The contract was won at auction in late 2015 by Mexican company Canamex Energy Holdings in association with two other firms and covered the Moloacan block in eastern Veracruz state.

The Canamex-led consortium will have to pay a fine of about $1.9 million for its failure to execute the minimum work plan it agreed to fulfill after winning the contract.

"The company recognized that the (additional) royalty that it offered was not viable," said Juan Carlos Zepeda, president of the regulator, the National Hydrocarbons Commission.

The block previously belonged to state-run oil company Pemex, which was forced to give up a large share of its acreage after the 2013 energy reform ended its longstanding monopoly, paving the way for first-ever competitive oil auctions.

At the time of the onshore auction, all 25 onshore contracts up for grabs were awarded, and the tender featured a minimum additional royalty set by the finance ministry, but no maximum.

Since then, a maximum additional royalty has been set for subsequent auctions in order to prevent companies from offering so much that they cannot afford to develop the project.

Canamex Energy Holdings won the block with an additional royalty offer of 85.69 percent while the minimum had been set at just 5 percent. The Moloacan block will be formally returned to the government next month.