Understanding the Impact of Mexico's Antitrust Rules

Q: What is your perspective on the initial interest in Round One, and how should its success be measured?

A: For most IOCs and independent Tier 1 companies, the shallow water phase is not that relevant. However, everyone is interested in participating in this phase as it is opening the market. The Mexican government wants to convey the image of a robust, transparent, and marketoriented country that also cares about general society, the environment, and fair competition. Therefore, Round Zero better create a very good first impression of the new landscape or the market will punish the authorities accordingly. There are various ways to assess success in a bidding round, and the government needs to be aware of this so as not to mislead expectations. If success is only measured by the number of companies bidding, then success is almost guaranteed, as most companies are willing to take part in the rounds. However, not all of these will make an economic proposal that falls into the range that allows a bid to succeed. The success of each bidding round depends on a combination of the quality and quantity of participants, the level of their economic proposals, and the effectiveness of their exploration and development plans. Having said that, the antitrust rules are causing problems for those companies seeking to form consortiums. It is a pity that all this political investment and the attempts to understand the needs of the global oil and gas industry have not helped the Antitrust Commission to understand certain elements of competition in the upstream industry.

Q: How can the antitrust rules undermine the attractiveness of the licensing rounds?

A: It takes deep knowledge of this country to understand the rationale behind the antitrust rules. Mexico now has a new constitutionally autonomous commission to oversee antitrust issues but it has not taken the right approach. By seeking to regulate the industry, authorities are killing a nascent market. There must be a market before one tries to regulate it. This is not CNH’s fault alone as the Central Bank and the Treasury seem to be unaware of the condition of the oil and gas sector. Insiders are trying to convey the message that the industry needs a great deal of freedom to decide on its partners for many reasons. However, the authorities feel they are being very careful about how the market is being formed. The spirit of the antitrust rules may be correct, but the rationale is not because they do not understand the market’s nature. We are encountering lots of problems in forming consortiums, which is the only way to share risks and make smart investments. However, CNH said during the announcement of the first phase of Round One that the same antitrust rules will not apply for the next phases of the bidding round. The tender package for the next phases will apparently be different, but that has just raised suspicion that other inconvenient antitrust rules are on the way. Since companies do not know how the antitrust rules will evolve, skepticism remains about their freedom to form consortiums. In fact, we might see a reduction in the number of consortiums, which will damage competition. In fact, the Antitrust Commission is reducing the competition, which does not really make sense.

Q: Why should IOCs participate in the shallow water phase of Round One, which includes relatively modest exploration and production opportunities?

A: IOCs do not have much to lose in economic terms but they will lose the chance to convey a message. IOCs are in a category of their own; they are not companies in a strict sense because they sometimes act like governments. In this case, IOCs have to portray an image of commitment to Mexico because they are looking to seize long-term opportunities here. This is closer to a geopolitical message than to an entrepreneurial decision-making process. After all, there are many ways to participate in a bidding process: by paying your respects to the government, by getting registered, by buying access to the Data Room, or by making an economic proposal, for example. Even if the participant is not interested in winning, well-crafted bids that are within the proper economic range send a positive message.

Q: What factors have impacted the attractiveness of investing in the Mexican upstream market?

A: According to some IOCs, independent Tier 1s, and financial institutions, the attractiveness has dropped because of external elements, such as oil prices and antitrust rules. These factors may have lowered expectations, but I remain optimistic because the law enables and empowers SENER and CNH to be flexible in respect to the tenders. This means they can change whatever needs to be changed. For the moment, the authorities do not seem willing to spend the necessary time to truly understand the sector they are regulating. However, the reaction to the antitrust rules has been so negative that I have the feeling something will soon happen on that front. The senior figures at SENER and CNH all come from the oil and gas sector, making them sensitive to its major concerns.

Q: What are the main concerns of private companies regarding joint ventures with PEMEX?

A: The problem is linked to the antitrust issue. Even if a company is considering teaming up with PEMEX, and some of our clients are, the problem is that there are many aspects for such a move that remain unclear. However, PEMEX is interested in linking up with some IOCs or independent Tier 1s, provided that these companies will be willing to partner with PEMEX in other phases of Round One or future rounds. At this moment, PEMEX presents an attractive proposition due to having its own assignations, but it will lose appeal soon because it has little money, no blocks, and no experience in certain fields. This is precisely why PEMEX wants to team up for other phases of Round One.

Q: Does the Antitrust Commission have any concerns about PEMEX teaming up through farm-outs?

A: Teaming up does not mean avoiding the tenders. There is no obstacle for an IOC or independent Tier 1 to seek to partner with PEMEX. It will not be illegal to do so whatsoever on certain blocks during Round One, since this will again be done through a tender process. If a company has the winning bid during the farm-out, it can still seek partnerships during the second or third phase of Round One. These will be governed by tenders, while rules will be in place to avoid potential antitrust behaviors. Companies coming to Mexico should be thinking with this strategy in mind as it is the only way to add value. It allows them to see the market as a whole and to not focus on simple parts, such as shallow water.

Q: Which areas of uncertainty must be addressed urgently?

A: First of all, the antitrust rules have to be revisited to follow international standards, which is not currently the case. Economic variables should take into consideration that oil prices are different to when the rounds were structured, which has to be accounted for. Thirdly, all the superfluous parts of the contracts, such as those concerning procurement, have to be eliminated as the market will have to road-test every aspect of a contract. The authorities truly need to understand the business model of a company, whether it be an IOC or a Tier 1 independent.