Shell Dominates Mexico’s ‘Very Successful’ Second Deepwater Auction

Mexico’s second deepwater bid round failed to disappoint as 19 of 29 blocks were awarded, including nine to Anglo-Dutch supermajor and Mexican offshore newcomer Shell. Eleven firms from 10 countries bidding individually and in consortia won blocks—thought to be mostly oil-rich—in the Perdido Fold Belt, Cordilleras Mexicanas area, and Salina basin of the Gulf of Mexico.

The winning bids comprised 44,178 sq km, 23 well commitments, and $525 million in tiebreak payments. Mexico’s National Hydrocarbons Commission (CNH) announced the results 31 January in Mexico City.

Benjamin Torres-Barron, partner at multinational law firm Baker & McKenzie, which represented four of the companies that participated in the round, said the auction was “very successful” with results “better than everybody expected.” Estimates prior to the event, including those of the government, had approximately 7-10 blocks being awarded.

Instead, about two-thirds of all available blocks were doled out, making Round 2.4 “a great success for the Mexican government,” said Eduardo Corzo Ramos, counsel with international corporate law firm Haynes & Boone. “Very important companies participated and in the bid values you can see how interested these companies are in Mexico’s energy sector.”

Ramos said he was impressed by the strength of the bids and high-dollar tiebreakers placed by the participating firms. “If you look at the winners, everyone was hitting the maximum [royalty of 20%] with a maximum investment factor.” Competition was particularly fierce for Salina basin Blocks 29 and 21, respectively won by Shell and a consortium led by Repsol with tiebreak bonuses of $110 million and $151 million.

Shell’s haul comprised four blocks won on its own, four in a consortium with Qatar Petroleum, and one more in a consortium with Pemex. Five were in the Perdido Fold Belt just south of the Mexico-US maritime border, and four were in the Salina basin to the southeast in the Bay of Campeche.

“We saw a vast, overwhelming victory by Shell,” said Torres-Barron. “I think Shell was very aggressive based on its prior experience” in Mexico’s first deepwater auction, Round 1.4 held in December 2016, in which the firm’s participation comprised a single failed bid alongside Atlantic Rim Mexico for Block 5 in the Salina basin. Shell learned that “you cannot have all the eggs in one basket,” and therefore diversified its bids through a number of blocks this time around, he said.

Shell concurrently announced on 31 January that it made “one of its largest US Gulf of Mexico exploration finds in the past decade” near Perdido in perhaps a signal that a comeback is under way for offshore exploration and development. Chevron and Total, two other majors that have actively participated in Mexico’s deepwater rounds, also reported a US gulf discovery the same day.

The Anglo-Dutch firm encountered 427 m of oil-bearing pay in its Whale deepwater well on the US gulf’s Alaminos Canyon Block 772, near the Shell-operated Silvertip field and 10 miles from the Shell-operated Perdido platform. Appraisal drilling there is under way. 

PC Carigali, a unit of Malaysia’s state-owned Petronas, also turned in a strong performance in Round 2.4 by taking six blocks, four in consortia and two on its own. Three were in Cordilleras Mexicanas and three were in Salina. New entrants included Qatar Petroleum and Thailand’s PTT Exploration and Production, which respectively won five and two as parts of consortia. Other participants included Spain’s Repsol, three blocks; Ophir Energy, two blocks; Italy’s Eni, one block; and Riverstone Holdings-backed Sierra Oil & Gas, one block.

Mexico’s state-owned Pemex won four blocks, three individually and one in a consortium with Chevron and Japan’s Inpex. Two were in the Perdido Fold Belt and one each was in the Cordilleras Mexicanas area and Salina basin. “Pemex continues to have a strong position” as the country tries to find balance between state-owned operations and private industry, said Torres-Barron.

Mexico’s Energy Transition Continues

With eight tenders and multiple Pemex farmouts now in the books since energy reform was implemented, Mexico has awarded 89 contractual areas of 123 tendered, a success rate of 72%.  

The latest deepwater round, which was more than three times the size of the first deepwater bid round where eight of 10 blocks were awarded, is one of three rounds set to take place this year through July. Mexico’s presidential election is 1 July, meanwhile, and the winner will be sworn in 1 December. Anxiety is growing among supporters of outgoing President Enrique Pena Nieto and the reforms he ushered as leftist candidate Andres Manuel Lopez Obrador, runner up of the last two elections, remains atop public opinion polls.  

Despite discussions of the election, the country’s relationship with US President Donald Trump, and the future as it relates to the North American Free Trade Agreement, Torres-Barron believes the outcome of Round 2.4 “confirms and ratifies the investment and commitment that most international companies have for Mexico” and for the deepwater gulf.

“Whoever is the next president in Mexico, [those companies] expect that president to honor the contracting commitments that the government of Mexico and these private companies already made,” he said, adding that the companies are essentially bidding on the country for decades into the future. He also lauded CNH for its transparency and accessibility in the round, which the positive results reflected.

Next up is Round 3.1, scheduled for 27 March, which includes 35 shallow-water blocks in the Burgos, Tampico-Misantla, Veracruz, and Sureste regions. The 26,265-sq-km area is estimated to hold prospective resources of 1.988 billion BOE. Scheduled for 25 July, Round 3.2 involves 37 conventional land blocks in the Burgos, Tampico-Misantla, Veracruz, and Sureste regions. The ​​9,513-sq-km area has estimated prospective resources of 260 million BOE.

A farmout of the Maximino-Nobilis deepwater block, previously slated to be announced on 31 January, was canceled in December. Pemex cited a lack of industry interest due in part to Brazil’s recent auctions, where some of the same firms that were awarded blocks had access to the Nobilis-Maximino data room. Pemex also blamed medium- and long-term crude price forecasts that would not be offset by falling development costs.

Maximino-Nobilis lies near Trion block, farmed out as part of the first deepwater round to Australia’s BHP Billiton, which became operator with 60% interest. The $11-billion project will tap into gross recoverable resources of 485 million BOE, with production expected to begin in 2023. Differing from Trion, Pemex notes that Nobilis-Maximino has shown increased geological complexity and higher gas content.