Did Chicontepec auction “fail”?

During the past week we received a number of calls and emails from journalists who have asked for help in understanding the “failure” of the Chicontepec bid round.  We do not support the narrative of “failure,” as we explained in Market Note 171.

The situation of Pemex vis-à-vis the IOCs is very simple: For the past 10 years (since 2003) Pemex has offered oil companies (and oilfield service companies acting as an operator) a revenue interest in production, but what the IOCs want is a mineral interest in production. A mineral interest would provide commercial rights over some share of production, plus, and as important, it would allow for Wall Street recognition of a major discovery.

The Chicontepec auction offered another variation of contract language with a revenue interest but not a mineral interest. The results of the auction are not surprising, except for the detail that Halliburton offered just $0.01/barrel as a fee.

The oil industry is all about experimentation, not only with proppant for multi-stage fracking (for example), but also with energy policy and contract language.  That some contract language (conveying terms and conditions) does not work out in a given auction should be seen as part of institutional and policy learning curves.

 As our report states, we regard the use of an integrated index value as an experiment that did not work out (certainly not as anticipated).  As another consulting firm observed in its report on the Chicontepec auction, there can be little meaning in one bidder competing with another on the basis of the “factor” by which he would go beyond Pemex’s minimal commitment of US$60 million if all of the additional investment would be reimbursed anyway. To give a weight of 30% on additional reimbursable expenses seems odd.

 The motive for going to this trouble at all is motivated by an outdated fixation on wanting to convey the impression of transparency and objectivity.  Más bien, the use of a “factor” and “index value” simulate transparency and objectivity but certainly do not guarantee the best value proposal for Pemex, the region or the Nation.

Click here to read “Mexico’s Petro Flop: A failed auction shows the need to reform the Pemex monopoly,” as published in the Wall Street Journal.

Written by

Mexico Energy Intelligence

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.