Pemex Emerges as the Main Winner of Round 3.1

Round 3.1, which tendered shallow-water fields in the Gulf of Mexico, took place on 27 March and was successful overall, albeit geographically uneven. Out of the 35 blocks available, 16 were awarded. This represents a total investment of $8.6bn to exploit up to 513mn boe of prospective resources. Round 3.1 included blocks in the Burgos, Tampico-Misantla, Veracruz and Sureste Basins. The tenders had particular success in the richly endowed Sureste Basin, located in the states of Veracruz and Tabasco, where all of the available blocs were assigned.

Pemex emerged as the round’s main winner, securing nearly half of the allocated blocks. Tellingly, out of the NOC’s seven blocks, Pemex won six by partnering with IOCs. In our view, this was the direct result of CEO Carlos Trevino’s efforts to promote JVs and partnerships in order to tap additional sources of funding and boost efficiency.

Round 3.1 has been widely perceived as a success. Eighteen companies placed bids, a number that was seen as highly competitive in light of the rival tender in Brazil taking place the next day. According to Minister of Energy Pedro Joaquin Coldwell, the IOC interest in this round was a ringing endorsement of the Mexican hydrocarbon sector. In our view, the popularity of Round 3.1 suggests that front-runner presidential candidate Andres Manuel Lopez Obrador (AMLO)’s troubling recent statements – about auditing contracts assigned by President Enrique Pena Nieto’s administration – have not severely impacted investor sentiment. This optimism-driven outcome was likely rooted in the checks and balances of the country’s regulatory framework, which would limit the scope of a revisionist AMLO presidency.

To date, Pemex has won a total of 14 contracts in the previous rounds. Notably, the NOC is relying heavily on partnerships to carry out most of them, as it will only develop three blocks on its own. This trend indicates that Pemex is indeed executing its updated business plan, which entails leveraging partnerships to address its tighter budget and the corresponding cancellation of key infrastructure projects. In our view, Pemex greatly benefits from partnering with IOCs, as it becomes familiar with international best practices and overcomes its longstanding organizational inertia. AMLO has proposed making Pemex once again the oil and gas sector’s backbone, and we assess that the more the NOC constructively collaborates with IOCs, the more feasible that suggestion becomes.

IOCs’ interest in Round 3.1 suggests that upcoming Round 3.2, which will be held in July and will solely consist of unconventional fields, will be well-received. After initially being delayed due to gaps in necessary regulation, Round 3.2 will be Mexico’s first offer of shale fields. Notably, these blocks have a higher level of uncertainty in both geologic and social terms, given that shale resources have never been exploited in Mexico before and environmental groups stridently oppose fracking.

So far, AMLO has yet to declare his stance on fracking and the exploitation of shale fields. Regardless of his stance on these issues, though, regulators have learned from previous rounds and are now better-poised to ensure competitive tenders of unconventional resources, drawing on environmental and technical norms enacted last year. Nevertheless, in our view, the results of the upcoming rounds will largely depend on how AMLO’s team signals its intentions toward investor rights.