First Mexico Offshore Auction Disappoints

Mexico auctioned only two of 14 blocks in a pivotal oil and gas tender on Wednesday, falling far short of the government's modest expectations as it begins to open up the long-nationalized industry to private investment.

Both the shallow water exploration and production contracts were awarded to the same consortium made up of Mexico's Sierra Oil & Gas, U.S. firm Talos Energy and Britain's Premier Oil (PMOIF).

The other 12 blocks received no bids, or none that cleared the bar set by Mexico's finance ministry, marking an inauspicious debut for the rollout of President Enrique Pena Nieto's signature economic reform.

"Without doubt, the start of round one didn't have the momentum we were hoping for," said Juan Carlos Zepeda, president of Mexico's oil regulator, known as the CNH.

Still, Zepeda called it "a solid start," pointing to a transparent process and the fact that seven private firms bid.

In the second block up for grabs, the government said the consortium would ultimately pay a total government take of between 74 and 86 percent of profits. In the seventh block, it saw the figure at between 83 and 88 percent of profits.

The government take is the sum total of the contract's fiscal terms, including a variable royalty, income tax, surface rental fee and the percentage of pre-tax profits.

The energy ministry said previously that at least 30 percent, or five contract awards, of the 14 would be a success. Blocks not awarded can be tendered again at a later date.

Zepeda said it would take up to two days to verify the required financial guarantees for the winning consortium.

The initial phase of the so-called round one tender, the first of five phases expected to auction a total of 169 oil and gas fields, comes at a time of depressed international crude prices and a decade-long fall in Mexican output.

A total of 34 companies, either in consortia or alone, pre-qualified for the first set of 14 shallow water production-sharing contracts, including U.S.-based majors ExxonMobil and Chevron (CVX).

But only nine bidders registered for the first phase.

Deputy Energy Minister Lourdes Melgar said international oil prices and weak growth forecasts had made firms more "selective." But she expected more interest in later rounds.

The 14 contracts were for areas with nearly 3.8 billion barrels of oil equivalent (boe) in proven, probable and possible (3P) reserves thanks to prior drilling by state oil firm Pemex.

Mexico has historically relied on crude oil revenues to fund about a third of the federal government budget. But slumping oil prices, down by about half since last summer, cut the government's take to about 15 percent in the first quarter.

The auction was the first test of Pena Nieto's sweeping oil sector overhaul finalized by Congress last year.

The reform aims to lure billions of dollars in investment into a domestic industry long dominated by Pemex, which saw its 75-year monopoly on exploration and production end in 2013.

The government estimates investment from each of the two awarded contracts will total $1.3 billion per block, with 80 percent coming in the first five years of the 25 year contracts.

By Adriana Barrera and David Alire Garcia