MAY 20, 2016 @ 09:36 PM
The government of Mexico is aiming to raise at least $44 billion in foreign direct investment via its inaugural sale of deepwater oil and gas exploration rights open to overseas bidders, despite the current turmoil in the oil market.
The country is poised to auction ten areas in Perdido near the US maritime boundary in the Gulf of Mexico and Cuena Salina in the prospect’s southern fringes on 5 December. In a recent interview,Energy Minister Pedro Joaquin Coldwell said rights on offer were attractive given that 76% of Mexico’s potential oil resources are located in the deep waters of the Gulf.
Yet, the minister declined comment on whether the government was directly courting several international oil companies. While names such as Chevron CVX +0.34%, Statoil and Total have been branded about, the said oil and gas majors have also declined comment on direct talks with Mexico. Of course, that they are in a group of 16 in the qualification process for the bids is a matter of record.
“No one can deny that the previous [shallow water] bidding round could have been handled better. For instance not releasing the minimum working prices till the last minute did not instil confidence. Had the prices been released two weeks before – as is intended now – it would have resulted in a few more bidders. Some prices for onshore bidding were unrealistic; with the numbers appearing to be very aggressive in wake of the oil price slump,” Torres-Barrón said on the sidelines of the Baker & McKenzie Oil & Gas Institute in Houston, Texas, USA.
Financial advisers in Houston are also sensing palpable interest, albeit one that is peppered with a dose of caution given the state of affairs in the oil and gas sector. Charles Dewhurst, International Liaison Partner at BDO’s Houston practice, noted: “In over two decades of my dealings with Mexico, what is afoot at the moment comes across as refreshing. Whatever the [Peña Nieto] government has said and done is very commendable.”
But Dewhurst feels that policy statements have been short on substance and market doubts persist about whether the government can actually deliver on all promises. “However, transparency was crucial and they have done exceedingly well on that front. It is something the market takes confidence from.”
Time and again the government has reiterated its commitment to transparency, given that it is fighting for investor dollars in the unfortunate climate oil market oversupply has dealt it.
Speaking at a recent industry event in London, Lourdes Melgar, Deputy Secretary of Energy for Hyrdocarbons in Mexico, promised “unprecedented levels of transparency” in terms of bidding processes and procedures, as well as derived incomes and proceeds of the oil and gas bids, to garner “public, corporate and institutional investor” confidence.
Such promises are noteworthy when the market is being led to believe that the current round of bids contain Mexico’s deepwater hydrocarbon “crown jewels” Dewhurst noted, adding that he expected a “decent take-up” come December.
One issue spooking foreign investors is the position state-owned oil company Pemex or Petroleos Mexicanos, which they would be required by law to partner with, finds itself.
The company is a precarious spot with a $5.5 billion budget cut, and the removal of its market monopoly – in 2014 – which it had held since 1938. Pemex’s liquidity also remains weak; Moody’s recently estimated that, as of March 31, 2016, the company’s debt maturing for the remainder of the current year amounted to $8.3 billion.
Nymia C. Almeida, Senior Credit Officer (Corporate Finance Group) at Moody’s de Mexico, said an upgrade of Pemex’s ratings is unlikely over the near term. “For an upgrade to be considered, the company would need to significantly reduce its leverage and improve its operating profile, cash flow and liquidity.”
Carlos Linares-Garcia, Principal Economist at Baker & McKenzie’s Latin America Transfer Pricing practice noted that far from an upgrade, the investor community is actually worried about a downgrade.
The eerie similarity in stature – in terms of being a major employer of 100,000 people and the country’s leading contractor of thousands of ancillary jobs – is not lost on the government.
Hence, the verbal statements of government support and the recent announcement of a potential cash transfer for up to $4.2 billion to the company, out of which $1.5 billion was transferred on 21 April. However, it is also worth noting the 9,632 million barrels of oil equivalent in reserves that Pemex has as of 2015 before unduly panicking.
“All things considered, even an oil price of $35 per barrel will not be good for Mexican deepwater exploration. I would say at least $40 is needed, but at least we are not down to $20. Investors betting on the long term viability of the projects would take heart from it,” Torres-Barrón concluded.
Overall, things appear to be finely balanced in a tricky climate for Mexico’s oil and gas industry. Whether the optimism is merited remains to be seen come December.
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