Mexican Onshore Auction Terms Better Than Expected, Say Canadian-Based Companies Planning To Bid BY JIM BENTEIN DEC. 2, 2015

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1 Mexican Onshore Auction Terms Better Than Expected, Say Canadian-Based Companies Planning To Bid BY JIM BENTEIN DEC. 2, 2015 The royalties and other terms set for a Dec. 15 auction of oil and gas leases by the Mexican body that s overseeing the sale of former monopoly-controlled leases are much more attractive than Canadian-based companies planning to bid expected they would be, say executives with two of those companies. Kevin Smith, the manager of business development for White Rock, B.C.-based junior Renaissance Oil Corp., which raised C$10.68 million earlier this year primarily to pursue Mexican opportunities, described the terms, which were announced late Monday, as very progressive. We re encouraged by this announcement, he said. We were thinking [royalties being sought] would be in the double digits. In fact, Mexico s finance ministry, which is working with the National Hydrocarbon Commission (CNH), the agency overseeing the bidding process, announced it will require winning oil companies to bid just one per cent to 10 per cent of pre-tax profits in the auction of 25 onshore blocks. The mid-december auction, the first land-based phase, after two previous auctions were held for shallow Gulf of Mexico assets, formerly controlled by Petróleos Mexicanos (Pemex), is aimed at establishing a private sector dominated Mexican oil and gas industry, CNH has said. CNH had already set terms aimed at making the bidding attractive to start-up Mexican companies and juniors and intermediates from the U.S., Canada and elsewhere. The 25 blocks, are divided into type one and type two blocks, according to background information from CNH, with over 21 of the type one blocks having less than 100 million bbls of residual volume of liquid hydrocarbons and four of the type two blocks having equal or greater than 100 million bbls of residual volume of liquid hydrocarbons. There are 52 companies which have pre-qualified to bid, including several Mexican start-ups (one of which is financed by Mexican billionaire Carlos Slim), Mexican divisions of Exxon Mobil

2 Corporation and Chevron Corporation and six Canadian-based companies, including Renaissance. The other Canadian-based firms are Vancouver-based junior International Frontier Resources (IFR), South American-focused intermediate Parex Resources Ltd., Colombia-focused Gran Tierra Energy Inc. and Vancouver-based junior East West Petroleum Corp., all of which are publicly-listed. In addition, privately-owned, Calgary-based Torenco Energy Inc. and Sun Gold Resources are participating in the land-based auction. In addition to Mexican, U.S. and Canadian-based companies that are qualified to bid, there are firms from Egypt, France, Spain, Argentina and Colombia that qualified. The eligibility criterion for the bidding firms illustrates how committed CNH is to encouraging smaller companies to bid. The operators bidding for type one blocks only need to establish shareholder s equity of US$5 million, with those bidding for the more prospective type two blocks needing to establish equity of US$200 million for each block. If they re involved in consortiums, the individual firms only need shareholder s equity of US$3 million for the type one blocks and US$120 million for the type two blocks. In addition, in order to avoid a situation where larger firms dominate the bidding, two large companies (defined as having average production of 1.6 million bbls of oil equivalent per day) can t form a consortium or joint venture to bid on blocks. Bidders also had to pay about C$200,000 to gain access to the data rooms, as well as having to pay a registry fee of about C$25,000. They also had to issue a credit letter for each of the blocks. And now, with the announcement of minimum payments that will be required being lower than was anticipated, CNH has made clear it wants to encourage the development of a strong oil and gas sector, as the dominance of state-controlled Pemex, which monopolized the upstream, midstream and downstream sectors, gradually shrinks. Smith, the Renaissance spokesperson, pointed out that in the previous phases the state was demanding a 30 per cent to 40 per cent share of pre-tax profits. That, plus the fact some of the blocks offered weren t considered to be highly productive, led to a tepid response. The first phase of round one, which took place in mid-july, was seen as a severe disappointment, with the award of only two of the 14 offshore oil and gas blocks made available. Those two blocks were purchased by Mexico City-based start-up Sierra Oil and Gas and partners, with minimal interest being shown by majors.

