Mexican Conventional Onshore Oil & Gas Blocks to be Auctioned Off in July 2018

In our October 2016 alert, we described the potential for development of Mexican shale oil & gas. Perhaps we were a bit too optimistic on the timing of the bidding rounds for Mexican shale oil & gas (we predicted for this to occur late 2017 or early 2018.), as the Mexican government has yet to put to auction its large blocks of unconventional hydrocarbons. Assuming crude oil and/or natural gas prices hold steady or continue to rise, it is plausible that the Mexican government could move forward with a shale oil & gas auction by the end of this year, but as the past year has shown this timing is difficult to predict.

On the conventional hydrocarbons front, Mexico is moving forward and recently announced the second tender of its third round of oil & gas auctions (dubbed Round 3.2). On January 25, the Mexican National Hydrocarbons Commission (CNH) announced a tender for onshore conventional acreage to be held on July 25, 2018. Round 3.2 will include 37 onshore blocks, with 21 blocks located in the Burgos basin, 9 blocks in the Tampico-Misantla and Veracruz basins, and 7 blocks in the Southeast basin. The underlying hydrocarbons in these blocks are forecasted to be dry gas, wet gas and oil (depending on the block), with the Burgos basin consisting of predominantly wet gas; the Veracruz basin consisting of predominantly dry gas; and the Tampico-Misantla and Southeast basins consisting of predominantly oil blocks.

Details of Round 3.2

Round 3.2 continues the Mexican government’s Plan Quinquenal, or five-year plan, to revamp and develop substantially its domestic hydrocarbon production by auctioning off substantial portions of Mexico’s hydrocarbon resources to international oil & gas companies. Mexican president Enrique Peña Nieto, who took office in 2013, has made a radical reform to the Mexican energy laws to allow for the participation of international oil & gas companies in the exploration and production of Mexican oil & gas. This energy reform has served as one of the major initiatives of the Peña Nieto administration. The prospective blocks to be auctioned off during Round 3.2 account for approximately 24% of the total conventional resources the Mexican government plans to auction off under the five-year plan.

Parties interested in participating in Round 3.2 are required to register with the CNH by May 11, 2018, and once registered, will have access to a data room containing additional information about the blocks being offered in Round 3.2. The data room is scheduled to open on February 9, 2018 and to close on May 9, 2018. Those parties that desire to submit a bid for particular blocks will be required to pre-qualify with the CNH between May 21, 2018 and June 29, 2018, with final bids being due in a sealed envelope on July 25, 2018. The winning bidders will be selected based on the best economic proposal from a duly qualified bidder (some of the requirements for qualification are noted below), as described in the official statement regarding Round 3.2 from the CNH.

Model License Contract

According to the Mexican Secretary of Energy (SENER), the model contract for Round 3.2 will be structured as a license for exploration and production and will contain producer favorable terms that will allow for flexibility over the operation of the area, and will have no depth restrictions as to formations. For participation in Round 3.2, SENER requires that bidders be experienced exploration and production companies with an appointed representative that has at least ten years of operational oil & gas experience. Parties that have previously registered for Rounds 1 and 2 will be able to use information previously submitted to qualify for Round 3.2. The license will be for a term of 30 years, with the possibility for two separate five year extensions, which would require the operator to exceed a commercial production threshold to receive each such extension. The first four to six years would be reserved for exploration and evaluation, and the remaining 24-26 years would be reserved for development. The model license contract also contains a local content requirement varying between 26-34% during the contract term (26% at the beginning and progressing toward 34% in 2025.

Specific Areas Involved

In its official statement regarding Round 3.2, SENER provided the following information about each of the basins featured in the auction:

Burgos Basin – Located in the northeast part of Mexico, along the Texas border in the Mexican states of Tamaulipas and Nuevo León, the Burgos basin is the largest offering in Round 3.2. There will 21 Burgos basin blocks offered with expected production of mostly wet gas with a few blocks expected to produce dry gas. The Burgos basin also features existing gas infrastructure in the Tamaulipas and Los Ramones gas pipelines, a Burgos gas processing facility, and proximity to the port of Matamoros.

Tampico-Misantla and Veracruz Basins – A total of nine blocks located in the Tampico-Misantla basin, near the city of Tuxpan, and the Veracruz basin, located near the city of Veracruz, will be offered in Round 3.2. The two Tampico-Misantla blocks are projected to produce oil, and six of the seven Veracruz blocks are projected to produce dry gas (with the additional Veracruz block projected to produce oil). The Tampico-Misantla blocks benefit from proximity to the Tuxpan-Tula gas pipeline and the port of Tuxpan, and the Veracruz blocks benefit from proximity to the Matapionche gas processing plant, the newly discovered Ixachi-1 PEMEX well (which has been described as the biggest onshore oil find in Mexico in 15 years) and the substantial port of Veracruz.

Southeast Basin – A total of seven blocks will be included from the Southeast basin; three located in the state of Tabasco and four located in the state of Veracruz. These seven blocks are projected to produce oil, dry gas and wet gas (depending on the block). The Southeast basin features substantial oil & gas infrastructure in the form of pipelines, gas processing plants, oil refineries and marine terminals. Additionally, the Southeast basin is adjacent to large offshore oil & gas discoveries, including the recent mega discovery by Talos Energy of the Zama-1 well.

Enjoy It While It Lasts?

While not attaining the results and success initially hoped for, President Peña Nieto’s energy reform has been warmly received by the international oil & gas community and has won applause and interest from energy investors. Maintaining the status quo in the Mexican government’s approach to energy reform for another five years would likely be the ideal scenario from the international oil & gas community’s perspective, but some question whether that scenario is a sure bet. President Peña Nieto’s presidential term is ending this year, and the current leader according to the polls is Andrés Manuel López Obrador, who has been described as a left-wing politician. López Obrador has not specifically laid out his planned agenda with respect to the energy reform should he be elected, but given his position as a progressive reformist and various comments he has made deriding President Peña Nieto’s energy reform, questions are raised as to whether progressing the energy reform on the same basis as President Peña Nieto would serve as his modus operandi.

Going forward one cannot simply expect that López Obrador, if he is the successful candidate, will push for continued oil & gas auctions in order to bring in international oil & gas companies to develop Mexican hydrocarbons. This raises the possibility that Round 3.2 could be one of the last oil & gas auctions (if not the last oil & gas auction) under the existing administration. Interested parties may be well-served to participate in Mexico’s oil & gas auctions while they can to establish a foothold under the Peña Nieto government, as such opportunities may not exist as readily under a López Obrador government.

Want to Know More?

Additional information about how to participate in Mexico’s bidding rounds may be found on CNH’s website. Interested parties should keep their eye out for news in the press on the Mexican energy reform generally and the conventional onshore Round 3.2 in particular.

Ms. Rodriguez and Mr. Lee are closely monitoring the energy reform developments in Mexico, and we look forward to providing additional updates on Mexican oil & gas activity. As we are experienced legal practitioners in Mexico and the energy industry, please do not hesitate to reach out to us for additional information or to discuss a potential engagement.