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Epic Fail: Mexico's Historic Oil Auction

July 15, 2015
"It's terrible. It's a failure," David Shields, a Mexico-based industry analyst said of the auction, at which only two of 14 fields were sold. 

MEXICO CITY--Mexico's historic first oil auction fell short of expectations on Wednesday, with only two of 14 offshore fields awarded as the world's biggest firms shunned the inaugural sale.

The government offered 14 oil fields in shallow water of the Gulf of Mexico worth a total of $17 billion, the first sale in an energy reform that ends the state's 77-year monopoly on drilling.

The auction was the climax of President Enrique Pena Nieto's top economic reform, which was enacted last year after a heated debate in Congress, with leftist parties warning against giving up a symbol of national sovereignty.

Energy Minister Pedro Joaquin Coldwell had played down expectations of a big sale, predicting that between four and seven blocks would be awarded.

But nine blocks received zero offers while the group led by one of Mexico's new independent firms, Sierra Oil & Gas, was the only one to make acceptable bids for two blocks. The consortium includes US company Talos and Britain's Premier Oil.

Seven consortiums and 18 individual companies had qualified for the auction, but only nine participated in the end.

US giants ExxonMobil and Chevron, Anglo-Australian firm BHP Billiton, France's Total and Russia's Lukoil decided to skip the shallow water projects.

"It's terrible. It's a failure," David Shields, a Mexico-based industry analyst and director of the magazine Energia a Debate, told AFP.

"It was the worst week because oil prices are very low and because of the (nuclear) deal" between Iran and world powers on the eve of the auction, Shields said.

Analysts had warned that the auction could be affected by the nuclear deal because it will cause oil prices to slide further as sanctions on Iran's oil exports are dropped, adding 1.5 million barrels of crude per day in the market.

Mexico's government will now have to look ahead four more auctions that include more complex blocks such as deep-water oil fields and onshore drilling, and which are expected to draw more interest from industry giants. 

Indian, Malaysian Bids Fail

The government estimated that each block was worth $1.3 billion. Those not awarded on Wednesday will be offered again at later auctions.

While nine of the blocks lacked bidders, three were not awarded because the offers fell short of government demands.

India's OGNC Videsh was the sole bidder for two blocks, but its offers fell short of the minimum take that the government was seeking.

A team comprising US firm Murphy Worldwide and Malaysia's Petronas made an offer of 35 percent for the fourth block, but it was under the government's demand of 40 percent.

Sierra's consortium outbid Italian giant ENI and Norway's Statoil for one of the blocks off Tabasco state, offering the government 69% of the proceeds in a production-sharing deal.

It won another block off Veracruz by offering nearly 56%.

Midway through the auction, when two of seven blocks had been awarded, National Hydrocarbon Commission president Juan Carlos Zepeda had struck a positive note, saying "we like the results."

Officials were to address reporters again later Wednesday.

The underwhelming result adds to a bad week for Pena Nieto's administration following the embarrassing fallout of the weekend jailbreak of the country's most powerful drug lord, Joaquin "El Chapo" Guzman, his second escape in 14 years.

Revive Production

The reform breaks the monopoly on drilling held by state-run firm Pemex since the industry's 1938 nationalization.

While Pemex qualified for the auction, it sat out this time and could participate in future contests.

Pena Nieto hopes the reform will reverse years of declining production -- from 3.5 million barrels per day in 2004 to 2.3 million now -- and give a boost to the economy.

Oil auctions are a new thing for Mexico and officials wanted to make them the most transparent in the world. The event was shown on a live Internet broadcast.

Analysts say the government made an effort to create a transparent system to ease any concerns over the country's poor track record when it comes to corruption.

Copyright Agence France-Presse, 2015

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