19 de diciembre de 2014 / 17:43 / en 3 años

INSIGHT-Oil shock to tilt Mexico energy opening in private sector's favor

By David Alire Garcia and Dave Graham
    MEXICO CITY, Dec 19 (Reuters) - The allure of investing in
Mexico's historic oil sector opening has been dimmed by the
plummeting price of crude, putting pressure on the government to
offer bigger incentives to private investors in the first major
round of contracts up for grabs.
    Since Congress in August approved the laws governing the
dissolution of Mexico's 75-year-old state oil monopoly, crude
prices have plunged more than 40 percent, reducing the appeal of
investing in Mexican deposits.
    Mexico, the world's 10th biggest crude producer, last week
announced bidding terms for the first set of production-sharing
contracts, unveiling 14 shallow-water exploration blocks that
will pay winning firms a share of each project's output.
    The overhaul aims to reverse a decline in crude output of 30
percent since 2004, but the slumping prices have cut potential
returns, putting the onus on Mexico to make it more attractive
for firms to invest - at the government's expense.
    By law, what companies must pay the government include a
range of taxes and a basic royalty which will vary depending on
the price of oil. 
    The most important consideration in determining who wins the
contracts will be what share of operating profits bidders offer
the government above a minimum level.
    The finance ministry won't set the floor on that share until
just before the contracts are awarded next summer, and it is
here that lawmakers say Mexico must be flexible.
    "What will the government do? Well, if it planned on a
certain percentage for a given (project), it's just going to
have to reduce the percentage," said German Pacheco, a
congressman from the opposition National Action Party who helped
craft the energy reform.
    Government officials admit privately that adjustments will
likely be needed to maintain strong interest, though in public
they are more circumspect, mindful that oil prices could still
rally before winning bids are revealed.
    "The market will determine how much it's willing to offer,"
said deputy finance minister Miguel Messmacher.
    Companies will know what the floor for the government's
share of profits is "just before" companies must submit their
offers on the first contracts by mid-July, Messmacher added.
    Some experts are pessimistic, suggesting that low oil prices
over a prolonged period could put off oil majors like Chevron
Corp and Exxon Mobil Corp, which tend to seek
only the biggest and most profitable projects.
    "I suspect most of them will buy the bid packages, but when
it comes to submitting a bid, those big companies won't bid
anything," said George Baker, a Houston-based oil analyst and
publisher of industry newsletter Mexico Energy Intelligence.
"This is a great, unacknowledgeable setback for the government."
    The oil slump is a blow to President Enrique Pena Nieto, who
is grappling with outrage at the apparent massacre of 43 trainee
teachers and a conflict of interest scandal. He has built his
presidency on reviving Mexico's struggling economy, and energy
reform is the cornerstone.  
    International benchmark Brent crude for February delivery
 traded at about $60 a barrel on Friday, down by nearly
half since June. Mexico's oil mix is worth even less, dipping
beneath $50 a barrel for the first time since 2009 this week.
    Revenue from Mexican state oil giant Pemex has for years
funded about one-third of the federal budget, and the government
hopes opening up the industry to private companies will generate
thousands of jobs and additional tax returns.
    "Even in the current price environment, all of those blocks
that are being auctioned offer a high degree of profitability,"
Emilio Lozoya, CEO of Mexico's state oil giant Pemex, said in an
    With oil down, Senate energy committee head David Penchyna
of the ruling Institutional Revolutionary Party said Mexico had
to do "whatever's necessary to avoid scaring off investment"
when asked about the government take for the first contracts.
    Oil industry officials say Mexico should make it easier for
companies to recover production costs - the first round foresees
up to 60 percent - as well as temper rigid requirements to front
load 80 percent of investment in the first three to five years.
    "Imposing rapid schedules in this low oil price environment
is not helpful because we're all struggling with less revenues,"
said a senior oil executive, speaking on condition of anonymity.
    However, Messmacher at the finance ministry insisted the
government is not yet contemplating additional sweeteners.
    "We believe that the contracts already have significant
flexibility," he said.
    Mexican officials say the relatively low production costs
expected for the first shallow water blocks should provide
enough upside for would-be investors. These could be below $20 a
barrel, Credit Suisse said in a recent report.
    But if prices stay low, the energy ministry has already
hinted it may trim the costliest blocks from subsequent rounds
given higher development costs in more complex deposits such as
shale, deep waters and the tight oil of the Chicontepec basin.


 (Additional reporting by Adriana Barrera; Editing by Simon
Gardner and John Pickering)

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