ExxonMobil, Hess & Chevron Team Up for Mexican Oil Auction

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ExxonMobil Corporation XOM, Chevron Corp. CVX and Hess Corporation HES have joined forces to bid for rights to explore for crude in Mexico’s deepwater oil areas, per sources with direct knowledge of the plans.

According to the sources, the companies have reached a Joint Operating Agreement that facilitates the consortium to bid for oil production in the 10 areas that will be auctioned on Dec 5. A Joint Operating Agreement is a contract that ascertainsassigns the role and obligation of each participant as well as designates the company that will act as the operator of a production area in case it is awarded in the auction.

This is the first time since 1938 that foreign crude producers have been allowed to operate in Mexico after the country approved final legislation with respect to the same in 2014. This is an attempt to reverse an 11-year decline in production in the nation. Mexico expects to raise $44 billion through its first-ever sale of deepwater drilling rights in the Gulf of Mexico. The region is located in the Perdido area, which is adjacent to the maritime border with the U.S and in the southern Gulf’s Cuenca Salina. Per the Mexican Energy Minister, 76% of the country’s potential oil resources are located offshore in deep waters.

The 26 companies that have qualified to bid in the auction include large foreign oil operators like Royal Dutch Shell plc (RDS.A), Statoil ASA (STO) and BP plc BP. These companies possess the expertise and capital to produce crude miles below the surface of the Gulf, which Petroleos Mexicanos or “Pemex” has been unable to explore because of lack of technology.

All the qualifying companies are expected to sign similar agreements because the government’s capital requirements for bidding are considered too huge for individual producers to meet. In May, the country’s state-owned oil company, Pemex, announced that it is in discussions with ExxonMobil, Chevron and Total SA (TOT) to ink agreements of mutual interest to ponder over the prospect of bidding jointly in the deepwater round.

A Joint Operating Agreement might be dissolved if any one of the companies withdraws its intention to take part in the contract. Also, the companies may elect not to bid even if the consortium remains intact.

However, none of the concerned parties disclosed any details regarding this development.

ExxonMobil, Hess and Chevron all carry a Zacks Rank #3 (Hold).

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