Mexico's oil prices to set pace of implementation

Mexico's National Hydrocarbons Commission implemented the second phase of Round One of the energy reform today. The results are very positive as the success rate was 60% (we expected 2 out of 5) while auctions of two areas were declared null. Also, 9 out of 14 approved firms submitted bids, while in the first phase only 9 out 24 participated. The winning profit sharing rates oscillated between 68 and 78% while the government's minimum values were around 30-36%.

The evolution of oil prices will set the pace of implementation. Analysts believe that both the government and firms feel more confident about the implementation process and the flexibility that the government has shown yielded positive results in this auction. The process could get delayed further if oil prices remain under downward pressure as the CNH has not yet announced the implementation dates for phase four.

"Tender results are consistent with our macroeconomic outlook. We believe that the outcome is compatible with our forecast of 17.00 USDMXN for year-end", says Barclays. 

Although the second phase of the first round yielded better results that phase one, the first phase was not a good gauge of how successfully the energy reform was being implemented as risks involved in the tendered blocks were very different.

While not particular to the Mexican energy sector, risks are believed to skewed to a slower implementation process as investment appetite in the oil sector remains subdued due to global growth concerns and a gloomy outlook for commodity prices.