Mexico Energy Update: Round One – Fourth Call (Deepwater Exploration & Extraction) Modifications to Bid Guidelines and Model Contract

On May 16, 2016, the National Hydrocarbons Commission (CNH) announced changes to the Round One – Fourth Call Bid Guidelines and Model Contract (available at www.ronda1.gob.mx). The changes to the Model Contract are particularly relevant, as they reflect the Mexican government’s reaction to a first set of industry comments since its original publication in December 2015. Some of the highlights can be briefly summarized as follows:

Bid Guidelines:

  • Operators and non-operators may now meet financial requirements showing their average shareholder’s equity for the past five years or for 2015, providing their public annual reports (for public companies) or their audited financial statements.
  • As part of the contract award variable, companies may now include in their offers an additional investment commitment (calculated in Work Units) of the equivalent amount to one or two exploratory wells, which shall result in an investment factor of 1 for one well, 1.5 for two wells, and 0 for zero wells.
  • The minimum Work Unit schedule has been completed and/or clarified in relation to their reference value and specific activities.

Model Contract:

  • Exploration period risks and concerns were partially addressed as follows:
    • The relinquishment obligations were reduced in case the exploration period is extended and restrictions to further extend the exploration period were eliminated.
    • Greater flexibility was included to present the appraisal plan.
  • Although the complex and burdensome adjustment mechanism included in Annex 3 of the Model Contract was not modified, some of the following changes were included to improve its efficiency:
    • The materials transfer clause was partially modified to apply only to immovable (fixed) materials and to exclude from the obligation to transfer to the State, those immovable materials that serve more than one contract/assignment area.
    • Clause 11.5 was partially modified to include a provision obligating third parties to deliver information as may be requested by the CNH, the Tax Ministry, or the Oil Fund.
  • Major industry concerns relating to the inconsistency of contract rescission, investment security, stability, and liability provisions of the Model Contract with industry standards were partially addressed as follows:
    • Clause 23.1 was partially modified to soften the Contractor’s default on its minimum work obligations and clarify some of the defined terms.
    • The contractual rescission causes were reduced and the remaining causes were qualified with the defined term “Without Justified Cause,” looking to eliminate government discretion in their determination.
    • The abandonment trust, force majeure, and insurance provisions were adjusted to follow industry practices.
    • A period of 60 days following the end of the initial exploration period was included for the CNH to issue a compliance certificate, for purposes of defining the Performance Guarantee’s term.
    • Clause 14.1 was amended to delete liability for reservoir damage, however, damages for which the Contractor is liable (wells, materials, environmental) are not capped.

Although critical issues still remain in the Model Contract that may influence companies’ decision to bid in Round 1.4 (such as joint and several liability and the adjustment mechanism for the State’s consideration), the Mexican government has shown a significant amount of willingness to receive and consider industry comments. Interested parties may continue to provide comments and suggestions until August 2016, when the final terms will be announced prior to bid submissions.

The Spanish versions of the Bid Guidelines and Model Contract are available through the following links: Bid Guidelines and Model Contract.