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Why Shell And Exxon Are Interested In Gulf Of Mexico Bidding

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By: MICHEAL KAUFMANPublished: Jan 21, 2015

Some of the largest global oil producers have shown an early interest in the first phase of Mexico’s bidding round for blocks of exploratory crude oil and natural gas, located in the Deepwater region of Gulf of Mexico.

According to a Mexican government official, the oil and gas blocks up for bids are located in a part of the Gulf with a high amount of upstream activities. A company with expertise in exploration can find oil for as low as $20 per barrel. At such a cost level, exploratory activities become an attractive investment despite oil price being caught in a downward spiral for over six months. Since peaking last year at $107 per barrel, crude oil price has halved

West Texas Intermediate crude oil futures for February delivery, the US benchmark for oil price, fell to $46.39, losing 5% on Tuesday. Whereas the global benchmark for oil price, Brent crude oil futures for February delivery fell $47.99, losing more than 4.5%.

Plummeting oil price has not discouraged suitors from bidding on the Gulf of Mexico oil and gas blocks because production costs are expected to stay low during the initial phase. In later phases, production costs are likely to go up as shale rock formations come into play.

The National Hydrocarbons Commission (NHC) is managing the initial phase of bidding, which is the first of its kind by Mexico. Previously, the state-run oil company Petroleos Mexicanos, also known as Pemex, had a government-supported monopoly over oil and gas exploration activities. The monopoly which had existed since 1938 ended last year after the Mexican government went ahead with plans to overhaul the country’s energy sector.

NHC Head Juan Carlos Zepeda had stated that the first round of bidding is “moving forward quite well”. As for the next phase where shale rock formations are involved, he has informed that it will be trimmed back to make it an attractive opportunity for prospective bidders.

Mr. Zepeda has revealed that several oil companies interested in the bidding process were given paid access to data centers where they can find comprehensive scientific data to help them come up with bids. The commission has reported interest from nearly 30 companies, including Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Ecopetrol S.A. (ADR) (NYSE:EC), BG Group plc (ADR) (OTCMKTS:BRGYY).

The decision to let foreign firms explore these sites has had mixed reactions from Mexico. Supporters defended the move as they believe Pemex is not best-suited to explore these fields and global oil giants possess the expertise which Pemex lacks. A negative reaction was seen from the naysayers as they consider this move a sell-out.

The exploration sites will not produce gas or oil for the next eight years, according to Mr. Zepeda. It has encouraged Big Oil firms to enter bidding as the crude oil price would have most likely recovered by the time production starts.

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