Mexico find could spur rush on auctions

Premier Oil, Sierra Oil & Gas and Talos Energy announced the first Mexican discovery

Abillion-barrel crude discovery in Mexico could be just the lure the country needs to boost investment from oil majors as it lacks the wherewithal to reverse years of sagging output.

At a time when global oil prices were cratering, and drillers were nervously cutting exploration funds, Mexico’s earliest auctions drew spotty interest. Since then, however, European drillers led by Italy’s ENI have increasingly become involved. The find in Mexico’s shallow waters could drive added interest — and higher bids — in future auctions as the government seeks to boost production that’s fallen by a third in the past decade.

On Wednesday, Premier Oil Plc, Sierra Oil & Gas and Talos Energy LLC announced the first Mexican discovery by explorers other than state-owned Pemex in 80 years, a reservoir with an estimated 1.4 billion to 2 billion barrels. With new auctions set for the end of the year, the find promises to rev up interest in Mexico’s energy riches moving forward, said Pablo Medina, an analyst at the consulting firm Wood Mackenzie Ltd.

“Future bids will likely be more aggressive,” Medina said in a telephone interview. “This obviously increases the attention people will pay. The area contiguous to this block is going to go up in value, no question.”

About a fifth of Mexico’s public budget relies on oil revenue, with production averaging 2.15 million barrels a day last year, the lowest level in more than three decades. That drop in output, combined with lower oil prices, forced the government to cut spending, causing growth in the $1.1 trillion (Dh4 trillion) economy to decelerate to the slowest pace since 2013.

Oil has hovered near $45 a barrel in New York, less than half the $100-plus it reached in 2014, as global supplies remain stubbornly high. The West Texas Intermediate benchmark closed at $45.49 on Wednesday.

The Mexican government will receive a 68.99 per cent profit share from every barrel produced in the block, and as much as 80 per cent when considering taxes and fees over the life of the project, Sierra said in a statement. “It is of great importance for Mexico,” Mexico Oil Commissioner Juan Carlos Zepeda wrote in an emailed statement.

President Enrique Pena Nieto embarked on an ambitious reform of the energy sector in 2013, aiming to revive flagging output at a time when oil prices were in the triple digits. The reforms, which didn’t kick in until after oil prices had fallen, involved amending the constitution to allow foreign investors into the country’s oil industry for the first time since it was nationalised in 1938.

The first auctions came in 2015, with outside investors invited to bid on fields that were previously only accessible to Pemex. Eni was one of the first oil majors to win a bid in Mexico and has stood out in the race by winning several contracts.

Since then, some of the world’s largest oil companies, including ExxonMobil Corp., Chevron Corp., and BP Plc, signed contracts in the country.