Mexico waited 77 years to invite foreign oil producers back into its borders. That was one year too many.

The move to lure tens of billions of dollars from the likes of Exxon Mobil Corp. will be put to the test for the first time at an oilfield auction on Wednesday. With oil prices down by about half since last year, five of 38 potential bidders, including Glencore Plc, Noble Energy Inc. and even Mexico’s state-owned oil producer, have pulled out.

President Enrique Pena Nieto moved to end the state monopoly after poor drilling infrastructure and technology failed to reverse a decade-long production decline that reduced government revenue. To lure investments now, Mexico will probably get a much smaller share of profits than it would have a year ago.

“They shaped expectation at a $100-per-barrel market and we are way off that now,” Wilbur Matthews, chief executive officer of San Antonio-based Vaquero Global Investment, which oversees more than $100 million of assets including oil-producer bonds, said by phone July 10.

West Texas Intermediate, the benchmark U.S. crude, lost 55 cents to $51.65 a barrel in electronic trading on the New York Mercantile Exchange at 11:18 a.m. Singapore time on Tuesday. Mexico’s Maya was at $50.69 on Monday. Both grades have lost about half their value since June of last year. The meltdown has led producers to cut more than 100,000 jobs globally and reduce spending by more than $100 billion.

Tough Competition

This means that Mexico will have to compete for limited global investments with rival producing countries such as Brazil and Colombia, which opened their oil industries years earlier, said David Enriquez, a Mexico-city based partner at energy consultant Goodrich Riquelme & Asociados AC.

“The cost of the uncertainty for new companies entering an unknown environment should be discounted,” he said in an interview at his office on July 6. “Mexico is the new kid on the block.”

In the first attempt to bring foreign producers back into the country since the industry’s nationalization in 1938, Mexico will offer exploration rights to 14 shallow-water blocks to bidders including Exxon and France’s Total SA.

The day of the auction, the government will disclose the minimum percentage of profits it will keep on each contract. The producers who offer the government the highest returns win.

Government’s Cut

“We have estimated that receiving bids on 30 to 50 percent of the 14 fields would be a very acceptable range,” Energy Minister Pedro Joaquin Coldwell said Monday in Mexico City.

The government will probably request a take of less than 50 percent on the contracts, Tim Samples, a law professor and Mexican-energy analyst at the University of Georgia in Athens, said by phone.

The first blocks being auctioned are estimated to contain a combined production capacity of as much as 80,000 barrels a day, according to Mexico’s energy ministry. Mexico was displaced last year by Brazil as Latin America’s largest crude producer, with output of 2.8 million barrels a day of oil and other liquids, according to U.S. Energy Information Administration data.

Mexico’s national oil company Petroleos Mexicanos, or Pemex, withdrew from the race a week before the auction to conserve cash and focus on bringing in partners for its existing operations. Pemex’s oil production has fallen by more than 1 million barrels a day over the past decade.

No Explanation

Other interested parties such as Glencore, Noble, PTT Exploration & Production PCL and Ecopetrol SA also pulled out, without saying why.

Spokesmen at Baar, Switzerland-based Glencore and Bangkok-based PTT Exploration & Production chose not to comment on the reasons for abandoning the bid round, while Bogota-based Ecopetrol didn’t reply to an e-mail and voicemail seeking comment. Houston-based Noble Energy chose not to bid in the initial shallow-water round, though is evaluating participation in upcoming offshore blocks, Reba Reid, a company spokeswoman, said in an e-mail.

Pemex press officials didn’t respond to e-mailed messages or phone calls seeking comment.

Some would-be bidders were reluctant to accept Mexico’s terms, people briefed on the matter said last month. Rules require each bidding group to have one partner to act as guarantor and for that company to maintain shareholder equity -- or total assets minus liabilities -- of at least $6 billion, three people said, asking not to be identified because the discussions were private.

“Nobody is going to put an aggressive bid on something when they don’t agree with certain terms of the contract,” Vaquero’s Matthews said. “It would boggle my mind if people were paying anything but rock bottom prices.”

Source: www.bloomberg.com

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