Mexico’s landmark oil block auction results disappoint

This week the boss of the Mexican oil industry perfected the understatement. “Without doubt, the start of round one didn’t have the momentum we were hoping for,” said Juan Carlos Zepeda, who runs the country’s oil regulator CNH.

Round one was the beginning of the Mexican President’s signature economic reform. Enrique Pena Nieto won over Congress last year to overhaul the oil sector. He planned on opening up the long-nationalised industry to private investment. It expected $62.5bn of new foreign money by 2018.

But then the oil price tanked. The government’s finances went through the floor. Historically Mexico has relied on crude oil revenues to fund a third of the government’s federal budget. In 2015 the revenue delivered only 15% in the first quarter.

The price slump has a lot to answer for. In October 2013 Forbes described Pena Nieto’s leadership as radical, saying, “..the country’s congress will by the end of this year almost certainly pass a constitutional amendment to open up its oil and natural gas sector to private investment. By this time in 2014 the likes of ExxonMobil, PetroChina and Norway’s Statoil could even have contracts in place to start exploring for Mexico’s untapped oil and gas bounty.”

By this time in 2014 oil prices were dropping faster than anyone could have predicted, production was being shut down, workers were being laid off. Investment in Mexico did not happen.

What was a ‘dream come true’ became a millstone. A year on from that Forbes article, and after the signing of the energy bill, the President’s approval rating had fallen 6% as the economy grew by 1.1% – the least since the end of the 2009 recession. Pena Nieto’s economic reform had become “decidedly unpopular” according to the Pew Centre.

The President charged on. He told a televised discussion with journalists that his reforms were aimed at improving the country’s economic potential not raising his popularity.

In March the UK government welcomed the opportunities offered by Mexico. When Pena Nieto visited Aberdeen the Energy Minister Matthew Hancock said the UK had much to offer. “The government of Mexico expects $50 billion of investment by 2018 in the wake of its energy reforms – boosting the economy and creating jobs while rejuvenating production. Together with Mexico’s energy ambitions and the UK’s wealth of experience and expertise, now more than ever there are unparalleled opportunities for partnership across business and education.”

So what went wrong? You could look to history. When foreign investors were last in Mexico’s oil market 77 years ago President Lazaro Cardenas seized their assets, sent them home and created state owned Pemex.

Or it might be a more worthy concern – the environment. Greenpeace criticised Mexico for increasing gas and oil exploitation and slammed the UK government for a $1bn investment with Pemex and other fossil fuel companies. That in itself is unlikely to have created the total ‘shitschturm’ (research Angela Merkel’s favourite high level pressure releaser) that round one became.

Let’s look at what happened. Pena Nieto’s government decided it would sell off 169 oil andgas fields to investors. The money generate would fund a development trust that would be managed by Banco de Mexico and support infrastructure investment, science and technology, pensions and scholarships. The Nobel Laureate Joseph Stiglitz sad it “could become a substantial development asset if managed properly.”

Round one saw 14 blocks go under the hammer. Only two were auctioned off. The remaining 12 received no bids or at least none that hit the reserve price. Mexico’s Sierra Oil and Gas, Talos Energy from the US and Premier Oil from Britain won the shallow water exploration and production contracts. Others who decided to pull out blamed the small size of expected reserves and the high cut of profits demanded by the government.

It is the first of five phases – there are still a lot of blocks to sell. From Zepeda’s point of view, the process was solid and transparent – something which is to be appreciated and given what is happening in Brazil, not to be underrated.

Next up are the deep-water blocks, expected in early 2016. They’re already attracting attention with one analyst saying the international energy producers will be in fierce competition with each other for the potentially massive projects. Let’s look on the bright side for Pena Nieto. Things can only get better.