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Competitiveness of shallow water hydrocarbon development projects in Mexico after 2015 actualization of fiscal reforms: Economic benchmark of new production sharing agreement versus typical U.S. federal lease terms

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  • Weijermars, Ruud
  • Zhai, Jia

Abstract

Development of Mexican hydrocarbon reservoirs by foreign operators has become possible under Mexico's new Hydrocarbon Law, effective as per January 2015. Our study compares the economic returns of shallow water fields in the Gulf of Mexico applying the royalty and taxes due under the fiscal regimes of the U.S. and Mexico. The net present value (NPV) of the base case scenario is US$1.4 billion, assuming standard development and production cost (opex, capex), 10% discount rate accounting for the cost of capital and revenues computed using a reference oil price of $75/bbl. The impact on NPV of oil price volatility is accounted for in a sensitivity analysis. The split of the NPV of shallow water hydrocarbon assets between the two contractual parties, contractor and government, in Mexico and the U.S. is hugely different. Our base case shows that for similar field assets, Mexico's production sharing agreement allocates about $1,150 million to the government and $191 million to the contractor, while under U.S. license conditions the government take is about $700 million and contractor take is $553 million. The current production sharing agreement leaves some marginal shallow water fields in Mexico undeveloped for reasons detailed and quantified in our study.

Suggested Citation

  • Weijermars, Ruud & Zhai, Jia, 2016. "Competitiveness of shallow water hydrocarbon development projects in Mexico after 2015 actualization of fiscal reforms: Economic benchmark of new production sharing agreement versus typical U.S. feder," Energy Policy, Elsevier, vol. 96(C), pages 542-563.
  • Handle: RePEc:eee:enepol:v:96:y:2016:i:c:p:542-563
    DOI: 10.1016/j.enpol.2016.05.048
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    Cited by:

    1. Weijermars, R. & Sun, Z., 2018. "Regression analysis of historic oil prices: A basis for future mean reversion price scenarios," Global Finance Journal, Elsevier, vol. 35(C), pages 177-201.
    2. Cerqueti, Roy & Ventura, Marco, 2020. "Optimal concession contracts for oil exploitation," Energy Policy, Elsevier, vol. 147(C).
    3. Weijermars, Ruud & Alves, Ibere Nascentes & Rowan, Mark G. & Flores, Diego Blasco, 2017. "Benchmark of deepwater field development projects in the Perdido foldbelt: Evaluating fiscal impacts (Mexico, and US) using a nodal analysis production model," Energy Policy, Elsevier, vol. 109(C), pages 898-915.

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