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Mexico’s New License Framework Should Prove Attractive in Upcoming Bidding Round, says GlobalData Analyst

GlobalDatalogoWhile the specific terms of Mexico's new contractual frameworks for its oil and gas industry are yet to be announced, the regime appears an attractive one and should be conducive to active bidding, according to an analyst with research and consulting firm, GlobalData.

Mexico's first licensing round is rapidly approaching, with bids for shallow water areas formally scheduled for the first half of this month. Round 1 is being staggered, with areas offered in the following order: shallow water, extra-heavy oil, Chicontepec and unconventional, onshore, and deepwater.

Will Scargill, GlobalData's Upstream Fiscal Analyst, states that much will depend on the specific contracts and terms allocated to the blocks and fields on offer, as Mexico looks to counter the significant production declines that its energy sector has experienced in recent years.
However, Scargill explains: "Analysis of the details released so far for the royalty and tax license framework shows positive signs.

"In addition to royalties, income tax and a predetermined signature bonus, contractors under this regime will pay a biddable additional royalty, which will be adjusted according to profitability. This mechanism is expected to be similar to that which will be applied for profit oil split under both production and profit-sharing contracts."

Based on the information provided by the Mexican government to date, GlobalData's assessment assumes an industry standard R-factor mechanism. No additional royalty is applied until cumulative net revenue equals cumulative investment, and the percentage of the bid that is applied increases linearly to 100% when cumulative net revenue reaches 2.5 times cumulative investment.

Scargill continues: "The fact that both the basic royalties and additional royalty are adjusted according to the commodity price and profitability, respectively, means that developments should remain commercially viable, even at low prices. This is particularly significant given the many heavy-oil areas on offer in Round 1 and recent falls in the world oil price.

"In comparison to the fiscal regime applicable to shallow water fields in the US Gulf of Mexico, the basic Mexican royalty and tax regime before the additional royalty offers much higher investor returns. This leaves space for significant competition in the bidding round," the analyst concludes.

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