The Mexican National Hydrocarbons Commission (CNH) announced Mexico’s first offshore licencing round of 14 shallow water blocks in the Gulf of Mexico on 11 December 2014. On the same day CNH along with the Secretariat of Energy of Mexico (SENER) also published guidelines for the bidding process and the model form PSA that will accompany any licence award.
The guidelines represent the culmination of a fast-tracked legislative process started on 12 December 2013 to reform the energy industry in Mexico. They provide guidance for bidders in the licencing round and details on how to register to engage in the process. Key elements of the guidelines include:
- Pre-qualification and submission of proposals will be accepted from foreign entities but successful bidders must incorporate a Mexican entity to contract into a PSA;
- Participation in unincorporated JVs is permitted but companies are only permitted to submit one proposal per block area and a maximum of 5 submissions within the first round;
- The prequalification criteria are finalised and include bidders being required to have either $10bn in assets or £1bn in shareholder equity. Bidders must also evidence their experience of participation in similar E&P work in the last 4 years (or that of their affiliates);
- Major oil companies cannot partner on conventional areas, only for deep-water and unconventional plays;
- Financial submissions will be assessed on a combination of the State contribution component and the total investment committed. The fiscal terms include an exploratory fee, royalties and an operational fee payable to the State, with the successful bidder entitled to any remaining operating profit and to recover costs up to a cap.
The planned key milestones in the licencing round include:
- Data room opening – January 15, 2015 (visits may be scheduled December 11, 2014 to March 16, 2015 via www.ronda1.gob.mx.)
- Prequalification – December 11, 2014 to March 31, 2015
- Final bid guidelines – June 15, 2015
- Proposal submission – July 15, 2015
- Contract execution – August 21, 2015
The model form PSA
Key issues that have been identified from initial reviews of the model form PSA include:
“Best Practices” – Licensees are required to use “best practices” when complying with obligations under the PSA. This varies from the more recognisable “good industry practices” used in other local jurisdictions, or the reference to “good and prudent industry practices” used in the AIPN JOA model contract of 2012.
Dispute resolution – Two dispute resolution clauses are included. The first requires the parties to submit to the jurisdiction of the Mexican courts for any case of administrative termination by the Mexican authorities. Such a clause will require consideration against any relevant bilateral treaties between Mexico and the country of registration for any foreign investor. The second provision requires the parties to use ad hoc arbitration under the UNCITRAL rules for any other contractual dispute. The legal seat of arbitration is The Hague, with Spanish being the language in which any dispute will be heard. In the absence of any designation by the parties, Article 35 of the UNCITRAL rules provides a broad permission for the tribunal to apply the governing law it determines to be appropriate to the dispute. Any such designation will require close consideration when entering the PSA, especially for foreign investors.
The use of The Hague as the legal seat sends a message to foreign investors that the Mexican authorities want to promote fair and impartial international dispute resolution to its reformed energy industry. This can be seen as a positive sign to investors that the Mexican authorities want the reform of its energy market to be seen as creating an open environment to do business.
This licencing round is the first stage in a multi-phase energy reform process including the tender of 169 round one blocks and the migration of existing contracts and acreage held under the old regime to a new liberalised format.
This Law-Now was prepared by Penelope Warne and Ian Herbert with contribution from Derek Woodhouse of Woodhouse Lorente Ludlow, Mexico City.