3 But, thanks to the availability of more seismic information beforehand and offers by the state of more ongoing profits, bidding in the second stage was more aggressive, with three of five offshore production-sharing contracts being awarded. One of the successful bidders was Italian energy giant Eni S.p.A., which won the contract for the Amoca, Mizton and Tecoalli fields. A consortium including U.S.-based Fieldwood Energy and Mexico s Petrobal won the Ichalkil and Pokoch field concessions, while Argentina s Pan American Energy and Mexican-basedE&P Hidrocarburos y Servicios took the Hokchi field. Smith said the government is seeking a higher share of pre-tax profit from blocks it knows are prospective for crude oil production. There s a base royalty on crude of 7.5 per cent, he said. That s a sliding share, based on oil prices under $48 a bbl (WTI). It rises one-eighth of a per cent for every $1 increase in the WTI crude oil price. If prices get back to $100 a barrel, the government takes a 14 per cent royalty, he said, adding that still would place Mexico among the states with the lowest royalty structure in the world. The companies will also need to pay the 30 per cent corporate tax rate in Mexico, which is also lower than many other parts of the world. He said the government also altered its requirements for minimum work it wants to see done on the leases companies win. They are giving credit for recompletions, which he said is a change from the past. It s good news, he said. He expects bids for most if not all of the 25 fields. Some are less attractive because they are gas-prone. That isn t a problem for Vancouver-based International Frontier Resources, said the company s president, Steve Hanson. IFR announced in early October that its Mexican subsidiary, Petrofrontera, had formed a joint venture with Mexican petrochemical company Grupo Idesa S.A. de CV (Idesa), which is called Tonalli Energia C.V. The new firm will attempt to capitalize on IFR s Canadian-based technological expertise and

4 Idesa s financial strength and strong roots in Mexico to pursue land-based opportunities, the pair said when the partnership was announced. Hanson suggested the partnership with Idesa means IFR might actually be focusing on gas-prone leases. We have a partner that is obviously interested in natural gas and liquids opportunities, he said, alluding to the fact that Idesa s new petrochemical plant is a large gas consumer. Hanson said that, like Smith, he was surprised to see the government s pre-profit take set so low. I think those numbers were lower than expected and can potentially provide more upside, he said. The government is being quite open and wanting to attract as many bidders as possible. IFR, which has minimal production now, but holds substantial oil and gas leases in the Northwest Territories, in Alberta s Mannville formation and in Montana, formed Tonalli in 2014 specifically to build the capacity to play a major role in Mexico. It has retained Ignacio Quesada as a special advisor in Mexico. He was formerly chief financial officer for Pemex. Hanson said the company considers Mexico to be one of the most attractive areas in the world for oil and gas investment, with a cost structure that allows operators to be competitive even in a low commodity price environment. He said the government has listened to the industry and his company will be active in many auctions going forward. We see opportunities that just don t exist any longer in the U.S. and Canada, he said. He said operating costs in the country are about US$10-$12 per bbl. Because Pemex experienced capital restraints and needed to invest in so many areas, virtually no drilling has been done for years on many of the blocks. Renaissance, formed in 2011 as a result of a merger with the former Realm Energy International Corp., announced in early November it had raised a total of C$10.68 million through private placements. It said it will use the cash to pursue opportunities in Mexico. The junior, which has no current production, has an experienced management team. The CEO and co-founder is Craig Steinke, who has more than 20 years of oil industry experience. Most recently he was able to form a joint venture with ConocoPhillips to assemble a number of shale oil and gas plays in Europe.

5 Another co-founder is Ian Telfer, former CEO of Renaissance, who served as chairman of the board of Canadian gold mining giant Goldcorp Inc. Telfer is a director of Renaissance and a major shareholder, as is Steinke. Renaissance touts its relationship with oilfield giant Halliburton Company, a world leader in developing unconventional reservoirs. Smith said investments required on most blocks would be in the low millions-of-dollars. Similar opportunities in Canada or the U.S. would require a much larger capital commitment. He said his company is also interested in the gas and liquids potential of some of the blocks. One cautionary note he added was that, despite the low take set by the government, interest could be so great the actual bids will be multiples of the minimum [the government is seeking]. The blocks with the greatest potential are called Mayacaste, Mundo Nuevo, Paraiso and Topén, all considered each to have millions of bbls of oil development potential. The government is seeking a 10 per cent share of pre-tax profits from those. Four of the blocks, including Tajón, Peña Blanca, Moloacán and Calicanto, are also considered to be rich in oil and gas reserves. The government is seeking a five per cent share of pre-tax profits from those. The government is seeking a one per cent pre-tax profit share from 10 of the blocks, with it seeking a 2.5 per cent to four per cent share of pre-tax profits from the remaining blocks. The DOB contacted other Canadian-based companies active in the pre-qualification bidding to seek comment, but calls were not returned. ARTICLE SECTION: MARKET INTELLIGENCE!ARTICLE CATEGORIES: LAND SALES, NATURAL GAS, OIL Read more: Mexican Onshore Auction Terms Better Than Expected, Say Canadian-Based Companies Planning To Bid Daily Oil Bulletin Follow on Twitter!

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