Geology, the Key to Success

There is much speculation surrounding the incremental award rate that Mexico has experienced for the blocks tendered from the first to the third bidding round of Round One. José Pablo Rinkenbach, Director of AINDA Consultores, does not believe that this success is so much a part of the government’s learning curve, but rather that it is related to the geological risk of each type of block. He explains that the first bidding round’s relatively low 14% award rate can be explained by the fact that the fields awarded were exploratory ones, which generally present a probability of success that is lower than 20%.

The second bidding round, on the other hand, made available fields with proven reserves. “In this case, it was no longer an exploration game that was involved, but a production one, and that is why it was more successful. However, it did not reach a success level of 100% because the fields awarded were offered under production sharing contracts, which are administratively problematic and provoke gold-plating,” Rinkenbach analyzes. Moreover, he believes that Mexico does not have the state structure to monitor and follow up on those contracts. “Indonesia has around 1,000 people in charge of administering the country’s 50 production sharing contracts, but Mexico only has 218,” he explains. While the third bidding round was hailed as successful by the entire industry, Rinkenbach warns that the success attributed to this phase depends on one’s definition of the word. “If considering the number of blocks awarded, then it was successful,” he acknowledges before pointing out that one of the reasons for the higher award rate could be linked to the absence of the gold plating issue in licenses. He believes this contract model to be technically more feasible, and administratively cheaper, because the regulator does not have to monitor profits. He considers this bidding round to have experienced an extreme over-bidding in terms of royalties, which could complicate field development. “The same occurred in Colombia, where although many fields were awarded, very few were developed,” he recalls. However, Rinkenbach admits that if one takes into consideration the government’s aim to develop an industry of national operators, then R1-L03 has to be viewed as successful.