12 blocks either received no bids at all, or the bids fell short of what the government had expected.

The sales are a key plank of President Pena Nieto's economic reform agenda, which he pushed through parliament last year despite fierce opposition from leftist parties warning against giving up what they see as a symbol of national sovereignty.

Pena Nieto hopes the reform will reverse years of dwindling production, which is down from 3.5 million barrels per day in 2004 to 2.3 million now.

Erste Öl-Auktion in Mexiko
Bidders were few and far between at the Mexico City auctionImage: Getty Images/AFP/M. Calls

Mexico has historically relied on crude oil revenues to fund about a third of the federal budget. But slumping oil prices, down by roughly half since last summer, have cut the government's take to about 15 percent in the first quarter.

Bad timing

The timing of this first phase of the sale was awkward, coming a day after a historic agreement on Iran's nuclear program was clinched after 12 years of negotiations.

The landmark deal is expected to put even more downward pressure on low crude prices, as Iran is preparing to flood an already oversupplied market with more oil and gas. The glut in the market has made global oil and gas companies more selective with their investments.

"International companies have their eyes set on deep waters, where they are much more competitive," Juan Francisco Torres Landa, a Mexico-based energy expert for global law firm Hogan Lovells told the AFP news agency.

The Mexican government has planned for four more auctions that include more complex deep-water oil fields and onshore drilling, which are expected to draw more interest from industry giants.

"This is the first chapter of a story that will have many more events. We can't judge it based on the first chapter," Torres Landa said.

ng/kms (Reuters, AFP)