Why Mexico's historic oil bid wasn't a complete flop

July 15 will not replace March 18 – the date in 1938 when Mexico seized foreign oil assets as property of the government – as the most momentous day in Mexico’s storied oil history. The results of the country’s first private oil bidding are in and it clearly is not the start that the Mexican government had sought, nor did it pan out the way those eager to invest had hoped.

By most metrics, including those established by the government, awarding merely 2 out of 14 blocks on offer is a failing grade. But there is more to the story than just the letdown in terms of the number of bids. Indeed, a useful question to pose is how can the government regain momentum for its energy reform agenda?

Fair or not, there is no doubt that the uninspiring results of the July 15 bid round only serves to increase the pressure on the Peña Nieto administration and its energy and finance team. Specifically, the outcome ups the ante in three ways.

First, it increases the burden on the government to improve competition and the fiscal and contractual attractiveness for future tenders, in particular the highly-anticipated deepwater bidding. Long touted as the jewel in the crown of Mexico’s oil and gas potential, the deepwater opportunities are considered the real prize of the new energy landscape in Mexico. The bidding process should reflect such a narrative.

Secondly, the spotlight and pressure on the government and state-owned Pemex to further develop and deliver on the pending farm-out opportunities with the national oil company has now been greatly elevated. The proposed farm-outs will offer significant oil and gas reserves and include large investment price tags across a wide range of opportunities onshore and in deepwater.

Finally, the question remains what the government will do with the 12 blocks that were not awarded. Many of the blocks drew interest but were not tendered on fiscal grounds. Several of the blocks could be conceivably conflated into a smaller number for future tender.

Mexico’s government is surely disappointed with the outcome of the shallow water bid, the first auction as part of the nation’s historic Round One. Energy Secretary Pedro Joaquín Coldwell had already lowered the government’s expectations to between 30 and 50 percent of blocks but with just 14 percent of blocks awarded, there will be implications and hopefully lessons learned for future phases.

During the pre-qualification period, 25 firms were granted access to the bid process and a data room. However, several companies pulled out in the lead up to the July 15 tender and public bid opening ceremony and only nine formally participated.

Not surprisingly given the volatility in international oil markets, there was much speculation over what-could-have-been in a more favorable oil price environment. But, the July 15 results point more toward the minimum bid requirements and the floor established by the Mexican government, and specifically the Finance ministry, that was the real game-changer for the tender.

The 14 shallow water areas comprised an estimated 3.8 billion barrels of oil equivalent (BOE) of 3P reserves, which should have been more attractive to investors. Block 2 was awarded to Mexico-based Sierra Oil & Gas in consortium with Talos Energy and Premier Oil. Second place went to Hunt Overseas Oil Company. Block 7 was the most contested of the auction, with the same consortium presenting the winning bid and Statoil coming in second. Hunt Overseas and ENI International also participated, the latter in a consortium with Casa Exploration.

The National Hydrocarbons Commission (CNH) rejected bids for four blocks that did not meet the minimal financial threshold set by the Finance Ministry. Eight blocks received no bids at all.

Some observers argued that in addition to the profit-sharing and investment requirements, the $6 billion corporate guarantee was too onerous. The Mexican Government responded that the purpose of the guarantee was to ensure companies entering the Mexican market are solvent and experienced. In this regard, Colombia’s experience in bid rounds after its reforms are illustrative. While greatly successful in terms of blocks awarded, in many cases investment, drilling and certainly production did not flow in a commensurate fashion.

But in at least one way, the tender bore some fruit. One of the main goals of energy reform is to open Mexico’s energy sector to new entrants. Nine international and Mexican firms participated in the bid round and two blocks were awarded to Mexico-based Sierra Oil & Gas in a consortium with Talos Energy from the US and Premier Oil from the UK.

That is to say that the big winner yesterday was a consortium that included British and US companies, led by a company established in Mexico specifically to go after these new opportunities; that should be noted if not celebrated.

The success of Mexico’s historic energy reform measures will not be determined by the first tender of 14 blocks in shallow water. Though knocked back on their heels, the government still has time to prove itself. To borrow from the current cycling action underway in France, July 15 in Mexico City was not the final stretch down the Champs-Elysees in Paris. There are plenty of hills and legs still to race for Mexico. But they cannot hope to regain momentum merely by drafting.

Success with Pemex’s farm-outs and the deepwater tender would be important shots in the energy reform agenda’s arm and boost momentum anew.

Jeremy Martin is director of the energy program at the Institute of the Americas, a policy center focused on Western Hemisphere Affairs based at the University of California, San Diego. Alexis Arthur is an energy policy associate at the institute.