In an important moment for its future, Mexico on Wednesday awarded three out of the five areas in the Gulf of Mexico it had put up for auction to oil drillers.
The successful auction was a follow-up to an inauspicious start of Mexico’s attempts to open up its oil assets to foreign companies. The first auction of 14 oil contracts in July ended with only two successful bids.
Mexico is in the process of major oil industry reforms, ending its state-controlled monopoly of oil that’s led to aging infrastructure and falling production.
“Energy, oil specifically, underpins the public finances of Mexico,” says Tim Samples, a Mexican-energy analyst at the University of Georgia.
The Mexican government has seen its oil revenue decline during the past 10 years, from 41 percent of total revenue to 33 percent.
Two years ago, Mexico began an ambitious turnaround plan that hinged on foreign companies drilling on its lands to boost production and bring in more money. But the plan was hatched during a time when oil prices were about $100 per barrel. They have since plunged to half that amount.
“You have oil companies around the world struggling with their cash flow,” and being picky about new investments, says analyst James West of Evercore. Still, Mexico has enticing oil fields, he said, and oil companies plan for the future and will invest if the terms are right.
On Wednesday, Mexico tried again. This time, it offered better drilling areas, ones where exploration had already been done, and demanded lower royalty percentages. The changes worked.
Tim Samples says Wednesday’s auction was an important indicator. “It shows that the Mexican regulators have the ability to react, read the market and respond.”
Samples said Mexico still needs to make a lot more deals in order to get its oil economy back on track, but it managed to right its course on Wednesday.
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