Mexico’s oil sector has just become exotic.
From the president of Spanish football club, Real Madrid, to telecoms mogul, Carlos Slim, and companies called Jaguar Exploration and Sun God Resources, new buyers are piling into the country’s industry that for decades had been the undisputed territory of state oil group, Pemex.
This month brought a particularly dramatic oilfield auction, with such intense competition that multimillion-dollar cash bonuses were needed to break eight tied bids, at times eliciting gasps from the audience because of their size.
The tenders came hot on the heels of a discovery that confirmed Mexico as containing world-class assets — a consortium including Talos Energy of the US, Mexico’s Sierra Oil & Gas and Premier Oil of the UK, announced the world’s fifth-biggest oil strike in the past five years, with as much as 2bn barrels of oil. The group has been exploring one of the only two blocks awarded in Mexico’s first tender, in July 2015.
Eni, the Italian oil major, also upgraded a discovery on its Amoca block to having a potential 1bn barrels.
Interest has been building in Mexican oil since a landmark reform in 2014 opened an energy sector that was shut in 1938 when the assets of US and UK companies were expropriated and Pemex, the state oil champion, was created.
But the state group’s finances collapsed after it was bled dry by the government — it had relied on oil revenues for one-third of its income. Blighted by corruption and battered by falling oil prices, its downfall made the need for reform of the sector particularly urgent to bring in new investment, given that production had been declining for a decade.
For the past two years, the Mexican government has been auctioning off assets that once belonged to Pemex, both undiscovered offshore exploration blocks and mature onshore fields that the company either lacked the funds or expertise to develop.
The auction process — designed in 2014 when oil commanded $100 a barrel but launched after the price crashed — initially flopped, with just two out of the first 14 blocks awarded.
But despite low prices, it has gone from strength to strength with increasing numbers of companies making ever higher bids.
Mexico, which supplied a quarter of world oil output in 1921, “is back on the map, without question”, says Pablo Medina, analyst at Wood Mackenzie, an oil consultancy.
All the global big guns — ExxonMobil, Chevron, Total, BP, Shell, Statoil, and BHP Billiton — have been lured by the country’s deepwater promise. Pemex honed its shallow water skills after the discovery of the giant Cantarell field in 1976 but needs the majors’ financial muscle and expertise. China’s Cnooc has also scooped two deepwater blocks and Shandong has picked up onshore fields.
Mexico has awarded 70 contracts worth an expected $60bn in investment to companies from 17 countries so far, according to Juan Carlos Zepeda, the head of the National Hydrocarbons Commission.
New players breaking into the market
Formerly the world’s richest man, Carlos Slim made his name and fortune in telecoms. But his Carso conglomerate has sprawling interests, including in construction of the flagship new Mexico City airport. Carso picked up two onshore blocks on July 12 — one, on a tiebreak, after paying a $13m cash bonus. Talos, Sierra and Carso bid together, unsuccessfully, in an auction in 2015, losing out to Eni on the now-1bn barrel Amoco field. Mr Slim’s company can take heart from a guiding Carso principle: “Firm and patient optimism always pays off.”
Dionisio Garza, the former boss of Mexican conglomerate, Alfa, is a keen hunter. Last Wednesday he landed his prey. His new company, Jaguar, won 11 blocks, five on its own and six more in partnership with Sun God Resources of Canada. His determination — and the deep pockets of his Topaz investment fund — were clear: Jaguar clinched two of the blocks after tiebreaks with cash offers of $26m and $29m. Most of the other tiebreak offers were in the $2m-$4m range. To put that in context, the Talos-led consortium has invested some $40m to $50m so far in its major discovery. Garza is no stranger to big deals: in 1994, he pulled off a $1bn alliance with US phone group AT&T.
Mexico’s best-known football player, Javier Hernández, aka Chicharito, netted nine goals during the season he played for Real Madrid. Now Florentino Pérez, president of the Spanish club, has scored big in Mexico. His Iberoamericana de Hidrocarburos company scooped three onshore blocks in partnership with Servicios PJP4.
When Talos Energy, Sierra Oil & Gas and Premier Oil announced a shallow-water strike of 1.4bn to 2bn barrels of light crude, one name was absent from the roster: Riverstone. The energy-focused private equity fund has bet big on Mexico. It backs Talos and Sierra and is teaming up with Miguel Galuccio, the former boss of Argentine energy group, YPF, to set up Vista Oil & Gas, which hopes to raise $500m in an IPO in Mexico within weeks.