Market Update: Auctions and Appointments

From new ambassadors to new administrations, big changes are coming to Mexico—and we’ve got some predictions. Keep reading for our take on an AMLO energy policy and learn about a rumored ambassador appointment that could be the crown jewel in a legendary career. Plus, find out why Shell is betting big on offshore blocks in the gulf.

 

New Diplomat on the US Side

Last week, Roberta Jacobson, the current US ambassador to Mexico, announced that she would be stepping down from her post in May. Attributed by many to rising tension with the current administration, her departure comes at a time of great consequence for the two countries. In addition to navigating the sticky diplomatic implications of Trump’s proposed wall, Jacobson’s replacement will be charged with furthering the burgeoning energy trade, renegotiating NAFTA, and leading the discussion around tariff battles. Clearly, Trump’s agenda for Mexico will require a very special person.

But if rumors are correct, that’s exactly what he’ll get. Legendary leader, Ed Whitacre—former CEO of both AT&T and General Motors—is expected to take the post. Mr. Whitacre is thought to be a Trump ally and will bring with him the benefit of longstanding relationships on both sides of the border. If in fact Whitacre is the chosen replacement, the CEO-turned-diplomat will be tasked with what could be the biggest turnaround of his distinguished career.

 

Master of the Shell Game

Eyebrows were raised and heads were scratched when the winning bids were announced for the most recent round of offshore blocks. When the dust finally settled, Shell was announced the winning bidder on nine of the 19 blocks auction, pledging $343 million out of the total $525 million raised by the auction. Even considering that Shell has participated in prior auctions, the play was considered by many to be quite aggressive. But it wasn’t the only big news coming out of the oil giant …

The day after the auction results were revealed, Shell announced the discovery of a giant oil reservoir aptly called, “Whale.” The Whale project, a partnership with Chevron, represents Shell’s largest exploration success of the past 10 years. Outsiders speculate the discovery could yield 700 million barrels of recoverable oil. As a means of replacing annual oil production, the Whale discovery is significant—but for Shell, there was value beyond the direct reserves discovered.

The Whale discovery is located on the U.S. side of the Gulf of Mexico just across the border from many of the recently auctioned blocks. It all makes sense now! Shell utilized the full scope of technical drilling information to interpret the adjoining blocks on the Mexican side and bid aggressively, hoping for similar potential reserve discoveries. Exploration companies are not required to disclose drilling results, positive or negative, so Shell did nothing illegal in delaying the announcement of the results. And in the competitive environment that national oil companies and international majors participate, where projects typically carry multi-billion dollar price tags and 10-year-plus timelines, it pays to have proprietary information—it pays big.

 

AMLO Cabinet, Platform Update

Mexico’s presidential election is rapidly approaching and Andres Manual Lopez Obrador (AMLO) has extended his lead in the polls. With the election just four months away, many in the US are wondering what an AMLO cabinet might look like. To the extent that we can see down the road, it is expected that Rocio Nahle Garcia will step in as Energy Secretary. In a recent interview with Argus, Nahle outlined the approach an AMLO administration would bring to the energy reform. His comments leave room for optimism, and concern.

Of concern to some, Nahle expressed an intention to review existing contracts, in response to what the AMLO contingency perceived to be corruption in the opening of the country for access by non-Pemex drillers. With that said, definitively proving illegal activity will be hard, and retracting valid contracts would significantly deter any future investment. If you ask me, what is in place now will stay in place in the future.

Curiously, Nahle also addressed the refining sector, lambasting the historic underinvestment in Mexico’s six refineries and floating the idea of building two additional refineries. Mexico’s lack of functional refining capacity is an issue that must be addressed, and although fuel dependence is a blow to the country’s pride, Mexico’s fiscal budget simply won’t cover all of Pemex’s spending needs. As a result, many projects will be shelved. The refining sector will be a hard sell for new investment when measured based on economic returns and generation of cash.

And of course, Nahle blasts the leadership within Pemex as inept and a bunch of “looters.” This may hold some truth, but AMLO won’t be the first new administration set out to institute unimpeachable ethics and technical capabilities. The track record of changing the culture and practices within Pemex is not so impressive.

Interested in jumping into the Mexican market? Click here to contact our international markets team.

 

Best,

Chad Smith
Senior Vice President of Terminal Services