Mexico sets minimum payments for next offshore oil field auction

ADAM WILLIAMS and ANDREA NAVARRO

MEXICO CITY, Mexico (Bloomberg) -- Mexico will require royalty payments of 30% to 36% for companies that win rights to produce oil in the nine shallow-water fields up for auction this month, the country’s finance ministry said.

Companies that win production sharing contracts to drill in the Gulf of Mexico will have to pay a rate that varies depending on the obligation of each field, according to the emailed statement. Mexico won’t require companies to pay an additional royalty for the investment that goes into production and development of each field, known as the work program.

The announcement of the minimum financial requirements prior to the awarding of the contracts is one of several adjustments made by the Mexican government to attract more bids than in July, when only two of 14 blocks were awarded to private companies. In the country’s first auction of oil blocks to private companies, Mexico announced the required financial terms on the day of the bidding, resulting in several offers falling short of the minimums set by the government.

“We will see a larger number of actual bids per contract than we did in the previous round,” Alexandro Padres, partner and Mexico energy expert at law firm Shearman & Sterling LLP, in a phone interview from Lima, Peru. “What is clear from the Mexican government is that they are looking to make these terms flexible and to accommodate the requests of private industry.”

Mexico has modified the bidding process to encourage more participation from private companies after terms of the first auction were thought to be “very rigid,” according to National Hydrocarbons Commissioner Juan Carlos Zepeda. The Hydrocarbons Commission lowered the financial guarantee required to bid on the fields to $1 billion from $6 billion to respond to current market conditions and the more than 50% slide in international crude prices, Zepeda said last month.

Energy Minister Pedro Joaquin Coldwell has said the government will consider it a success if 30% to 50% of the areas are sold in the country’s first round bidding process, which will also include onshore and deepwater auctions. Chevron Corp, Royal Dutch Shell PLC and CNOOC International Ltd are among the 20 companies qualified to bid on Sept. 30.

“Anything that Mexico can do that provides companies more of an opportunity to know what the government minimums are going to be is going to be helpful,” Glenn Pinkerton, a partner at Sidley Austin LLP who has worked on Latin American energy financing and infrastructure projects, said in a phone interview from Houston. “The primary factor to how aggressively people bid are whether they feel like this is the opportunity to get your foot in the door in Mexico in a way that puts you in good position for future bids.”