Drafts of bidding terms and license contract for the first Pemex

July 29, 2016
ENERGY
ALERT
Drafts of bidding terms and license
contract for the first Pemex farmout
were published by the CNH
On July 28, 2016, the Mexican National Hydrocarbons Commission
(CNH) published the drafts of the bidding terms for the election of
a partner for Pemex’s subsidiary Pemex Exploración y Producción
(PEP), to jointly carry out exploration and extraction activities in the
Trion block, as well as the License contract and the Joint Operating
Agreement (JOA) models.
Below is a summary of the most important terms and conditions
of the aforementioned documents. These documents are published
and accessible to the public in the CNH’s webpage
(http://rondasmexico.gob.mx/)
Tamaulipas
1
AE-0092
AE-0093
3
1
2
4
Golfo de México
Asignaciones Bloque Trion
Bloques R1L04
Bidding Terms
• The interested participant will be able to participate as operator
or non-operator, but solely in the form of a Consortium, which will
then enter into a Joint Operating Agreement (JOA) with PEP to
jointly carry out exploration and extraction activities in the Trion
block.
• Consortiums will have to be incorporated with a minimum of
2 operators, from which one will have to be appointed as the
“designated operator”.
• Bidding and contract terms, excluding prequalification
requirements, might be subject to change at any point in time
before their final publication.
• The bidding process will occur in the following stages: i) publication
of bidding terms, ii) access to data rooms, iii) registration, iv)
clarifications to the bidding terms, v) prequalification, v) filing
of proposals, vi) awarding of contracts and vii) execution of the
contract.
• The following payments will apply:
• Registry fee - $750,000 MXP.
• License for the use of information from the National Center of Information on Hydrocarbons (CNIH) - $1,600,000 MXP.
• Registry fee will be waived for non-operators in case they prequalify
jointly with an operator.
• Participants that have access to the data room of Round 1L04 will
not have to pay the amount corresponding to the license for use of
information in order to participate in the bid. However, they will not
have access to the information corresponding to codes TS, TP o TG
unless they pay the corresponding fee.
• Access to data room will be granted to companies engaged in
exploration or/and extraction of hydrocarbon activities or those that
show interest in participating as non-operators.
• Operators and non-operators are subject to different registration
processes.
• There will be two clarification stages: i) questions regarding
payment process for the access to the information of the data
room and registration and ii) questions regarding prequalification
process, bidding structure, filing of proposals, JOA and contract.
• The following timeline indicates the most relevant dates of the
bidding process:
• To prequalify for the bidding process companies have to
demonstrate, among others, the following:
1. Legal origin of the funds
a. If the participant provided this information for Round 1.1., 1.2. and 1.4, they will not have to file the required documentation to meet this requirement.
2. Technical requirements
a. Operators
• Experience as an operator in the last 10 years in at least 1 ultra deep-water project with a depth of 1,500 meters and production of an annual average equal or higher than 50Mbpced in deep or ultra deep-water fields in any year within the period of 2011-2015.
• Experience in industrial and environmental, health and safety programs during the last five years in exploration and/or extraction projects.
3. Financial requirements
a. Operators
• The operator shall demonstrate economic capacity, meaning that their shareholder’s equity shall be of at least USD $5 billion or property of assets of at least USD $25 billion and have an investment credit rating.
• Capital investments in exploration and/or extraction projects that together add up to at least USD $2 billion.
b. Non-operators
• Shall demonstrate economic capacity, meaning that their shareholder’s equity shall be of at least USD $250 million.
• If the information provided by the participants in Round 1.
4 meets the financial requirements of this bid, no additional
information will need to be provided. Same will apply for the
requirement of experience in industrial and environmental, health
and safety programs.
• PEP shall have a participation of 45% in the JOA, the designated
operator shall have at least 30% and maximum 45%, the second
operator a minimum 10% and maximum of 25% and the nonoperator shall have a maximum participation of 10%. Note that
the bidding terms establish a 45% maximum participation for
PEP, however, the contract and the JOA establish it as a fixed
percentage.
• Pursuant to the bidding guidelines, , the JOA should recognize
a “carry” to PEP on contributions (costs, expenses and capital
investments) to the joint account for an amount of USD $464
million.
• The value of the economic proposal in the bid process will only
correspond to the over royalty rate offered to the State. In case
of a tie, the highest offer corresponding to a cash amount will
determine the winning proposal.
• Different from previous rounds, maximum values for the over
royalty rate offer will be established in this bid. Such values
together with the minimum values for the over royalty offer, will
be determined by Hacienda before the CNH publishes the final
version of the bidding terms and license contract.
• In case of a tie, part of the cash payment will be paid as a signing
bonus at the moment of the execution of the contract. The
signing bonus will be determined based on percentages and
thresholds that will be provided by Hacienda no later than the day
the final version of the contract is published. The rest of the cash
paymentt will be added to the “carry” in favor of PEP.
• A USD $3 million letter of credit should be submitted by the
bidder as bid bond. Bond should be valid for 100 days following
the day proposals are filed. Note that only bonds from the first
and second place awarded bidders will have to be valid for the
aforementioned period.
• Different from previous rounds, an activity catalogue for the
contractor to elect the activities to perform in order to comply
with the minimum work program is not established in the
contract.
• A minimum work program is established for the exploration
period, as well as for the appraisal period corresponding to the
discovery already declared by PEP.
• Contracts should be executed within 90 days after the awarding
day.
License for the Exploration and Extraction of
Hydrocarbons in the Trion Block
• The Pemex “Asignación” will be migrated into an exploration and
extraction license contract, which would be equivalent to the ones
offered in Round 1L04.
• The initial term of the Contracts will be 35 years. The term may
be extended for 2 additional periods. First extension of up to 10
years and the second extension of up to 5 years.
• Contracts include a transition phase of 120 days following the
effective date of the contract. In such period the contractors
will have to document the status and integrity of the fields and
equipment and initiate social impact and environmental studies.
• Contractors will have to file an exploration plan for approval
within the 180 following the effective date of the contract.
• Late filing of the exploration plan will be subject to a conventional
penalty of USD 10,000 per late day.
• Contracts include an initial exploration period of 4 years. In
such period Contractors will be obliged to finish the minimum
work program. The exploration period may be extended for
two additional periods of 3 years each, but additional work
commitments will apply for each extension.
• The contractor can request an extension of the additional
exploration periods in case the activities contemplated in the
exploration plan cannot be completed for causes that are not
attributable to the contractor.
• Amount of work units to be committed as minimum work program
for exploration and appraisal activities, as established also in the
bidding terms, are as follows:
• Estimated amount of the minimum work program is USD $250
million, pursuant to current reference values indicated in the
contract.
• Contractors will have to inform the CNH in case of a discovery
within the subsequent 30 days the discovery is confirmed. Once
that the Contractors notify the CNH, they will have 180 days to
file the appraisal plan. With respect to the discovery declared by
PEP, the contractor shall file the appraisal plan within 180 days
following the effective date of the contract.
• The appraisal plan should include the activities that the
contractor will carry out for a maximum period of 3 years. This
plan shall include the minimum scope of the appraisal activities
established in the contract. Regarding the discovery that has
already been declared by PEP, the appraisal plan shall also include
the minimum work program established in the contract.
► Within 90 days after the ending of any appraisal period,
contractors will have to inform if the discovery is a “commercial
discovery”.
• Likewise within 2 years after the confirmation of a commercial
discovery contractors will have to file a development plan.
• Provisions related to the relinquishment and unitization are
included.
• Contractors will have to keep an Operating Account where
transactions related to the contract should be recorded
Additionally contractors will have the obligation to file indicative
budgets and work programs.
• Volume of hydrocarbons will be measured at the measurement
point which may be inside or outside the blocks. Simultaneous
to the filing of the development plan, contractors will have to
propose the procedures to store, measure and monitor the quality
of the hydrocarbons.
• Immovable property generated or acquired by the contractors
to carry out the exploration and extraction activities will be
automatically be transferred to the Government when the
contract is terminated. The immovable property that provides
services to more than one contractual area will be exempted from
being transferred until the provision of said service is completed.
• Contractors will be able to commercialize the production by
themselves or using other parties.
• Ownership of sub products obtained from the production will
remain property of the Government.
• The consideration for the Government will include i) signing
bonus, ii) quota for exploration phase, iii) royalties and iii) overroyalties that will be adjusted according to an R-factor included
in the Contracts. The consideration for the contractor will be the
onerous transfer of the hydrocarbons.
• R-factor should be computed on a quarterly basis and is based on
the profitability of the contractor as in Round 1.4, however, in this
bid the value of the assets already invested by PEP in this project
will be considered as costs incurred. According to Annex 14 the
value of said assets is USD $380 million, subject to verification by
Hacienda.
• The Contracts include provisions to determine the value of
hydrocarbons similar to the ones included in prior contracts.
• Contractors shall file a performance bond to cover their
obligations related to the minimum work program. The amount
of said bond will be the result of multiplying the reference
value of the work unit by certain percentage of the work units
corresponding to the minimum work program. The applicable
percentage is yet to be determined.
• Contractors should also provide a Corporate Guarantee issued
by their ultimate holding company, or by another entity. In case
the Corporate Guarantee is not issued by the ultimate holding
company the contractors should file audited consolidated
financial statements that demonstrate a shareholder’s equity
equal to its participation in the Consortium times USD $14 billion.
• Decommissioning provisions are included. Contractors will have
to incorporate a trust to fund the decommissioning activities on
quarterly basis.
• Local content obligations are included: 3% during the initial
exploration phase; 6% during the first extension of the exploration
phase and 8% during the second extension of the exploration
phase will apply. For the appraisal period the same percentage
applicable at the moment the discovery took place will apply.
During the development phase the percentage will be of 4%. Such
percentage will increase to 10% when the regular commercial
production starts.
• Contractors shall have insurance policies that cover civil liability,
well control and damage to the materials generated or acquired
during the exploration and production activities.
• Administrative and contractual rescission clauses are included in
the Contracts as well as provision related to dispute resolution
mechanisms under ICC rules as in prior rounds.
• Shared infrastructure regulations were also included in Annex 13
of the contract.
Contacts:
Alfredo Álvarez
alfredo.alvarez@mx.ey.com
52 (55) 1101-8422
Oscar López-Velarde
oscar.lopezvelardeperez@ey.com
52 (55) 5283-8677
(1) 713-750-4810
Rodrigo Ochoa
rodrigo.ochoa@mx.ey.com
52 (55) 5283-1493
José Fano
jose.fano@mx.ey.com
52 (55) 5283-6425
Regarding the JOA, it is important to note that the applicable JOA
should meet international standards, since it follows the 2012
Model International Joint Operating Agreement of the Association
of International Petroleum Negotiators (AIPN). A careful review
should be made for the elections made by PEP based on the model
and review any deviations from it.
Yuri Barrueco
yuri.barrueco@mx.ey.com
52 (55) 1101-8433
The main relevant aspects of the JOA, are among others, the
following:
Elizabeth Ceballos
elizabeth.ceballos@mx.ey.com
52 (55) 5283-1300
• During the “carry” period PEP will not incur in any costs or
expenses until the joint account balance reaches the amount of
USD $464 million, as established in the bidding terms. Thereon,
costs and expenses will be divided pari- pasu.
• PEP will not be subject to any guarantee payments during the
“carry” period.
• Provisions regarding the voting rights for decision making in
corporate and operating matters are included in the JOA.
► Provisions regarding appointment of the operator and their
rights and duties are established, as well as regulation regarding
employment needs of the operator.
• A Technical, a Financial and a HMS Sub-Committees and their
corresponding duties are incorporated in the agreement.
• Rules regarding budgets and work programs established in the
applicable contracts are included in the JOA.
• Each party will have the right and obligation to own, receive and
dispose of their interest pursuant to the contract. In the case of oil
production, a lifting agreement shall be negotiated. In case there
is a gas discovery, a special agreement shall be negotiated for the
gas disposition.
• Each party of the JOA will be subject to that established in article
32 of the Hydrocarbon Revenue Law and will be responsible
of filing and paying their respective taxes, as well as complying
with any fiscal obligations corresponding to them by virtue of the
contract and the JOA.
• Income, tax incentives (including deductions, depreciations,
credits and capitalization) in regards to the costs assumed
by the parties will be prorated among them according to their
participation percentage.
• The operator shall provide to each party the corresponding
invoices, information and supporting documentation in order for
them to be able to comply with all applicable tax obligations.
► Provisions regarding change in control are set forth.
Santiago Llano
santiago.llanozapatero@ey.com
(1) 713-750-8376
Jimena González de Cossio
jimena.gonzalez@mx.ey.com
52 (55) 1101-7294
Javier Noguez
javier.noguez@ey.com
(1) 713-751-2043
Salvador Meljem
salvador.meljem@mx.ey.com
52 (55) 5283-1300