At press time Mexico had just concluded its historic auction of shallow water blocks in the Gulf of Mexico, its first such event in 77 years, but we can’t say the results were as hot as a jalapeño. Of 14 blocks on offer, only two were awarded. The rest either received no bids, or had low bids that failed to meet the required minimum set by the government.

Eighteen companies and seven consortia were pre-qualified for this auction, but not all ended up bidding. It’s easy to criticize the way this was organized and the terms under which it was held, not to mention the lukewarm results, but I still think the auction was significant. It was the first step in a great leap forward that is long overdue.

The next auction in the series will be held sometime in first-half 2016 most likely. More important, it will offer deepwater blocks near the U.S.-Mexico border, where the reserve potential is far greater and interest will be much more heated. That will attract the majors who sat out this first round, such as Chevron and ExxonMobil.

It is noteworthy that the consortium that won the two blocks in shallow waters off Veracruz is backed by some familiar names: EnCap Investments and Riverstone Holdings. The group is composed of Sierra Oil & Gas, which is Mexico’s first private E&P start-up dedicated to this opportunity; well-known North Sea operator Premier Oil; and Houston-based Talos Energy LLC, a private E&P run by CEO Tim Duncan that has fields in both shallow and deep waters on the U.S. side of the Gulf.

Last fall Sierra Oil & Gas, Mexico City, unveiled private equity commitments of $525 million. It is led by Ivan Sandrea, who has quite a track record in energy including Statoil, BP, OPEC and Energy Intelligence. Riverstone and EnCap each committed $225 million to Sierra and Infraestructura Institucional, Mexico’s largest infrastructure private equity firm, committed $75 million. The latter is being acquired by yet another U.S. private equity firm, BlackRock Inc.

The consortium’s winning bid for the production-sharing contract covering the shallow water block along the southern rim of the Gulf of Mexico offered 55.99% of pre-tax profits to the government, according to Reuters.

Talos is also backed by Riverstone, and by Apollo Global Management. It has large working interests on deepwater Green Canyon Block 237 and on East Cameron 346. In May its borrowing base was increased to $525 million from $475 million.

While an exciting step forward for Mexico, the auction process did illuminate a few thorny issues, according to analyst George Baker, editor of the Houston-based newsletter, Mexico Energy Intelligence.

“First, why were there no bidders on eight blocks? We don’t have an answer yet, but is there a common profile among them? And why were there so few bidders overall? Is it Iran, the low oil price, or something else? We don’t know.” Indeed right before the auction, the price of crude fell back again, and people fear it will test $50/bbl.

Second, on Block 7, the two highest bidders came within less than 1% of each other, a virtual tie, Baker said. The problem is, Mexican authorities had made no provision to have any discretion on this unusual situation, he said. The number two bidder was Statoil, an acknowledged, world-class offshore operator with vast technical expertise at its disposal; but the winner was the newcomer, the group led by privately held Sierra Oil & Gas.

“So in essence, you are sending Statoil home, when you would like to have had that expertise…?”

Baker decried the Mexican authorities’ lack of what he calls discretionality, citing two blocks where the high bidder offered the government 35% of the operating profit in its bid package—yet the government finance ministry had set an undisclosed minimum of 40%.

“The hardline against discretionality worked against them in this case,” Baker said. “Those two blocks are thus not awarded, and so the government gets nothing. And, under the current system they cannot even go back and negotiate with that bidder—what about accepting 36% or 38% instead of nothing? The State is supposed to look for the best value it can get.”

Looking for value is what it’s all about, and as the price of oil continues to confound, industry participants, governments and regulators need to leave no stone unturned in their quest to wring value out of oil and gas reserves.

Will industry consolidation and asset A&D activity finally blow wide open this fall, as so many experts have predicted? Who are the first movers if this is the case and what kind of prices will they pay? For answers to this and more, we hope to see you at our annual A&D Strategies & Opportunities Conference in Dallas on Sept. 10, with the popular A&D workshop and shark tank held the day before. You can view the full agenda at ADStrategiesConference.com.

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