Industry Trend Analysis - Shallow Water Round Brings More Upside - AUG 2017

BMI View: The success of the shallow water phase of licensing Round Two demonstrates the positive outcome of government/industry cooperation in creating attractive licensing terms. The resultant block awards will provide another wave of support to Mexican oil production in the 2020s .

The first shallow water phase of Mexico's second license round concluded successfully with 10 of the 15 blocks awarded. The round was competitive with 12 different companies, of the 36 prequalified, being awarded acreage, including the European integrate oil firms Shell, Total and Eni, the national oil companies of Pemex, Ecopetrol and Petronas, as well as smaller European and Mexican participants. None of the qualified US companies including Chevron, Noble Energy and Murphy Oil, won a block.

Round 2.1 Winning Bids
Block Winning Bid Exploration Well Commitment Mexican State Equity Prospective (P50) Resources (mn boe) Water Depth (m)
Source: CNH
Area 1 no bids - - - 30-400
Area 2 DEA/Pemex 1 57.92% ~200 20-250
Area 3 no bids - - - -
Area 4 no bids - - - 35-500
Area 5 no bids - - - 50-550
Area 6 Petronas/Ecopetrol 1 65.19% 215 30-80
Area 7 Eni/Cairn/Citla 2 75% 169 150-250
Area 8 Pemex/Ecopetrol 2 20.10% 413 100-500
Area 9 Cairn/Citla - 75% 571 80-550
Area 10 Eni 3 75% 512 250-500
Area 11 Repsol/Sierra Oil & Gas - 62.28% 949 300-550
Area 12 Lukoil - 75% 958 100-500
Area 13 no bids - - - 220-500
Area 14 Eni/Citla - 37.27% 472 50-300
Area 15 Shell/Total - 30.11% 496 -

In our view, improved licensing conditions assisted in attracting interest and competition ( see ' Round Two Gearing Up For Success ' , August 30 2016). In particular, for the latest round, companies were allowed to submit their own work programmes rather than having to fulfil a government-determined schedule. This resulted in commitment to nine exploration and appraisal wells, as well as extensive seismic activity, over the initial four year exploration period.

According to Energy Secretary Perdo Joaquin Coldwell, the license awards will bring in more than USD8bn in investment, and result in production of upward of 170,000boe/d. This offers upside risk to our post-2020 oil production forecast and will be a crucial new source of oil to cover heavy declines at Mexico's legacy oil fields.

10 of 15 Blocks Taken
Mexico - Round 2.1 Shallow Water Blocks
Source: CNH, BMI

The limited bids in Areas 1, 3, and 4 comes as somewhat of a surprise, given the light oil potential of the region and its more extensive infrastructure build out. One of the dissuading factors may have been the large volume of associated gas production expected from these areas, which could squeeze potential project margins due to low gas prices. There were also no bids on the wet gas prospective Area 5 or the heavy oil Area 13, both of which were at the deeper end of the blocks on offer in terms of water depth.

The success of the round bodes well for the continued revitalisation of the Mexican oil sector, and will be positive for phase 2 of the Round Two licensing. Phase 2 covers 12 onshore exploration blocks and will likely attract more domestic companies as seen in Round One, given the smaller resource base on offer and lower technical requirements.