Mexico: Awarding Criteria Evolution In E&P Bids

The National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos or "CNH") is responsible for conducting acreage tenders and the Ministry of Finance (Secretaría de Hacienda y Crédito Público "SHCP" or Treasury) is responsible of managing Mexico's E&P fiscal regime. After six completed bid rounds, they have moved up rapidly in the learning curve. The CNH and the SHCP have a better market understanding of how the oil industry values underground hydrocarbon resources. Mexican authorities have learned to apply common tender and fiscal practices widely used in Colombia, Brazil and the US Gulf of Mexico (US GOM), among others. These common practices consist in not only offering smaller blocks, but also favoring upfront signature bonuses over other future government take instruments (Royalties and/or Governmental Production Share). We expect this trend to continue as Mexican geology is "de-risked" by new knowledge and smooth contract management is demonstrated.

The advantage for a resource owner in awarding acreage based on signature bonus or bid bonds is two-fold: 1) The operator pre-pays petroleum rent even if no oil and gas is produced; and 2) a signature bonus is a sunken cost that allows small fields to be developed, even when the total government take is high (referring to small fields). The downside or drawback is that when geological risks or other kind of risks are high, signature bonuses tend to be too small; nevertheless Mexican Hydrocarbons Law already has incorporated some progressive component with royalties/share adjustments.

Generally, the main variable in the License or Production Sharing Agreements (PSA) awarding process is additional government take, over and above the minimum set in the Law, followed by investment commitments. Often the numerical values/formulas of these variables are designed to result in tie bids by one or more bidders. A tie breaking mechanism is also common in the industry. The most popular tie-breaking mechanism is an upfront cash payment or signature bonus.

Awarding all blocks in a given tender is not always the main objective of the authorities; these objectives sometimes include to promote loyal players, to attract new participants or to promote national content. The very first acreage tender (called Round 1, call 1 or R 1.1)1 in Mexico under the new Hydrocarbons Law met one key criteria set by the Mexican Government. It demonstrated that the Reform was not giving the nation's resources too cheap. The first Round (R 1.1) awarded only 2 out of the 14 offshore blocks auctioned for the tendered PSA. The CNH and the SHCP decided to capture the largest possible rent the market would offer by defining a minimum acceptable bid that was not disclosed until all offers had been submitted. Not just the drop in the price of oil explains these results but also because the authorities misjudged the market or were too cautious by not giving the impression to the public that they were leaving much rent uncollected. The minimum share of "profit oil" earmarked for State Participation set for most cases at 40%, and four of the bids presented by participants fell below those values and were discarded according to the tender rules. Had the referred values been published before, some of that threshold or low bids could have been adjusted for a successful award. It was then clear that Mexican authorities were going through an important learning curve that was reflected in the results of that bid.

Rounds 1.2 and 1.3 (see table) went much better. The next major lesson was evident in the results of R 1.3. The R 1.3 was to tender 25 small marginal fields. This call was designed for small operators as well as to encourage local industry to play a role in the oil industry. Again, the objective was met at a cost: out of 25 blocks offered, all 25 were awarded. Here the success was not the 100% block awarded but the participation on many Mexican companies. Local inexperienced operators generally overbid rendering many fields contractually uneconomic.

This time the CNH published the minimum value for bidding variables to avoid repeating the former experience of bid 1.1; three blocks out of five were awarded with dangerously high bids. As indicated above, the third call or bid 1.3 was interesting. Out of 25 small onshore producing (or had already produced) blocks, all 25 were awarded, -again- with very high offer values (as high as 85.69% additional royalty over the royalty mandated in the Hydrocarbons Law) submitted by the participants. In order to attract local players, the authorities lower the required qualifications for submitting bids to encourage local companies. Given that with one or two exceptions, Mexican companies do not have experience evaluating the economic value of this type of contracts. Under Mexican law, in contrast to that of other countries, it is prohibited that participants negotiate a lower value once such value has been submitted as part of the bid.

The third lesson came during the first "Farmout" tender to select a potential partner for Pemex to develop Trion field, an ultra-deep water discovery conducted in parallel with Round 1.4. Here the objective was not the capture of maximum government take but a high cash carry to Pemex in operating the Deepwater field. The award criteria were designed with a low government take but the key parameter was the amount of carry the new Pemex partners were willing to fund. The two bidders BHP and BP bid 632 million and 600 million respectively.

The lessons learned are:

  1. No need to be extremely cautious on setting minimum government take since the market will determine that level.
  2. Extremely high bids will result in contractors not performing and potentially abandoning the field.
  3. If the acreage tendered is attractive, it is feasible to obtain cash now (as opposed to high government take that materialize after this administration is out of office).

In other countries, such as the United States of America, the award mechanism requires only one parameter: it is signature bonus, however the US GOM blocks are small (50km2) and the geology of the area is well known to a multitude of players ensuring that way strong competition. Currently, Mexican blocks are quite bigger but a trend moving toward smaller blocks may be the path that the CNH will choose to follow in future bidding processes. Another procedure that is noteworthy mentioning here is the one used in Brazil also awards Licenses (conventional areas not applicable to Pre-Salt deposits) based primarily on highest signature bonus offers. A second variable with much lower weight is the bidder's commitment to acquire locally produced equipment, materials and services.

The next set of tenders under Ronda 2 came all with minimum and maximum values for key award parameters and a tie-breaking mechanism by submitting a cash offer. Four tenders composed this Ronda. Of those four, one was for onshore blocks and two more offshore blocks in shallow waters, and one still under process for deep waters. As a result of the experience in Round one and the Farmout Trion, the CNH and the SHCP began publishing relatively low thresholds for the maximum bid parameters and reducing the variability of Additional Investment parameters. The result is that many bidders tie and in order to break the tie, a cash bonus is called for.

As can be seen in the table, the different calls for tenders in Round 2: In R 2.1 two bids out of 30 bids offered the maximum, producing 1 tie breaker; in Round 2.2 five out of 12 bids were the maximum parameter resulting in one more tie-breaker, round 2.3 was an eye opener; out of 52 individual bids for 14 blocks, 36 were the maximum causing 8 tie-breakers. The government has received US$ 115 million dollars as a result 3 tenders and Pemex has been offered US$870 million in carry to develop on Deepwater field and two onshore fields.

Further detail on the bid patterns can be obtained by contacting RDA.


1. In Mexico the so-called Rounds1 and 2 are divided in 4 different calls for bids, for simplicity we will number here Round 1.1, Round 1.2... Round 2.1, Round 2.2 and so on. In total 8 bidding processes have been launched divided in two Rounds. Additionally, CNH conducts terns for finding a partner of Pemex in the "Strategic Associations" better known as "Farmouts"

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official opinion or position or institutional view of Rodríguez Dávalos Abogados.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions