MEXICO ROUND 3.2 AND ROUND 3.3 ONSHORE CONVENTIONAL AND UNCONVENTIONAL

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1 MEXICO ROUND 3.2 AND ROUND 3.3 ONSHORE CONVENTIONAL AND UNCONVENTIONAL Mexico s National Hydrocarbons Commission (the CNH ) has announced terms and conditions to bid on 37 conventional onshore blocks with light crude oil and wet and dry gas ( Round 3.2 ) and nine unconventional onshore blocks with wet and dry gas ( Round 3.3 ). 1 The Round 3.2 blocks on offer are located in the Burgos, Tampico-Misantla-Veracruz, and Southeast basins, as shown in Exhibit A, and the Round 3.3 blocks are located in the Burgos basin in northeast Mexico, as shown in Exhibit B. This Client Alert provides a brief summary of the key terms of the bid rounds and offers commentary regarding their significance in the overall context of Mexico s growing oil and gas industry. I. SUMMARY OF TERMS ROUND 3.2 (Conventional) Blocks 37, with a total surface area of 9,513 km 2, and blocks with extensions ranging from 46 km 2 to 478 km 2. Bid Process and Timeline: (i) Data Room Access and Registration Companies may access the Data Room by acquiring a Use of Information License from the National Hydrocarbons Information Center ( CNIH ) and paying an Access Fee of $1,000,000 Pesos (approximately US$55,000). Additionally, companies looking to prequalify as bidders (and ultimately submit a bid) must also pay a Registration Fee of $775,700 Pesos (approximately US$42,000). For companies participating through a consortium, only one member is required to pay the Access Fee; however, all members are required to pay the Registration Fee. ROUND 3.3 (Conventional and Unconventional) Blocks 9, with a total surface area of 2,704 km 2, and blocks averaging 300 km 2 in extension. Bid Process and Timeline: (ii) Data Room Access and Registration Companies may access the Data Room by acquiring a Use of Information License from the National Hydrocarbons Information Center ( CNIH ) and paying an Access Fee of $2,500,000 Pesos (approximately US$130,000). Additionally, companies looking to prequalify as bidders (and ultimately submit a bid) must also pay a Registration Fee of $898,000 Pesos (approximately US$47,000). For companies participating through a consortium, only one member is required to pay the Access Fee; however, all members are required to pay the Registration Fee. 1 The Bid Guidelines for Round 3.2 and Round 3.3 are available at:

2 Only those companies/consortia that have paid the Access Fee and the Registration Fee may request a prequalification appointment. Data Room access requests may be scheduled from February 9, 2018 to May 9, Registration is open from January 25, 2018 to May 11, (iii) Prequalification Interested companies will need to show: Technical (Individual Bidder or Joint Bidder Operator) (i) Experience as an Operator in the last five years in at least one exploration and/or production project, or (ii) that the personnel proposed for management positions have at least 10 years of experience, or (iii) capital investments in exploration and/or production projects that collectively total US$250 million. Safety and Environmental (Individual Bidder or Joint Bidder Operator) Experience in the last five years operating safety programs in E&P projects. Financial (Individual Bidder or Joint Bidder Operator) Shareholders equity of at least US$100 million (five-year average or last fiscal year) or total assets with a value of at least US$500 million and an investment grade credit rating from Fitch, Moody s, or S&P. Non-Operators Companies may also prequalify as non-operators by showing shareholders equity of at least US$50 million. In addition, companies will have to deliver customary legal documents and information as well as prove the legitimacy of their sources of funding. Only those companies/consortia that have paid the Access Fee and the Registration Fee may request a prequalification appointment. Data Room access requests may be scheduled from March 12, 2018 to June 12, Registration is open from March 2, 2018 to June 14, (iv) Prequalification Interested companies will need to show: Technical (Individual Bidder or Joint Bidder Operator) (i) Experience as an Operator in the last five years in at least one exploration and/or production project, or (ii) that the personnel proposed for management positions have at least 10 years of experience, or (iii) capital investments in exploration and/or production projects that collectively total US$100 million. Safety and Environmental (Individual Bidder or Joint Bidder Operator) Experience in the last five years operating safety programs in E&P projects. Financial (Individual Bidder or Joint Bidder Operator) Shareholders equity of at least US$100 million (five-year average or last fiscal year) or total assets with a value of at least US$500 million and an investment grade credit rating from Fitch, Moody s, or S&P. Non-Operators Companies may also prequalify as non-operators by showing shareholders equity of at least US$50 million. In addition, companies will have to deliver customary legal documents and information as well as prove the legitimacy of their sources of funding. 2

3 Prequalification appointments may be requested from January 25, 2018 to May 11, 2018, and delivery of prequalification documents will occur between May 16, 2018 and May 18, (v) Proposal Submission and Award Proposals will be evaluated on a weighted value basis considering the additional royalty for the State and an additional investment amount (calculated in Work Units equivalent to the amount of one or two exploratory wells resulting in an investment factor of 1 for one well, 1.5 for two wells, and 0 for zero wells). Bidders must submit a US$250,000 stand-by letter of credit to guarantee each of their proposals. The proposal submission date is scheduled for July 25, Consortium Restrictions Prequalified operators may participate as Individual Bidders and/or as part of one or more Joint Bidders with another operator or with a non-operator. Prequalified non-operators may only participate through a Joint Bidder with at least one operator, and every Joint Bidder must have an operator with at least a 30% interest. Prequalification appointments may be requested until June 13, 2018, and delivery of prequalification documents will occur between June 19, 2018 and June 22, (vi) Proposal Submission and Award Proposals will be evaluated on a weighted value basis considering the percentage of the Operating Profit for the State and an additional investment amount (calculated in Work Units up to 45,000, plus a cash payment in case bidders offer the maximum permitted amounts). Bidders must submit a US$250,000 stand-by letter of credit to guarantee each of their proposals. The proposal submission date is scheduled for September 5, Consortium Restrictions Prequalified operators may participate as Individual Bidders and/or as part of one or more Joint Bidders with another operator or with a non-operator. Prequalified non-operators may only participate through a Joint Bidder with at least one operator, and every Joint Bidder must have an operator with at least a 30% interest. Contract Terms The model License Agreement for Round 3.2 and Round 3.3 contains the following terms: Term Phases Fiscal Terms Rescission 30 years, extendable to up to 40 years Transition Phase of 180 days; Initial Exploration Period of two years, extendable for two additional periods; an Appraisal Period of up to two years; and the Development Period Consideration for the Mexican State shall consist of an Exploratory Phase Fee, Royalties, and a percentage of the annual Operating Profit Administrative Rescission For causes listed in Article 20 of the 3

4 Hydrocarbons Law (i.e., default on minimum contract obligations, serious accident caused by negligence or willful misconduct of Operator, etc.) Contractual Rescission For causes included in the contract such as default on delivery of guarantees, bankruptcy of the contractor, and other material defaults Guarantees Performance Guarantee Stand-by letter of credit for 75% of the total Work Units to be executed in the Initial Exploration period Corporate Guarantee Submitted by the ultimate parent company of the contractor or by other guarantors, provided that a minimum shareholders equity is evidenced; guarantors that do not meet the foregoing have other alternatives National Content Dispute Resolution Exploration, Appraisal, and Development Period 26% of the value of specific items, such as technology, goods and services, qualified labor, training, and infrastructure during the Exploration Period; 26% during the Appraisal Period; and 27% to 34% (from 25-35%) during the Development Period Conciliation Applicable for any controversy related to the contract except for administrative rescission Federal Courts All disputes related to the events of administrative rescission; contractor may challenge the amount of damages ruled by the Court in arbitration Arbitration Any dispute arising from or relating to the contract that has not been resolved during conciliation; the arbitration shall take place in The Hague, Netherlands, in Spanish, and in accordance with UNCITRAL Conciliation and Arbitration Rules II. CONCLUSION The announcement of Round 3.2 and Round 3.3 reflects the continuing effort by the Mexican Government to implement the Energy Reform process and open Mexico s oil and gas industry to private investment, despite a complex international economic environment and local political uncertainty. Interestingly, Round 3.3 represents the first bid round in Mexico s history offering blocks with unconventional resources and will certainly test the regulatory framework recently enacted by oil and gas regulators in Mexico. Also, Round 3.2 and Round 3.3 provide the Mexican Government another opportunity to continue adjusting the model contract, seeking greater competitiveness by industry standards and 4

5 allowing smaller and local companies to participate in the bid process. We will keep you advised, either through our periodic alerts or upcoming live seminars, as developments unfold. If you have any questions about the information contained in this Client Alert, please contact the Thompson & Knight attorney with whom you regularly work or one of the attorneys listed below. CONTACTS: Gabriel Ruiz Rocha Luis Fernando Gomar Andrew B. Derman This Client Alert is sent for the information of our clients and friends. It is not intended as legal advice or an opinion on specific circumstances Thompson & Knight LLP 5

6 Exhibit A: Round 3.2 Blocks 6

7 Exhibit B: Round 3.3 Blocks 7