Mexico's Pemex raises hand in final oil auction before election

By David Alire Garcia and Marianna Parraga

MEXICO CITY (Reuters) - Mexico awarded nearly half of the 35 oil and gas blocks tendered on Tuesday, in an auction where state-run Pemex took advantage of growing political risk ahead of a presidential election to consolidate its predominance in the Gulf's shallow waters.

The bidding round is the last before the July 1 election in Mexico, which has been directly competing with Brazil for foreign investment in recent years. The Mexican presidential frontrunner has said he will review contracts awarded under a historic energy opening if he wins.

Either or alone or in consortia, Pemex won seven blocks of the 16 areas awarded by Mexico's CNH oil regulator.

"What we're seeing in Mexico is very interesting. In some cases, these companies are our competition. In others they're our allies. This is the new game; we've been getting ready to play it," Pemex's exploration chief, Jose Antonio Escalera, told Reuters.

Foreign firms including France's Total (TOTF.PA), Spain's Cepsa and Repsol (REP.MC), Germany's DEA Deutsche Erdoel and Britain's Premier Oil (PMO.L) were also big winners.

"These (awarded areas) are not bad, but there's no doubt that the best ones are in Pemex's hands," Juan Carlos Zepeda, head of the CNH, said in a news conference.

A final, competitive round of bidding in the Southeast Basins improved what started patchily, with little interest in fields believed to contain high volumes of natural gas.

"There was a good result overall ... but the political risk definitely was an issue for some companies," said Pablo Medina from consultancy Welligence.

About $8.6 billion in investment is expected from the projects to be developed in the awarded blocks, Mexico's Energy Minister Pedro Joaquin Coldwell said.

Early production would start in 2022 with a crude output potential of 280,000 barrels per day (bpd) and a gas output target of 220 million cubic feet per day.

Presidential candidate Andres Manuel Lopez Obrador, who has a comfortable lead in most polls, says that if he is elected, he will review over 100 contracts signed since Mexico passed legislation in 2013 ending Pemex's monopoly, looking for signs of corruption.

Lopez Obrador has also said he would hold a referendum on the future of the reform and ask President Enrique Pena Nieto to cancel two auctions planned for the second half of the year.

Mexico's next president takes office in December. Joaquin Coldwell said auctions scheduled for July-September will not be changed according to "electoral cycles." A fifth auction this year for heavy oil areas is also under consideration.

Mexico's oil production has been declining since peaking in 2004. Even though Pemex's output was expected to grow slightly this year, a senior official said on Tuesday he does not expect a major change in crude output before 2025.

A DIVERSE MIX

Oil firms of varying sizes and provenance won blocks in the auction, which received bids over the minimum royalty. The expected government take from these projects is 72-78 percent, higher than in the most recent deepwater auction in January.

Repsol and Premier Oil individually claimed two areas each in the shallow-water blocks offered in the Burgos basin, where less than a third of areas were awarded. Premier won another block in a consortium with DEA and Sapura Energy.

Consortia made up of Pemex, Mexico's Citla Energy, Cepsa (CPF.GQ), Britain's Capricorn Energy and DEA won four blocks in the Tampico-Misantla-Veracruz basin further south along the Gulf. There, around a third of blocks were awarded.

In the final Southeast Basins tender, competition was higher, and the oil regulator awarded all eight of the shallow-water blocks it tendered to consortia including Total, Eni (ENI.MI), Royal Dutch Shell (RDSa.L) and Pemex.

Mexico collected $124 million in cash payments from the auction, below the $525 million raised in January's auction.

The Southeast Basins areas are located in a portion of the Gulf where many of the companies that won blocks on Tuesday had already secured areas in earlier rounds, which would allow them to build clusters to reduce infrastructure costs.

Others are looking for sub-salt reserves, an attractive option as projects with similar geology have been successful on the U.S. side of the Gulf, said Welligence's Medina.

Mexico's Deputy Energy Minister Aldo Flores blamed weaker early interest in the auction on the quantity of natural gas areas, saying companies were more interested in finding crude.

"This will continue to be a challenge for us given the abundance of natural gas in Texas at very low prices," he told Reuters on the sidelines of the auction.

(Reporting by David Alire Garcia, Adriana Barrera and Marianna Parraga; Writing by Gabriel Stargardter; Editing by Frank Jack Daniel, Susan Thomas, Diane Craft and Cynthia Osterman)