Mexico’s hopes of replicating the US offshore oil boom rest on authorities sweetening contract terms after prices collapsed, according to prospective drillers.
Preliminary terms being offered by Mexico “need to be a little more competitive,” BP Plc Chief Executive Officer Bob Dudley said in an interview Monday from a conference in London.
BP has a record 10 rigs active in the Gulf of Mexico as US offshore investments prove resilient to global cutbacks. The London-based driller joins Occidental Petroleum Corp. and Alfa SAB in calling for less onerous conditions as Mexico opens its vast crude and natural gas reserves to outsiders for the first time in three-quarters of a century.
Production-sharing contracts for 14 shallow water blocks to be auctioned this year include a 60 percent cost recovery limit and call for 25% local content in the first year.
“Under these terms it doesn’t make a lot of sense to invest in Mexico as opposed to investing somewhere else,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, said by telephone from Washington.
Occidental would rather develop US projects than “fool around with some ridiculous contract” in Mexico, Chief Executive Officer Stephen Chazen said on the Houston-based company’s earning call on January 29. Requirements to participate in the fields are ’’extremely high,’’ Raul Millares, head of Alfa’s energy projects, said on an earnings call last week.
Alfa has a partnership with Pacific Rubiales Energy Corp.
Oil rigs working in the Gulf will increase by more than 30 percent this year compared with 2014, according to data from Wood Mackenzie, an industry consultant.
At the same time, the number of land-based rigs in the US has fallen by a third since October, bearing the brunt of industrywide cutbacks that have shed tens of thousands of jobs. The rise in deep-water drilling stems from years of planning and billions of dollars already invested.
Mexico passed legislation in 2013 to end state-owned Petroleos Mexicanos’ production monopoly and allow foreign companies to develop fields. The oil opening is forecast by the government to generate $50 billion in investments by 2018.
Preliminary contract details for Mexico’s first-ever private bidding round for the 14 shallow water blocks were announced in December and won’t be finalized until mid-June, with winners to be announced a month later. Mexico’s National Hydrocarbons Commission has requested feedback and commentary from companies regarding the fiscal terms.
Chevron Corp. and Exxon Mobil Corp. are among 26 companies that have purchased access to the geological and seismic data available for the shallow water blocks.
Mexico continues to see interest from international companies even after crude’s collapse to the lowest levels since 2008, National Hydrocarbons Commissioner Juan Carlos Zepeda said in a January interview. His agency announced last week an additional blocks to be auctioned this year.
Oil companies around the world have lowered investment plans and are cutting staff amid falling profit margins, including Pemex, which trimmed $4 billion from its annual budget and will announce layoffs in the coming weeks, Chief Financial Officer Mario Beauregard told Radio Formula.
Mexico’s proposed tax structure may be pricing the country out of the market as would-be investors take a more cautious approach, Gabriel Salinas, an energy lawyer at Mayer Brown, said.
“The small shallow water areas can have high exploratory costs so the risk for the companies is high as well,” Salinas said by telephone Houston.
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