Mexico & Nafta - 9 December 2003

Foreign investors have shown little interest in bidding for multiple service contracts (MSCs) to develop the Burgos field in the north of the country. There was one bidder only for each of the first three auctions and for the next two there were no bidders at all. The government had hoped to hold seven auctions this year and attract foreign investment of close to US$10bn. It had anticipated that the auctions would help to double production from the fields, which stands at 1m cubic feet a day.

Big energy companies say that it is not the size of the concessions, which are pretty large, but the terms that are off-putting. ExxonMobil said that the flat service fees did not meet its minimum rates of return for new investment. Those companies that did bid say that they did so more to establish their credentials with Pemex and Mexican officials.

Other energy companies say that the MSCs were framed in an unattractive way: companies had to commit to making major investments in drilling wells, building pipelines and installing pumps, but were not able to profit from any upside: the prices in the contracts were all fixed. Energy companies say that they prefer jurisdictions in which they can produce hydrocarbons as they want, paying only a royalty to the government.

Several energy companies pointed out that the Mexican system is more dirigiste than China's. In China, international companies can go into joint ventures with local (state-owned) oil companies and share profits from sales of oil and gas. Joint ventures, which give both partners equal rights to the hydrocarbons, are banned by the Mexican constitution.

Admission
Francisco Barnés, the deputy minister of energy, admitted that the government would have to rework auctions. He conceded that clearly the terms were not attractive enough. One major problem the MSCs face is that nationalist senators are threatening to challenge the contracts in the courts, alleging that they are unconstitutional.

Policymakers had hoped that the MSCs would encourage foreign or private sector companies to take a greater role in the development of the country's gas deposits. Under the constitution, foreign companies cannot take the prime role in the development of the country's hydrocarbons. Until recently, the state oil company, Petróleos Mexicanos (Pemex), neglected gas: indeed it was flared off in the main offshore fields in the Sonda de Campeche. Now gas has become highly prized because so many gas power stations have been built that run on it. Currently, Mexico imports gas from the US to feed these power stations.

The terms
The MSCs allowed foreign and private companies to participate in projects to construct and operate gas production facilities. The concessions would last for 19 years. There were single bidders for each of the first three concessions:

• The first concession, Reynosa-Monterrey, went to YPF Repsol.
• The second, Cuervito, went to a consortium composed of Petrobras, Teikoku from Japan, and the Mexican company D&S.
• The third bloc Misión, went to Tecpetrol from Argentina and Industria Perforadora de Campeche from Mexico.

These three deals should produce US$3.7bn in foreign direct investment. They should also increase Mexico's gas output by 350m cubic metres a day and allow Pemex to save US$700m in gas imports over the life of the contracts. Pemex had hoped that, besides generating US$10bn in FDI, the MSCs would also lead to the drilling of 4,000 new wells in the Burgos basin and create 10,000 new jobs. The company also hoped that the new investment would save it US$2bn.

The two concessions for which there were no bidders were Ricos and Corindón-Pandura. Pemex says that it may try to auction the unawarded concessions at a later date. Sergio Guaso, who is handling the MSCs at Pemex claimed that the reason why there were no bidders for these two concessions was that the deals were so big. He said that they may be divided up into more easily digestible offerings. He said a year ago, when he was designing the auction, that the market had wanted large blocs which could be bid for by consortia. Now the market wants smaller concession areas.

Guaso and Pemex have already conceded that one of the remaining MSC concessions, Olmos, will not be offered this year as scheduled. The only company to have bought the tender documentation, Lewis Energy, said that it will not be able to bid until mid-January. The original deadline for the tender was 18 November. The other concession which should have gone out to tender this year was for Fronterizo.

• Pemex is undaunted by the failure of the gas MSCs. Its director of exploration, Luis Ramí­rez, is pushing for the company to open up the upstream part of its oil business to the private sector. Independent oil analysts claim that Pemex's monopoly makes it one of the least efficient oil producers in the world. A local oil analyst, David Shields, claims that Pemex produces only 87 barrels per employee per day, while Royal Dutch/Shell produces 300. As Pemex expects to increase its exploration and development spending by about 10% next year, and drill 700 new wells, it is likely to need more foreign help and expertise. Pemex's plan is to increase crude oil production from the current level of 3.4m bpd to 3.8m bpd from 2005.
  
  
• Pemex's exploration record is improving. New discoveries allowed the country to replace 8.3% of the oil extracted this year. Next year the figure should be even better because the oil services company, Schlumberger, is helping the company to reclassify 8.9bn barrels of oil in Chicontepec, which had been probable, as proven. The citerion is that the oil field has to have been exploited within the past five years. Schlumberger has been working with Pemex on bringing the field back into production.
  
  Pemex's goal is that by 2010 only 20% of the oil produced, and 10% of the gas, will come from fields currently in production. The company is reckoning that 40% of 2010's gas and oil output will come from as yet undiscovered fields. The company is hoping to be producing between 4m and 5m bpd by 2010.
  
  
• Pemex's capital structure is alarming commentators and credit analysts. The problem is that the company will achieve negative net worth at some point in the next 18 months unless there is an about turn in the way it caries on. What has been happening is that its liabilities have been increasing, while its assets (thanks partly to depreciation) have been falling in value. Technically and legally, Pemex is not a company but a statutory public organisation. This means that it does not, formally, have to draw up a balance sheet or provide a profit and loss statement. The company only declares operating surpluses or deficits (or losses). Pemex does provide a balance sheet and P&L, but this is only as part of its prospectuses for bond issues. Investors and the financial markets expected this.