The revisions made to the terms for shallow water areas in Mexico’s first licensing round have enhanced the attractiveness of the production sharing agreement terms by improving the contractor’s upside potential, but the benefits are limited at higher prices when compared to fiscal regimes in the Americas.
Mexico closed the first phase of bidding for 14 shallow water oil and gas blocks in March. Contracts will be awarded in July.
According to GlobalData senior analyst Will Scargill, Mexico has yet to mitigate initial concerns regarding the adjustment based on pre-tax Internal Rate of Return (IRR), combined with royalty rates that are adjusted according to price, this leaves E&P companies with little upside.
"The fact that royalties adjust to prices means the regime is relatively competitive in a low-price environment, insofar as a 30% bid for the state’s initial share of profit oil would be comparable to the fiscal regimes of Colombia and the US Gulf of Mexico at $50 per barrel (bbl).
"However, as prices rise, the royalty and profit oil adjustment mechanisms kick in at an increasing rate, meaning that in order to be comparably attractive to the Colombian and US regimes, the bid would have to be around 25% at $70/bbl, 15% at $90/bbl and 0% at $110/bbl," Scargill said.
According to Scargill, companies are less likely to bid at levels that would give them little upside potential, despite the low prices.
"Two possible options would be to base the mechanism on post-tax IRR rather than pre-tax, or to further increase the IRR thresholds by 5% each.
"However, the result of either of these options at a $90/bbl oil price would only be to increase the bid that is comparable to Colombia and the U.S. to 20% rather than 15%."