Mexico made history this week when it auctioned off its first oil tenders in 77 years. 14 shallow water Gulf of Mexico plays were up for grabs to a list of pre-approved companies and investing consortiums. While the Mexican government initially suggested selling 30 to 50 percent of the blocks would mark a success, only two were sold in the auction—less than half of the possible fields that would have been needed to meet that threshold. So, was Wednesday a failure for Mexico?
Director of the Mexico Institute at the Woodrow Wilson International Center for Scholars Duncan Wood thinks so, telling Bloomberg that this week’s auction “has to be crushingly disappointing for the government. It has to be seen as a very clear message that they need to do a lot more to make the oil and gas opening a success.”
Fair enough, but if our southern neighbor isn’t coming out of the block with any alacrity, it has a good excuse. To begin with, this is only the first of five separate auctions in just the first round of sales, with more four rounds to follow in subsequent years (the FT has a good run-down of the schedule ahead). So this week’s blocks were just the tip of the iceberg, so to speak, and the fact that those shallow water plays didn’t entice more qualifying bids wasn’t entirely unpredictable. “Shallow water is the minor leagues and these companies want to play in the major leagues”, a New York-based analyst told Bloomberg Wednesday. “Deepwater is where the major leagues are. The shallow waters have already been picked dry.” In other words, these weren’t the choicest cuts of meat, and the lack of a feeding frenzy doesn’t doom future sales.
Moreover, this week’s two sales were the first of their kind since the Mexican government nationalized its oil back in 1938. There’s plenty of inertia to overcome here as foreign firms acclimate to these newly-available reserves and as the Mexican people come to terms with this radical reshaping of what for many years was a source of fierce national pride.
It’s to be expected that Mexico’s denationalization and privatization of its crude resources will be characterized by fits and starts, but this week’s disappointing results shouldn’t distract from how necessary these reforms were and are. Pemex, Mexico’s state-owned oil firm, was running the Red Queen’s race, spending more money and hiring more workers just to stop output from sliding. Last year Mexican oil production hit a 19-year low as conventional shallow-water fields (like those sold this week) matured. The country needs the kind of risk-taking, technical know-how, and capital investment private companies can bring if it hopes to tap deep-water and shale reserves.
This week’s sale won’t have blown anyone’s socks off, but it still marks an important event in Mexican history. Mexico has much more potential than the media likes to give it credit for, and as halting a step as this may have been, at least it was in the right direction.