The liberalisation of Mexico’s oil and gas market is continuing apace with the blocks to be auctioned in Round 2.3, the next stage in the tendering process, revealed on 15 November 2016. Mexico’s energy ministry (“SENER”) announced the auction of 14 onshore blocks covering an area of 2,595km² in Burgos, Tampico-Misantla, Veracruz and Cuencas del Sureste. This adds to the momentum created by the 10 deepwater blocks in Round 1.4, to be awarded on 5 December this year, and the 12 onshore blocks covering 5,006km² in Round 2.2, to be awarded on 14 July 2017.
There are total prospects of 251 million barrels of crude equivalent and 328 million barrels of proven reserves on offer in Round 2.3, from which both gas and oil may be extracted. SENER estimates that the first commercial production will take place in 2018 and reach a maximum output of 65,000 barrels per day by 2023 and 112 million cubic feet of gas per day by 2025.
Licences as the contractual model
Most of the winners of the previous Rounds in Mexico were awarded production sharing contracts. However, licences will be the contractual model used in this Round 2.3.
The licences for exploration and production will last 30 years and this period can be extended for a maximum of two additional terms of five years each.
Under a licence, licensees will be able to commercialise production themselves and at their own risk and cost after purchasing those products, which remain property of the Mexican Government. Licensees will have to pay a contractual fee during the exploration phase, royalties (which vary depending on the contract value) and a signing bonus to the Mexican Government.
Licensees will be required to file an exploration plan within 120 days and they will have an initial exploration period of two years (beginning on the date on which the exploration plan is approved) and this period can be extended for an additional two years.
According to the National Hydrocarbons Commission (“CNH”), it is expected that Round 2.3 will attract an investment of USD $1bn by the sector and as such, it is important that participants have the required technical and financial experience to successfully fulfil the contractual terms.
A participant who wishes to qualify for the auction must be able to show, among other requirements, that:
- It is employees who will have key roles in the project must have at least ten years of experience in managing and operating onshore and/or offshore exploration and/or extraction projects.
- The (i) participant, or (ii) its employees who will have key roles in the project, must have at least five years of experience in implementing and operating industrial health and safety and environmental protection systems.
- It has a total share capital of at least USD$100 million.
Additionally the licences for this Round 2.3 have the following key contractual characteristics:
Structure of bidders: Interested parties may prequalify and bid as individuals or as part of consortia in up to four contracts, but may not bid more than once for the same block.
Local content: In order to ensure that growth is stimulated within Mexico, there are minimum local content requirements of 26% and 38%, depending on the stage of the project.
Performance guarantee: Licensees must present an irrevocable letter of credit or bond in favour of the CNH to guarantee the work promised during the exploration period.
Corporate guarantee: Licensees must have the backing of their respective parent companies or affiliates to guarantee compliance with the terms of the licence.
Plans and Programmes: Exploration and Development Plans, Work Programmes and Budgets must be approved by the CNH.
Data room access will open on 15 December 2016 and participants should submit their applications for pre-qualification between 27 March 2017 and 31 March 2017. As with previous phases, only pre-qualified companies can participate in the auction, and they may do so alongside PEMEX, Mexico’s national oil and gas company. The result of the auction will be announced on 14 July 2017.
The overall requirements for submitting technical and financial information have been relaxed to attract more bidders. With signs that the worst of the oil price slump may be over, Mexico’s oil and gas industry looks set to take advantage of increased international investment.
CMS in Mexico and in the Mexican Energy Reforms
The Mexican oil and gas reform provides an exciting environment for private investment flowing into Mexico. CMS is at the forefront of this development through its association with leading local law firm in Mexico City, Woodhouse Lorente Ludlow S.C. (“WLL”), which has an extensive oil and gas practice and has advised international oil companies in the Mexican oil and gas Rounds.
Co-authored by Ricardo Masferrer Oliveira, trainee solicitor.