On December 5 of this year the National Hydrocarbons Commission (CNH) of Mexico will conduct a tender for deepwater acreage in what is being dubbed as Round 1.4, concluding the currently envisaged tenders for Mexico’s deepwater production rights in the Gulf of Mexico. Mexico’s licensing rounds to date have not garnered as much interest nor bids as lucrative as the CNH initially hoped for. Much of this can be chalked up to a severe decrease in the price of hydrocarbons that has practically mirrored the timeline of Mexico’s bidding rounds and, in the case of Round 1.4, that deepwater production requires significant upfront capital investment during a period when many energy companies are slashing new project budgets. But the uncertainty around the structure of the contracts with Petróleros Mexicanos (Pemex), formerly Mexico’s national oil company and a de facto prospective joint venture partner of bidders, has likely chilled bidding as well. The conclusion of Round 1.4 will, nonetheless, be a positive culmination of the initial stage of Mexico’s energy reform being brought to bear by current President Enrique Peña Nieto, although both Mexico and the international energy industry view room for improvement.

Bien hecho…what now?

Many companies successful at extracting unconventional resources in the Eagle Ford Shale play in South Texas are wondering what is the next step in the Mexican energy reform. They are well aware that the shale oil and gas deposits that they have become so adept at efficiently extracting do not stop at the Texas-Mexico border. The U.S. Energy Information Administration estimates that Mexico has the world’s sixth and eighth largest potential reserves of shale gas and shale oil, respectively, with much of those potential reserves being located in Northern Mexico. A gating item to auctioning off shale production in Mexico has been the lack of environmental regulations in place to accommodate hydraulic fracturing. It is encouraging that according to Mexico’s Energy Secretary, Pedro Joaquin Coldwell, those regulations are scheduled to become effective by the end of the first quarter of 2017. Three questions follow: 

When will Mexico conduct bidding rounds for its areas containing shale oil and gas?

Originally scheduled for auction as early as 2015 but pushed back due to the decrease in oil and gas prices, expect to see Mexico’s shale gas bidding rounds in the latter half of 2017 or perhaps early 2018. The tender for shallow water and on-shore areas is expected to take place in late March or early April 2017. The success and level of interest by international companies, along with the expected positive movement of oil and gas prices, is expected to heavily influence the incentive for Mexico to auction off shale oil and gas basins as the next round of bids.

Where are these areas located?

The bulk of Mexico’s shale deposits are in Northeast Mexico in the Burgos basin, which runs along the Texas-Mexico border, and the Tampico-Misantla basin, which lies further south along the Gulf of Mexico. The location of these basins presents two important issues: lack of infrastructure and security. 

• Infrastructure: While there is legacy infrastructure from Pemex in those areas, the concern is whether the volume and quality of such infrastructure can adequately handle the levels of potential production. Both public and private investment into infrastructure in these areas is important to increasing the attractiveness and long-term viability of Mexico’s shale oil and gas industry. 

• Security: The Mexican government will need to continue increasing its policing efforts against organized crime in the area to help attract lucrative bids from investors. With the prospect of a booming shale industry, it would seem that Mexico’s strategy would be to tackle the security challenges head-on.

How does an interested company get more information and participate in the bidding process?

Information about how to participate in Mexico’s bidding rounds may be found on CNH’s website. Further developments with respect to the exact timing of the shale bidding rounds are expected to be fluid and will likely depend on the results of the next two bidding rounds and movement in oil and gas prices. But based on recent comments by Mr. Coldwell, there is optimism that the shale bidding rounds could be targeted for the latter half of 2017. In the meantime, interested parties should keep their eye out for news on the Mexican energy reform in the press and develop relationships with advisors and industry parties that are active participants in the current phases of Mexico’s energy reform to see what insight might be gained from those relationships.