OREANDA-NEWS. August 04, 2015. Mexico’s debut bidding event in Round One of its energy reform is now history, and resulted in what was widely agreed was a poor showing.

Now, the post-mortems have begun, both within industry and the Mexican government, which openly acknowledged it needs to do a better job of listening to industry’s concerns about contract terms that might have attracted more winners had the sticking points been addressed to begin with.

Of 14 exploratory blocks offered in shallow waters in the Bay of Campeche — the same area that produces a large chunk of Mexico’s current 2.257 million b/d of crude production — the July 15 auction produced winners on just two tracts. Both were captured by a consortium made up of Mexican startup Sierra Oil & Gas, US’ Talos Energy and UK’s Premier Oil. Six blocks received offers, but on four blocks the sole bid on each was below minimum amounts set by the government. The other two blocks received more than one bid.

In addition to bidders’ pre-event complaints about relatively small fields, other objections abounded.

For example, the four-year terms with two-year extensions may have been too short for some operators that wanted longer contract terms for more extensive exploration, a top official for energy consultants IHS said.

The operators may have wanted to perform “more extensive exploration, such as whether there might be complex pre-salt formations that could be exploited at deeper levels,” said Carlos Pascual, senior vice president of the large consultancy and former US Ambassador to Mexico, in testimony last week before the US government’s House Foreign Affairs Committee Subcommittee on the Western Hemisphere.

In addition, “government minimum bids may have been influenced by historic Pemex production costs, which may be lower than the costs estimated by potential investors,” Pascual said.

After the bidding, obviously chastened bidding officials pledged to do better for the upcoming second bidding phase, which will involve five blocks also in the Bay of Campeche but this time aimed at exploitation of the fields. That will take place on September 30, and it’s unknown if the round will be postponed to allow the government more time to make the changes.

Meanwhile, in a paper prepared for the Atlantic Council last week analyzing Mexico’s first bid round, David Goldwyn, chairman of the Council’s energy advisory group, and his associate Cory Gill, noted the country’s finance ministry set minimum profit shares of 25% on five of the 14 blocks and 40% on nine blocks — which for all but the two most competitive tracts appeared “too high relative to [their] limited resource potential.”

But the two most competitive blocks attracted offers much higher than the minimum bids, the analysts noted. In other cases, had the minimum been set as little as 5% lower, “the blocks would have been sold” and the government would have ended up with something rather than nothing in those cases, they added.

The lesson? Set a lower minimum and let the market determine the price, and let geologists lead on valuing the blocks, the analysts said. They also applauded the mechanics of the process which they said worked “beautifully” — since it was transparent, webcast over the Internet, and each bid was read aloud and prominently displayed for the cameras.

As to contract terms, however, risk and reward are still out of balance, the Atlantic Council analysts said. Mexico held bidding rounds for numerous blocks in the 2000s for fee-based service contracts that paid companies according to incremental production. Interest was low among international companies, and Mexican bidders or smaller companies mostly ended up as winners of those rounds.

The specter of that contract type apparently still hovers over the present production-sharing and license agreements, according to Goldwyn and Gill.

In addition, bidders were concerned about “holes” in the geologic data offered which need to be fixed, they said.

The analysts also suggested Mexico consider moving to license agreements — which they said are less complex to administer — in subsequent rounds rather than production-sharing agreements, which they called “poorly altered versions of the … old service contracts and do not reflect international standards.”

The consensus is that Mexico has made great progress, but needs additional tweaks to come up to international standards and terms satisfactory enough to attract Big Oil (and even Medium Oil) in sufficient numbers. And with deepwater bidding being planned, the tweaking needs to happen sooner rather than later.

“With some lessons learned from the first round, there is every reason for optimism that further success is achievable and likely,” Goldwyn and Gill said.