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Mexico's billion-barrel shallow waters oil find could drive big money on next oil auctions

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Sierra Oil & Gas among explorers in group that struck crude. Next auctions expected to involve deep-water and shale fields.

Petroleumworld 07 14 2017

A billion-barrel crude discovery in Mexico could be just the lure the country needs to boost investment from oil majors as it lacks the wherewithal to reverse years of sagging output.

At a time when global oil prices were cratering, and drillers were nervously cutting exploration funds, Mexico's earliest auctions drew spotty interest. Since then, however, European drillers led by Italy's Eni SpA have increasingly become involved. The find in Mexico's shallow waters could drive added interest -- and higher bids -- in future auctions as the government seeks to boost production that's fallen by a third in the past decade.

On Wednesday, Premier Oil Plc , Sierra Oil & Gas and Talos Energy LLC announced the first Mexican discovery by explorers other than state-owned Pemex in 80 years, a reservoir with an estimated 1.4 billion to 2 billion barrels. With new auctions set for the end of the year, the find promises to rev up interest in Mexico's energy riches moving forward, said Pablo Medina, an analyst at the consulting firm Wood Mackenzie Ltd.

“Future bids will likely be more aggressive,” Medina said in a telephone interview. “This obviously increases the attention people will pay. The area contiguous to this block is going to go up in value, no question.”

About a fifth of Mexico's public budget relies on oil revenue, with production averaging 2.15 million barrels a day last year, the lowest level in more than three decades. That drop in output, combined with lower oil prices, forced the government to cut spending, causing growth in the $1.1 trillion economy to decelerate to the slowest pace since 2013.

Oil has hovered near $45 a barrel in New York, less than half the $100-plus it reached in 2014, as global supplies remain stubbornly high. The West Texas Intermediate benchmark closed at $45.49 on Wednesday.

Mexico's Gain

The Mexican government will receive a 68.99 percent profit share from every barrel produced in the block, and as much as 80 percent when considering taxes and fees over the life of the project, Sierra said in a statement. “It is of great importance for Mexico,” Mexico Oil Commissioner Juan Carlos Zepeda wrote in an emailed statement.

President Enrique Pena Nieto embarked on an ambitious reform of the energy sector in 2013, aiming to revive flagging output at a time when oil prices were in the triple digits. The reforms, which didn't kick in until after oil prices had fallen, involved amending the constitution to allow foreign investors into the country's oil industry for the first time since it was nationalized in 1938.

The first auctions came in 2015, with outside investors invited to bid on fields that were previously only accessible to Pemex. Eni was one of the first oil majors to win a bid in Mexico and has stood out in the race by winning several contracts.

Since then, some of the world's largest oil companies, including Exxon Mobil Corp., Chevron Corp., and BP Plc, signed contracts in the country. European majors Repsol SA , Royal Dutch Shell Plc , and Total SA also won leases earlier this year in shallow-water fields.

Less Risk

The find has “de-risked a little bit some of these shallow-water opportunities” in Mexico as it confirms that other explorers have the potential to find assets that Pemex either overlooked or couldn't develop, said Jeremy Martin, vice president of energy and sustainability at the Institute of the Americas, speaking over the phone from La Jolla, California.

“There are a host of companies on the U.S. side of the Gulf that may now consider participating in upcoming auctions because this is a way of showing them that the process works, and can lead to a discovery,” Martin said.

The next auctions, in deep water and for shale blocks, will likely come at the end of this year or the start of 2018.

The new find will “certainly create more buzz” around the next auctions, said John Padilla, Managing Director of energy consulting firm IPD Latin America in an emailed response to questions.

Dos Bocas

The shallow field holding the find is located 37 miles (60 kilometers) offshore from the Mexican port of Dos Bocas in 546 feet (166 meters) of water and contains light oil, Premier Oil said in a statement. The discovery comes just two years after the three companies jointly won the exploration license.

In an interview on Wednesday, Premier CEO Tony Durrant listed the potential of the site at 1 billion to 1.5 billion barrels. Sierra said the primary target reservoir contains 1.4 billion to 2 billion barrels, and could extend into a neighboring block.

Mexico “took a really difficult decision for them politically after 40 years of 100 percent Pemex-ownership,” Durrant said. The opening up of the country's industry “caught them at absolutely the worst time because of the collapse in oil prices. But to be fair to them, they persevered and they have now got very strong industry interest.”

Story by Adam Williams, Amy Stillman, and Giacomo Tognini from Bloomberg.

07 12 2017 /Updated on 07 13 2017

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