Shallow Water Opportunities in Mexico's Round One

Source: www.gulfoilandgas.com 3/10/2015, Location: South America

New analysis by Wood Mackenzie looks at Mexico's Round One shallow water opportunities, a licensing round that includes nine shallow-water fields with a total of 356 million barrels of oil equivalent of 2P reserves. These fields, which have not yet been put into production, are organized in five different contractual areas within the Salinas Sureste Basin.

"The proposed fiscal terms represent an improvement over the originally proposed terms for shallow-water exploration opportunities." Says Marco Baltazar, research analyst Latin America upstream.

In addition, the modification to the IRR (Internal Rate of Return) adjustment mechanism is a step in the right direction and is a response to both industry feedback and the current oil price environment, explains Wood Mackenzie.

The following are key considerations from Wood Mackenzie's Round One analysis:

Progressive fiscal regime with higher IRR thresholds: Under certain scenarios, "gold-plating" can be an issue, as the operator can potentially earn more profit when it incurs higher unit cost. This creates a potential misalignment of incentives between the operator and the government.

Qualification criteria are similar to those of shallow-water exploration: Qualification criteria are in line with the shallow-water exploration opportunities, with one exception; operators already qualified for the shallow-water exploration round must now fulfil a 10,000 barrels a day minimum production threshold for this round.

PSCs continue to be the contract of choice: Development areas will be governed by a production-sharing contract, which will have a 25-year duration with the possibility of two five-year extensions for the application of EOR. The appraisal phase will take two years, with a one-year extension possible if operators commit to drilling an additional well. The 60% cost-cap observed for shallow-water exploration also applies to development opportunities. The low cost-cap means that high cost, marginal projects may be unable to recoup their investment quickly enough to meet costs of capital – companies will pay a 30% corporate tax.


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