Mexico may have missed the mark in opening up its energy market to foreign investors as the oil price decline continues to hit, according to a leading expert.
Derek Leith, UK head of oil and gas taxation at EY, said the fall in oil price may be a deciding factor in the historic auction for 14 licences in the North American country.
Mexico is rebounding from a decade long decline in oil production, with analysts estimating a loss of a million barrels of oil per day.
Now Mexico is looking to US, European and Asian energy firms to bid for 14 blocks in shallow waters in the Gulf region, worth an estimated $17billion.
Leith said: “It’s the first time in 77 years that they’re allowing any private investment and they’ve possibly left it a year too late because of the fall in oil price.
“I think in some ways this is not just a ‘dry-run’ for the companies but for the Mexican authorities as well.
“There’s stipulations in this round that they might then receive feedback on – they probably have already – when they see the success of this round potentially they might think we should have something in again.
“One which has been discussed quite widely is this concept of one of the participators in any of the joint ventures has to provide a guarantee of $6billion which clearly is attracting attention and putting some people off.
“These types of things I imagine might change over time. This is important because it is the first part of what is a wide program of bringing in new investors, it’s the first time they have thought about the terms and I’m sure they will react and adjust the terms going forward.”
The legalisation put in place for private investors for the first time since 1938 also breaks the monopoly on drilling which was held by state-run firm Pemex since the industry’s nationalisation.
The tax expert said in comparison to some of its less successful neighbours, like Brazil, Mexico could benefit from its close proximity to US waters.
He said: “The attractiveness to the oil industry generally is that it is very close to the Gulf of Mexico and the US production there so we’ve got an established supply chain, established people with technical capability so there is huge interest but of course it will depend on what the fiscal terms are and how all these sort of things interact.
“It will benefit from seeing what other countries have tried to do in the past and not quite got right. I hope that it will be responsive but by doing these things in tranches, each time it has a further tranche of licences I think it will presumably respond positively to what it needs to do.
“I think companies are interested in what the return might be, and what the oil industry has really been struggling with over the past year is this fundamental uncertainty as to what the future price will be.
“Any investor will want to understand that they get a reasonable return on their investment and that if the oil price improves that return might be better.”
But Leith said it was too soon to predict Mexico’s licensing success.
He said while the country is “certainly getting after the prize” he believes the outcome of the auction will be “difficult to gauge”.
Those watching closely might view the bids as unsuccessful but with a low oil price to contend with, how Mexico improves the terms for investors will be crucial to future bids, according to Leith.
He added: “I think it might be the first in perhaps a slightly twisty road to get to that balance we are talking about.”
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